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Asia’s Private Equity News Source avcj.com March 28 2017 Volume 30 Number 12

FOCUS DEAL OF THE WEEK

All about the bank?Standard Chartered and the challenges of bank-led secondary deals Page 7

Hardware’s horizonEdtech start-ups eye China opportunities 1

Think out of the boxDelhivery targets India’s logistics space Page 12

BlackBuck’s trucking tech readies for the next level

Page 12

FUNDS

Fund-of-funds Adveq talks China strategy

Page 15

Square Peg’s debut fund seeks global tech plays

Page 13

Chinese investors target the magic kingdom

Page 3

Aion, Blackstone, Boyu, C-Bridge, CMC, Fairfax, Gateway, Khosla, KKR, MBK, Northstar, Riverside, Sequoia

Page 4

EDITOR’S VIEWPOINT

NEWS

LP INTERVIEW

DEAL OF THE WEEK

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WANG JIANLIN’S AMBITIONS IN THE theme park space are clear. The founder and chairman of Dalian Wanda Group wants to take the fight to Shanghai Disneyland, saying that The Walt Disney Company’s one “tiger” in China won’t be able to compete with his “pack of wolves.” Wanda launched the first of 15 planned theme parks last May, a month before the $5.5 billion Shanghai Disneyland opened its doors.

With Comcast-owned Universal Studios breaking ground on a $7 billion theme park in Beijing last October and DreamWorks Animation working with CMC Capital Partners and Lan Kwai Fong Group on an entertainment complex in Shanghai, the industry is becoming crowded with big names. According to local media, 21 theme parks opened in China in 2015 and 20 more were under construction. It is unclear how broadly the definition of theme park stretches.

SeaWorld could be added to that list in due course. Last week, The Blackstone Group agreed to sell its remaining 21% stake in the company to China-based Zhonghong Zhuoye Group for about $449 million. As part of the deal, SeaWorld will advise Zhonghong on the concept development and design of theme parks, water parks and family entertainment centers to be built in China, Taiwan, Hong Kong and Macau. The president of Zhonghong’s US operation put it bluntly: SeaWorld would be coming to China.

Wanda inevitably attracts the most attention among the domestic players, for its deals as much as for its flamboyant founder. The company wants to become a service-oriented business covering four key industries: commercial property, culture, financial services, and e-commerce. In addition to developing theme parks, Wanda has established itself as the world’s largest cinema chain operator, and bought a Hollywood production house (Legendary Entertainment), an international sports event (the Ironman series), and a sports marketing business (Infront Sports & Media).

This is clearly a real estate-plus strategy: culture, financial services and e-commerce are essentially enablers for property development.

Think of content – underpinned by sport or entertainment – driving consumers to theme parks surrounding by luxury hotels and to multiplex cinemas sitting at the heart of shopping malls. It is all about staying relevant as lifestyles evolve, and there is every reason to believe Wanda might become more creative in its investments as it looks further into the future.

The company is not alone among real estate developers in pursuing diversification – Zhonghong appears to be doing much the same. The company’s listed subsidiary, Zhonghong Holding, generates the bulk of its revenue from property, but has interests spanning tourism and leisure, including hotels, resorts and theme parks. As of 2015, it was planning to invest nearly RMB15 billion ($2.2 billion) in two projects in Hainan and Zhejiang provinces incorporating resorts and entertainment as well as residential real estate.

Zhonghong made its mark internationally in 2016 with the acquisition of luxury tour operator Abercrombie & Kent from Fortress Investment Group. The company’s name also came up in the context of PAG Asia Capital’s $3.2 billion bid for DreamWorks, which was trumped by Comcast. It emerged in legal disclosures (from an indirectly related case) that PAG held preliminary discussions with Zhonghong before approaching DreamWorks, presumably with a view to monetizing the brand in China.

Theme parks represent one aspect of China’s broader push into the media value chain. Whether driven by corporates or private equity – CMC is the best example of the latter, having created a dedicated platform for long-hold assets such as theme parks – these investments are ultimately intended to leverage the Chinese consumer. The question for buyers, particularly those in highly competitive segments, is how soon they need these bets to start paying off.

Tim BurroughsManaging EditorAsian Venture Capital Journal

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AUSTRALASIA

Riverside promotes Spiteri to partner in AustraliaThe Riverside Company has appointed Steven Spiteri as a partner in Australia. He is the second partner appointed in the last six months, following the elevation of Nicholas Speer last September. Riverside closed its second Asia fund at $235 million in 2014.

VCs invest $75m in US-New Zealand aerospace playerUS VC firms Data Collective and Promus Ventures have joined Bessemer Venture Partners, Khosla Ventures and New Zealand’s K1W1 in a $75 million Series D round for US and New Zealand-based aerospace company Rocket Lab. The capital will be used to scale up production of the Electron rocket, which will launch small imaging and communications satellites.

GREATER CHINA

Chinese group buys Blackstone SeaWorld stakeThe Blackstone Group will exit its remaining 21% stake in theme park operator SeaWorld to Chinese real estate developer Zhonghong Zhuoye Group for about $449 million. Blackstone bought the company from AB Inbev in 2009 for $2.3 billion and made partial exits through the 2013 IPO and subsequent stake sales. Zhonghong will advise SeaWorld on development of theme parks in greater China.

Boyu buys 25% of Vanke property services unitBoyu Capital has bought a 25% stake in Vanke Property Development, a property services unit of China Vanke, for RMB166 million ($24 million). Chinese online marketplace 58.com also paid RMB33 million for a 5% holding. The parent company will retain a 63% stake.

C-Bridge backs China pharma mergerC-Bridge Capital and traditional Chinese medicine business Tasly Holding have agreed to invest $150 million in an entity formed through the merger of Shanghai-based Third Venture Biopharma and Tianjin-based Tianshizhen Biotechnology. The combined entity will use the

new funding for R&D, drug development, clinical trials and international expansion.

Video communication player gets $18mXiaoyu Link has raised a RMB125 million ($18 million) Series B round led by ZhenFund and Zhen Cheng Fund, with participation by Sinovation Ventures, Lightspeed China Partners, and Chengwei Capital. The company, which produces video communication equipment, will use the capital for product development.

Huaxing leads $29m round for DadaoHuaxing Capital Partners has led a RMB200 million ($29 million) Series B round for residential

property financial services provider Shenzhen Qianhai Dadao Financial Services, with participation by Sequoia Capital China and PAG Asia Capital. The capital will be used to add more branches and also for marketing, brand building, and technology development.

Minsheng Education gains after Hong Kong IPOChina’s Minsheng Education Group closed up 9.4% on its first day of trading in Hong Kong, following a HK$1.38 billion ($177 million) IPO with the International Finance Corporation (IFC) as a cornerstone investor. The company sold one billion shares for HK$1.38 apiece. IFC and another cornerstone investor covered approximately 27% of the offering between them.

State-backed fund leads round for TianyanchaChina’s National Small & Medium Enterprises Development Fund has led a RMB130 million ($18 million) Series A round for business data search firm Tianyancha. This is the first investment by the vehicle, which is managed by THG Ventures, a VC arm of Tsinghua Holdings. Tianyancha will use the capital to develop new products and expand its market share.

Alibaba assumes control of VC-backed DamaiAlibaba Group has taken full ownership of Chinese online ticketing platform Damai.cn for an undisclosed amount. Damai provides ticketing services for concerts, sporting events, live theater, movies and other events, covering 330 cities globally. It had sold tickets for over 1.8 million events as of the end of last year.

CMC, HG Capital lead $26m round for NewrankChina-focused GPs CMC Capital Partners and HG Capital have led a RMB180 million ($26 million) Series B round for Chinese media platform Newrank. Newrank will use the capital to develop its businesses in data consulting, marketing, e-commerce and copyright distribution.

Travel sites Woqu, Lulutrip merge, raise $25mVC-backed Chinese outbound online travel platforms Woqu.com and Lulutrip have agreed to merge, with the combined entity, Woxing Group, receiving a $25 million round led by Yuantai Changqing Fund. Woxing will use the new capital

Tencent leads $350m round for VC-backed KuaishouKuaishou, a Chinese live-streaming video app backed by VC investors and search engine Baidu, has raised $350 million in a new round of funding led by Tencent Holdings. The company didn’t disclose whether other existing backers also participated in the round.

Founded in 2011 as a photo-sharing app, Kuaishou subsequently added new functions to allow users to share short videos, either by uploading them to the platform or streaming

them live. The company claims to have over 50 million daily active users, with more than five million videos uploaded per day.

Kuaishou had raised more than $200 million as of December last year. Morningside Venture Capital was the first investor, and was followed by the likes of Sequoia Capital China, DCM, CMC Capital Partners and Lighthouse Capital.

Following the latest investment, Kuaishou said it will work with Tencent and Baidu on products and services in order to improve user experience. It also plans to use the capital to invest in artificial intelligence and visual analysis technology.

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to consolidate Woxing’s leading position in the outbound travel market and to improve its IT systems and customer services.

NORTH ASIA

MBK set for a second stint with jeweler TasakiMBK Partners has submitted a JPY31.5 billion ($286 million) buyout offer for Tokyo-listed jewelry retailer Tasaki & Co. The firm will pay JPY2,205 per share for all outstanding shares in Tasaki. MBK will commit JPY18.7 billion in equity and finance the rest of the offer through debt.

VCs invest $33m in Japan’s DelyJafco, YJ Capital, and Gumi Ventures have taken part in a JPY3.7 billion ($33 million) round for Japanese online food media start-up Dely. The new capital will be used to expand Dely’s online video recipe platform Kurashiru. The company plans to bring more users into the core platform while expanding its service offerings.

KKR completes Japan tender offersKKR has completed a JPY147.1 billion ($1.28 billion) buyout offer for power tools manufacturer Hitachi Koki and a JPY498.3 billion ($4.5 billion) offer to purchase automotive components manufacturer Calsonic Kansei Corporation. Both are divestments driven by a recognition that third-party capital and expertise is required to make the companies more competitive.

SOUTH ASIA

Fairfax India buys stake in Bangalore airportFairfax India Holdings has completed its purchase of a stake in Bangalore International Airport for INR25 billion ($385 million), buying a 33% holding from GVK Power and Infrastructure and 5% from Flughafen Zürich AG. The deal represents the biggest investment to date for Fairfax India, which raised $500 million late last year in a combined public and private offering.

WestBridge invests $28m in India’s CEATWestBridge Capital Partners has paid INR1.8 billion ($28 million) for a 3.5% stake in India-

listed tire maker CEAT. The firm bought 1.43 million shares at INR1,290.35 apiece from Kotak Mahindra Bank in an open market transaction. The purchase gives WestBridge a total holding in CEAT of 11% .

Sequoia, Fosun Kinzon back travel site IxigoSequoia Capital and Fosun Kinzon Capital have invested $15 million in Series B funding in Indian online travel marketplace Ixigo. The company will use the capital to improve its technology offering, expand brand awareness and strengthen its development team. This is Fosun’s first VC investment in India.

FTV Capital leads round for Indian researcherUS venture investor FTV Capital has led a $56 million funding round for India-based industry research and consulting company MarketsandMarkets, which provides research services in high-growth, emerging markets. Zodius Capital also participated. The capital will be used for an international expansion effort, especially in the US and Europe.

India’s Flipkart raises $1b in downroundIndian e-commerce giant Flipkart has reportedly raised a $1 billion round of funding at a valuation of about $10 billion – a drop from $15 billion as of its previous round. Investors in the latest round included Microsoft, eBay, and China’s Tencent Holdings. The round caps off a turbulent year for Flipkart marked by multiple executive departures and serial markdowns by US-based hedge funds.

SOUTHEAST ASIA

Gateway invests in Healthway MedicalSingapore-based GP Gateway Partners has agreed to invest S$70 million ($50.2 million) in distressed local hospital operator Healthway Medical. Healthway, which has struggled due to a number of questionable loans, will use the capital for immediate operational needs. Gateway could take up to a 90% stake in the company.

Riverside makes Malaysia chemicals bolt-onDCM Asia, a chemicals distributor owned by the Riverside Company, has acquired resin maker Erapoly Marketing for an undisclosed amount. The acquisition is intended to help DCM deepen its product offerings and consolidate its position. DCM counts some of the largest global paints and coating companies and consumer products companies among its customers.

Northstar completes Innovalues take-privateNorthstar Group has completed its S$331.4 million ($238 million) acquisition of Singapore-listed precision components maker Innovalues. The GP paid S$1.01 per share in cash or one share in the Precision Solutions Group – parent of the acquisition vehicle – plus S$0.61 per share in cash.

Aion acquires India’s PlanetCast, Kubera exitsAion Capital Partners, a special situations joint venture between Apollo Global Management and ICICI Venture, has bought a controlling stake in Indian broadcast technology services provider PlanetCast Media Services from investors including PE firm Kubera Partners.

Affiliates of the Essel Group and the Shyam Group partially exited their stakes as well, according to the Press Trust of India. Financial details of the transaction have not been announced, though Kubera had earlier announced it would receive about INR1.5 billion ($22.5 million) for its 28% stake.

PlanetCast provides uplink, downlink, and content management services for the broadcasting and satellite communication industries in India and Southeast Asia. After the acquisition PlanetCast will be led by the current management team.

Kubera invested $13.4 million in PlanetCast, then called Essel Shyam Communication, in 2008. The firm reported revenue of INR3 billion ($45.9 million) for PlanetCast in the 2016 financial year, up from INR2.6 billion 12 months earlier. EBITDA grew from INR749 million to INR877 million over the same period.

NEWS


COVER [email protected]

ON NOVEMBER 1 OF LAST YEAR, JOE Stevens’ decade-long career with Standard Chartered Private Equity (SCPE) came to an abrupt and unhappy end. Since 2013, he had helped put together $2.3 billion in secondary deals designed to remove PE assets from the bank’s balance sheet while latterly working on a spin-out of the GP. But Standard Chartered axed the spin-out, telling Stevens it would proceed with an orderly wind down and he would not be required to oversee the process.

To LPs that backed those transactions, the termination was a shock. They felt they had entered into agreements with Standard Chartered in good faith – with a clear understanding as to how and by whom assets would be managed – only to have it thrown back in their faces. This was not the deal they had signed up for, and the contracts said as much. In the ensuing chaos, at one point it seemed possible that a unique secondary market exercise could come crashing down in a wave of litigation.

A formal solution has yet to be reached: LPs could still use the key person event triggered by Stevens’ dismissal to remove SCPE as manager of the secondary portfolios. Indeed, the LPs, investment professionals and advisors who spoke to AVCJ cited the lack of an agreement – though they hope there will be one – as a reason for keeping discussions off the record. They describe the situation as tense.

The bank, meanwhile, is scrambling to recover it. “We have got plans to realign the portfolio. We have some third-party stakeholders in terms of co-investors and others who are relying on our exercise of good oversight and very focused on getting the very best economic results for ourselves and our stakeholders. That is a small business and we will migrate to a new format in a year or two,” Standard Chartered CEO Bill Winters told media last week on a trip to the Middle East.

Steps have been taken to keep the team together and assuage fears that individuals would depart in the wake of the failed spin-out. Sources close to the bank also say that capital will be made available from the balance sheet for new deals – although investments will be made selectively – and further secondary transactions will be explored. Moreover, the idea of creating an independent GP is still on the table. It remains

to be seen whether investors are willing to participate.

“Put yourself in our position. We did have a positive outlook on the idea of doing a second transaction with them,” says one LP with exposure to the secondary portfolios. “Today, the issue for us is, are the assets we have invested in going to be properly managed and exited, not whether we care about the team spinning out. If my colleagues proposed a deal with SCPE involving a spin-out, I might veto it.”

None of the parties involved is entirely blameless: not the bank, which took action without considering the consequences; not Stevens, who perhaps pushed too hard for the spin-out due to concerns that the team would break up; and not the LPs, who arguably could have done more to understand the dynamics of the situation. Above all, the situation underlines

the difficulties presented by secondary transactions, and how these are magnified by internal politics when dealing with banks.

“Banks make decisions based on what is in the best interests of the P&L account at that point in time,” says Juan Delgado-Moreira, managing director at Hamilton Lane. “Those decisions often have nothing to do with private equity and whether the bank thinks it is an attractive asset class, and everything to do with their stock price, their management and their balance sheets, and their capital adequacy ratios.”

Signature secondaryRegulation was a key consideration when, around 2012, Standard Chartered decided it could no longer support a principal investment business off its balance sheet. This was not an unusual view; a number of banks have spun out assets for similar reasons. However, the SCPE situation was unusual in two respects. First, the bank decided against a complete spin-out of the PE unit, recognizing the role a captive GP could

play in building up the Standard Chartered brand among growth companies in emerging markets. Second, there were a lot of assets to move and limited time in which to move them.

This led to five transactions across four new limited partnerships, completed between 2013 and 2015, in which secondary investors took out more than 40 bank positions, with the captive GP retaining management responsibilities. The SCPE team took a minority interest in each partnership. Management fees and carried interest – lower than 2% and 20% – accrued to the bank with an agreed portion going to the team. It left the bank with balance sheet assets that now stand at approximately $2 billion, including $600 million in a real estate business that is in the process of being sold off.

Goldman Sachs bought the first tranche and Coller Capital led the second and third, bringing

in GIC Private and Abu Dhabi Investment Authority (ADIA) as co-investors in the third. Tranches four and five, which involved a single limited partnership, featured LGT Capital Partners, Partners Group, Goldman Sachs and Blackstone Strategic Partners, followed by Rothschild and Unigestion. Standard Chartered took a 20% stake in the last partnership.

Tranches four and five were supposed to be a staple, with participation in the secondary conditional on committing to a new primary vehicle, but preparations could not be completed in time. Still, there was talk of a new fundraise in 2016 or 2017; the bank was supposed to participate as an LP and hopes were expressed that several investors in the secondary deals could be persuaded to re-up.

Standard Chartered’s plans changed last June with a decision to exit the PE business, driven in part by poor performance within the portfolio. The principal finance division had contributed $53 million of income to the bank in 2015, but this turned into a $216 million loss in 2016

A cautionary taleCracks have appeared in the secondary transactions through which Standard Chartered Private Equity had sought to secure its future, underlining the challenges for investors of bank-led deals

“Banks make decisions based on what is in the best interests of the P&L account at that point in time” – Juan Delgado-Moreira


as investments in Nigeria and Southeast Asia struggled, particularly those with oil and gas industry exposure.

Talks began with the investment team over a spin-out, and a working group was tasked with devising a solution that met the needs of the bank, the secondary investors and the team. One of the challenges was compensation. In the secondary transactions, Standard Chartered didn’t want to sell below net asset value and got its way on all bar the last of the four partnerships. However, in order to maximize sale prices – and make a bigger dent in its risk-weighted assets exposure – the bank pushed down the management fees. The LPs were paying 0.5% on the first three partnerships and 1% on the fourth.

“At the time, banks across the world were focused on making sure their tier-one equity ratios were above what was required by regulators,” says another source familiar with the situation. “The view was that as long as the team was still going to be part of Standard Chartered, the bank would continue to pay salaries and cover the expenses of the private equity business. If there was going to be a spin-out, it could be addressed.”

One way to make up the shortfall was for the bank to provide soft working capital for a few years. This was nixed due to concerns that it might violate US regulations as to what kind of relationship Standard Chartered could have with the GP once it was independent.

Attention then switched to raising a new fund, but existing investors were mindful that it shouldn’t be too much, given the team’s responsibilities to the secondary tranches. A staple deal, comprising $500 million in legacy assets and $250 million in fresh capital was discussed. However, this wouldn’t fully close the gap so it was suggested the bank sell working capital to the team up front and at a discount. Negotiations are said to have faltered over how big the discount should be.

One LP recalls a meeting around this time with Stevens and Bert Kwan, SCPE’s head of Southeast Asia who was also involved in the negotiations but to a lesser extent. “They were saying a spin-out was a couple of months away, that they were in final negotiations with the bank,” the LP says. “But they were also a bit cryptic, saying that the bank was isolating them and seeing them as a separate entity. Acrimonious would be the wrong word, but it seemed a bit weird.”

Nevertheless, this did not prepare him for what followed as the deal fell apart. Some LPs learned of Stevens’ departure via the media;

others found out in advance of that, but not by much. Kwan was terminated shortly afterwards. The two individuals who were key persons or super key persons on most of the secondary tranches – and who were the primary point of contact for the LPs – had been removed. “We were dumbfounded,” says one LP.

Conflicts of interestWhen AVCJ covered the SCPE secondary deals last year, various investors expressed concerns about alignment of interest in situations where the assets spin out but the team does not. There are routine measures for minimizing potential

conflicts between a GP’s fiduciary responsibilities to the new third-party investors and its obligations as a unit of a bank, such as having the management team invest in the fund. Beyond that, investors must believe in the quality of the team and its ability to stay together.

Lucian Wu, a managing director at HQ Capital, said at the time that he is most comfortable with clean spin-outs because teams tend to be more motivated. If they stay part of the institution, even with some skin in the game, “There is no sense of ‘If I don’t make it I’m going to die.’” His views on the matter have not changed. “As long as the GP sits inside the bank it’s clear who the ‘real’ decision maker is and how interests could be misaligned. Interest alignment is key to me in any secondary transactions, just as important as the quality of the assets,” Wu says.

These sentiments are echoed by Andy Nick, a managing director at Greenhill & Co. He acknowledges that retaining some ties to the

former parent can be helpful, but only as long as the economics are aligned in favor of the team. “I think investors are served best if the economics of the GP reside with the spin-out team exclusively or the majority of the economics sit with the team that is going to be managing the assets, versus somehow accruing back to the former parent,” Nick says.

While GP replacement is an option in the case of SCPE and some LPs are said to have reached out to other private equity firms for price quotes, there are obstacles to pursuing this course of action. First, the management fees on the secondary portfolios are below market rate; a

replacement GP would likely charge more. Second, the portfolio is geographically diverse, covering Asia, Africa and the Middle East; few, if any, managers offer similar coverage, so it would be necessary to break up the portfolios.

Rather, the focus has been on finding a solution with Standard Chartered, and reaffirming an alignment of interest is central to these efforts. LPs typically have three priorities in these situations: no more surprises; stabilization of the team, ideally so there is little or no change in representation on portfolio company boards; and, particularly in the case of SCPE given the bank’s goal to give up principal investment, a longer term plan for the business that ensures the assets will be properly managed.

Standard Chartered has awarded bonuses to team members in order to secure their immediate loyalty and LPs say the percentage of carried interest that goes to the team has been increased and pushed out so that payments start in two

years. According to sources close to the bank, the incentives are comprehensive and structured with a view to making the business more valuable in the long term. There are currently approximately 50 staff across private equity and real estate, led by 10 managing directors, and that is seen as an appropriate number for the size of the portfolio.

The narrative coming out of the bank is that the spin-out proposal put on the table last year did not represent a satisfactory solution for the three stakeholder groups. There were also attempts to push it through too quickly, leading to a breakdown in communication. Now the process will be discussed in more measured terms and with greater transparency. And with a slimmed down team, getting market fees on a combination of another secondary deal and some primary capital would cover costs.

While the LPs that spoke to AVCJ do not wholly dispute this view, they add two caveats.


Standard Chartered’s financial performance2016 2015

Underlying performance US$m US$m

Transaction banking 2,168 2,448

Financial markets 2,486 2,533

Corporate finance 1,801 1,733

Lending & portfolio management 236 414

Principal finance -219 53

Operating income 6,472 7,181

Operating expenses -4,268 -4,456

Loan impairment -1,401 -2,076

Other impairment -368 -244

Underlying profit before tax 435 405

Statutory loss before tax -24 -1,651

Loans & advances to customers 122,231 121,523

Customer accounts (no. of accounts) 204,279 187,462

Risk-weighted assets 142,765 167,735

Source: Standard Chartered


First, Standard Chartered has no option but to be transparent given what has gone before. Second, there are questions to which they will probably never get accurate answers. For example, the question of whether Stevens pushed too hard for the wrong deal or was the victim of a political

assassination would elicit subjective responses – and this uncertainty would factor into any decisions about working with SCPE again.

Several industry participants say they can see another secondary deal getting done, perhaps as a staple. The large amount of dry powder in the secondaries market might be helpful in this respect. “There are all kinds of things investors will look at in Asia that in a different kind of market they might not look at,” says one. “If the bank steps up with significant primary capital there is a chance of a deal getting done.”

Others are unsure about the longer term prospects for the franchise as an independent GP. A number of PE firms with broad emerging

markets coverage have seen spin-outs in different geographies – even in the absence of concerns about team stability and future fundraising, it can be difficult to hold things together. Much rests on the bank’s ability to stay involved in the business for longer than it at one time might have

envisioned, and whether the secondary portfolios perform well enough to convince the existing LPs to provide positive references to new investors considering primary commitments.

Risk factorsFor some, the experience amounts to a cautionary tale. “It validates why we don’t like backing captive GPs – this was supposed to be the exception because of the dynamic of the spin-out, but it still went wrong,” one LP observes. Another investor describes the situation as “a classic case of why it’s problematic working with banks,” adding that whoever at the bank decided to terminate Stevens “really didn’t think

through the implications.” These are not isolated viewpoints.

Standard Chartered appears to have suffered reputational damage as a result of the episode, and there could be additional financial costs as well. One question asked by several sources is why – as far as they are aware – no one within the bank has been held accountable for the decision. The answer may lie in the conflict that underpins many bank secondary transactions: the need to observe fiduciary responsibilities to LPs on one hand, and the need to act in the interests of shareholders on the other.

Standard Chartered had $122.2 billion in outstanding loans at the end of last year – more than 50 times the size of the balance sheet PE assets spun out through the secondary deals. Negotiating a private equity deal in the face of all manner of other, bigger ticket considerations is challenging, and it requires a keen grasp of who is making the decisions and why.

“You have to navigate through their decision trees and oftentimes these are not very transparent to outsiders. And it is important to find the decision makers,” says HQ’s Wu. “Any secondary deal requires a lot of knowledge of the seller, but this is especially true when dealing with a bank because the decision making process could just be a bit more complex.”

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Asian Private Equity and Venture Capital Review 2017AVCJ private equity and venture capital report

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“Any secondary deal requires a lot of knowledge of the seller, but this is especially true when dealing with a bank” – Lucian Wu

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THE LATEST INVESTMENT IN CHINESE education technology reflects the rising profile of hardware in a software-dominated field. The strategy behind the deal, however, suggests this warmer sentiment comes with an asterisk.

Makeblock – a domestic start-up focused on educational robot construction kits –received a $30 million Series B round led by Shenzhen Capital and Evolution Media China (EMC), an arm of US-based Evolution Media Partners. The prevailing interpretation is that the investment highlights a VC awakening about China’s potential to service growing interest in business models based on hardware-related curricula such as science, technology, engineering and mathematics (STEAM).

“In an increasingly complex world, the demand for workers with sophisticated problem-solving skills that students learn by studying STEAM is stronger than ever,” says Charles Li, an associate at EMC. “We have been looking at the market for a while, and Makeblock really impresses us with its enthusiastic team, unique product, strong pipeline and global positioning. We believe that Makeblock will keep perfecting the combination of education and entertainment and become the 21st century Lego.”

More quantifiably, the company is posting fast revenue growth, driven by sales in some 140 countries. The plan is therefore to further internationalize operations, with the fresh capital aimed at opening new offices in the US, Japan, the Netherlands and possibly Singapore within the year. EMC hasn’t formally outlined its value-add contribution yet, but its background in international media suggests it will focus on cross-border marketing.

For industry observers, the implication is clear. Despite anecdotal evidence that STEAM is catching on in China, the country’s educational hardware companies will have to be able to flex some global muscle.

Building blocksThe fundamental appeal of educational hardware recalls many of the drivers behind the smart phone phenomenon. As the production costs continue to drop and coding languages become simpler, the world of electronics and programming is opening up to children who might be distracted by educational material

without a physical context. At the same time, the emergence of digital-from-birth generations as culturally distinct consumer sets is placing new demands on how connected devices enhance traditional lifestyle routines.

The pros and cons of hardware business models play out in China as they do in other major economies, but with a relatively less inviting cultural backdrop for STEAM education and only a smattering of viable investment targets in related segments. Northern Light Venture Capital, a China-focused firm, has reflected VC appetite in the country by indirectly backing Makeblock via a local angel fund but otherwise steering its education agenda towards online teaching platforms.

“We found STEAM education to be so popular in the US that we tried to find STEAM companies

in China, but there have not been a lot of very good candidates,” says Lu Lin, an executive director at Northern Light. “In China, most people will still only pay for services like live one-on-one lesson streaming for English and mathematics.”

Cracking the educational hardware market in China therefore requires investors to remember that device manufacturers are still software companies at heart. This view has prompted a number of successful combination plays incorporating services and user data that make hardware “smart” over time. For Wonder Workshop, a US and China-based educational robot maker backed by Sinovation Ventures, the dual hardware-software approach has focused on content for subscription. The company raised a $20 million Series B last year to support further expansion in China.

“The gadget should be a Trojan Horse that wraps around something valuable for users on

an ongoing basis,” explains Angela Bao, senior investment manager at Sinovation. “When considering a hardware investment, we always look deep into how the technology addresses a core pain point for the users and how the start-up weaves non-hardware elements into its go-to-market and expansion strategy.”

Hybrid approachPiggybacking software products on physical learning toys could be a particularly savvy ploy in China because the popularity of professional after-school tutoring is believed to be disproportionally expanding sales potential by blurring the lines between B2B and B2C opportunities. The effect could be further amplified as the country’s education methods evolve in step with other social modernizations.

“In terms of general educational hardware adoption, like interactive whiteboards, tablets and connectivity, China is nowhere close to the US,” Bao adds. “But we’ve seen a growing trend among tier-one schools that are opening up for mobile devices and creative products.”

Most of these schools are in the affluent cities and provinces of the east coast. Hong Kong is one of the standout markets, with more than 400 of about 1,000 local schools now using STEAM educational hardware.

It also helps to focus on elementary and junior high schools, which often have a more open attitude towards creative learning methods and products since they face less academic pressure. As a result, the hardware companies that got their start in the advanced, US-led hobbyist niche known as the ‘maker’ market are now anticipating a more universal social movement by targeting an ever-younger clientele.

“Kids and parents are surrounded by technology and every conversation about what they’re going to do in the future leads to more engineering in hardware, robotics and electronics,” says Cyril Ebersweiler, founding and managing director at hardware accelerator HAX. “But in China, being a ‘maker’ is not cool because it’s going back to the blue collar roots of manufacturing and doing things with your hands. It’s funny that it’s the more progressive parents who understand that we need to go back to the basics of the past if we want to build new things for the future.”

Tangible teachingsEducational hardware remains an emerging investment segment globally. In China, cultural shifts are piquing expectations for a local boom, but success will depend on various cross-market diversifications

“The gadget should be a Trojan Horse that wraps around something valuable for users on an ongoing basis” – Angela Bao


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Japan日本 201722-23 June, Conrad, Tokyo

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Keynote speaker

Confirmed speakers include:

Forum key statistics:

BOO

K

NO

W!

SAVE US$400

before 31 March!

420 14 50+Speakers

11Exclusive Panel Discussions

230+LPsCountriesDelegates

David Gross-Loh Managing Director BAIN CAPITAL

Yoshisuke Kiguchi Chief Investment Officer OKAYAMA METAL AND

MACHINERY PENSION FUND

Jesper Koll Chief Executive Officer WISDOMTREE INVESTMENTS

Tadasu Matsuo Head of Alternative Investment Credit and Alternative

Investment Department JAPAN POST INSURANCE

Takeshi Ito Senior Portfolio Manager AISIN EMPLOYEES’

PENSION FUND

Tatsuya Kubo Managing Director HARBOURVEST

PARTNERS (JAPAN) LTD… and many others!

Asia Series Sponsor Co-Sponsors

Exhibitors


YAJESH RABAJI HAD RESPONSIBILITY AND power – what he was missing was influence. As supply chain head for the leaf tobacco business of Indian conglomerate ITC, he needed to rationalize and simplify the procurement process, but quickly realized the real problem lay with a highly fragmented intercity trucking industry. He had little leverage in this area.

“Every process was so basic and non-standardized that a team within a corporate entity could never have solved it,” Yajabi remembers. “It was clear to us that this had to be done by a different entity.”

Seeing opportunity in this logistical dysfunction, Rabaji joined fellow ITC alumnus Chanakya Hridaya and supply chain consultant Subramaniam B. to launch trucking services marketplace BlackBuck in 2015. With a fresh $70 million in Series C funding and the help of new investors, the start-up hopes to reach new heights in the industry it is helping to create.

Rather than trying to impose order in India’s long-haul trucking business from the top down, BlackBuck aims to give truckers and customers the tools to self-organize. Similar to Uber, the 100,000 trucks on the platform use a mobile app to receive orders, with supply and demand setting prices rather than a central authority.

BlackBuck sees even greater opportunity in upcoming regulatory reforms expected to ease many of the struggles for third-party logistics providers. For instance, the recently approved goods and services tax will replace the country’s burdensome state and federal tariffs with a single point-of-sale

payment. Companies with established networks like BlackBuck expect to benefit from the resulting surge in interest for trucking.

“The supply chain networks will become more business-efficient rather than tax-efficient, and optimized supply chain networks will increase demand for intercity long haul

transportation,” Yabaji says. “For an organization doing business in this segment, this is definitely a plus point.”

BlackBuck’s innovative approach has gained it significant VC backing. Accel Partners and e-commerce giant Flipkart participated in the company’s first funding round and have re-upped in every round since then, including the most recent one. Yabaji says the two investors have been crucial to the company’s success, with Flipkart guiding management through the challenges of building an online business while Accel helped improve the internal organization. The arrival of US-based PE firm Sands Capital, which led the Series C round, on BlackBuck’s investor roster has given the company fresh confidence to tackle a new set of challenges.

“Accel’s help meant the company was actually moving from a venture organization into a more full-scale organization,” Yabaji explains. “This is a phase where we want to partner with firms like Sands Capital, which not only plays in the venture space but also on the growth equity side and in the public markets as well.”

INDIA’S E-COMMERCE BOOM IS WELL underway, with the convenience of online ordering rapidly winning over consumers. But behind the scenes industry observers worry that the logistics sector has failed to keep pace with customer demand for efficient and fast delivery, much less the unique needs of the Indian market.

“You need to provide very high service levels, which traditional logistics companies in India haven’t done,” says Neeraj Bharadwaj, a managing director in the Asia buyout team for The Carlyle Group. “There has been a stronger demand for third-party e-commerce logistics companies for better technology integration and value-added services such as cash-on-delivery and returns.”

Carlyle’s recent investment of more than $100 million in Delhivery, alongside existing backer Tiger Global Management, is aimed at supporting one of the few companies that the firm believes has what it takes to provide logistics services to Indian e-commerce players.

The GP did not jump into its new investment lightly. Delhivery had been in operation for over five years when Carlyle came on board. The GP

concluded that the company passed its start-up speed bumps and showed it could be a strong partner for homegrown e-commerce giants like Snapdeal and Flipkart, along with specialists such as furniture merchants and online grocery providers.

Delhivery’s express logistics services network, which spans 600 cities with 12 fulfilment centers, is one of its most visible signs of success. But the company’s backers are more satisfied with its management team’s understanding of the benefits that modern technology can to the sector. For example, Delhivery’s collection of data on shipments and returns gives it unique insights into customer behavior and a marked advantage over its competitors in the logistics space that have not realized the value of this information.

“You sometimes find managers who come from very traditional logistics backgrounds, and they obviously bring very valuable experience,” Bharadwaj says. “But you need to supplement

that with a strong grounding in analytics and technology, which is what Delhivery has done. They have both facets of that covered.”

For its part, Carlyle expects to play a crucial role in the company’s continued expansion through its experience in emerging markets e-commerce logistics. In particular, the GP believes its work in China, where the volume of e-commerce shipments is 80 times that of India, will help it to advise its new portfolio company on likely

developments in the market.“India’s 7-10 years behind China in terms of

e-commerce, and the experience of supporting our portfolio company ANE Logistics in China has provided us with a better understanding of the transformation of e-commerce logistics,” says Bharadwaj. “You can’t build what China has today because the market’s not there yet, but it does give you a perspective on what you need to build in the future.”

DEAL OF THE [email protected]

BlackBuck climbs the logistics ladder

Carlyle backs Delhivery’s cutting edge

Logistics: Taking a new path

Trucking: In for the long haul

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THE FIRST FOUR YEARS OF SQUARE PEG Capital’s existence were spent backing start-ups on a deal-by-deal basis, working in conjunction with high net worth individuals (HNWIs) and family offices. It relied largely on the resources and networks of co-founders Paul Basset, who previously set up job listings site Seek, and Barry Bott, formerly an early-stage investor for a family office.

The Australia-based firm’s first formal venture fund is the product of rising LP demand. Domestic superannuation fund Hostplus contributed $50 million and further commitments came from HNWIs, entrepreneurs and family offices as Square Peg raced past its $150 million target to close at $180 million. Total assets under management now stand at $300 million.

“We have a wide network of high net worth LPs whose capital we have been investing prior to this fund, and many of them have now invested in the fund. We have also added several

new family offices and HNWIs as LPs alongside institutional investors like Hostplus,” says Tushar Roy, a partner at Square Peg.

The bulk of capital still comes from family offices and individuals, including tech entrepreneurs, which may explain why Square Peg hasn’t felt the need to create separate

early-stage and follow-on vehicles like fellow Australia VCs Blackbird Ventures and AirTree Ventures. The firm also differs from its counterparts in seeking opportunities in Southeast Asia and Israel as well as Australia.

“We believe venture is a global asset class, and great venture opportunities can arise

anywhere,” Roy says. “We’re looking at three main geographies where we are advantaged from our knowledge, experience and network to find the best deals. As we’re looking at different markets, the bar is very high for us to make investments. We are comparing start-ups not just in the Australian context, but with start-ups we see in

the US, Israel, and Southeast Asia.” Square Peg’s deal-by-deal investments

include Uber and Stripe in the US, as well as PropertyGuru in Southeast Asia, and Canva and Rokt in Australia. While online marketplaces are a common theme across all geographies, the GP will also look at specific segments in certain areas: software-as-a-service (SaaS) in Australia, deep learning technology in Israel and consumer internet in Southeast Asia.

“Series A and B are our sweet spots, but we have the capacity and ability to go earlier and later. In Square Peg’s early years we made a lot of seed investments. We will continue to do that but in the last few years we have also done some large growth rounds,” Roy says.

To emphasize the variety, he points to Fiverr in Israel, where Square Peg provided more than half of the $60 million raised, and PropertyGuru, where the firm joined TPG Capital and others in a $129 million round. “We can use co-investment as a way to do larger rounds,” Roy adds. “We expect to bring Hostplus and other LPs further into these opportunities.”

Square Peg goes formal with $180 fund

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Vietnam 2017 Private Equity & Venture Forum

25 May 2017, Park Hyatt Saigon, Ho Chi Minh

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Stability and opportunities for private investors The first event of its kind in Vietnam, the inaugural AVCJ Vietnam Forum will offer in-depth analysis of the risks and rewards presented to private market investors looking to commit capital to the growing economy of Vietnam.

The Forum will provide a platform for attendees to showcase the latest alternative investments opportunities, share strategies for navigating the Vietnamese market whilst networking with a diverse audience of LPs, GPs and service providers.

Felix LaiDirector InvestmentsGAW CAPITAL

Henry NguyenManaging General PartnerIDG VENTURES VIETNAM

Dominic PiconeManaging DirectorTPG CAPITAL

Binh TranVenture Partner500 STARTUPS

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ADVEQ WAS FOUNDED IN SWITZERLAND, but its fund-of-funds business began 20 years ago in the US with a technology program intended to back VC managers. One year later, the scope of the program was expanded, resulting in the firm’s first fund commitment to an Asia-focused GP. It was the start of movement that has seen around $600 million raised for three Asia-dedicated funds, with still more capital deployed in the region from global vehicles.

“We started our fund-of-funds investments in VC funds, so we have a strong VC angle in our DNA,” says Jun Qian, executive director and head of China investment at Adveq. “We also have a strong presence in China enabling us to go in deep, which is quite different from other international counterparts. As such, we are well-informed when new opportunities arise in terms of fund investments or co-investments.”

Adveq currently has about $7 billion in total assets under management (AUM) globally across primary, secondary and co-investment strategies. While the Asia-dedicated funds have not increased significantly in size – the most recent closed in 2011 at around $200 million – the firm continues to channel capital into the region from its global vehicles, including co-investment funds and separate accounts. Between $100 million and $200 million is deployed each year.

China accounts for 50-55% of the Asia allocation, with 35-40% going to India and the remaining 10% earmarked for other Asian countries. Approximately 30% of the region-wide total is invested in venture capital, predominately in China and India.

Investments are made by a 15-strong team based out of Beijing, Shanghai and Hong Kong (Beijing was the first Asian office, opening in 2008). They are responsible for 40 GP relationships, 20 of which are in China. Individual funds receive commitments of around $20 million, drawn from the Asian funds and from other pockets of capital.

Success factorsWhen conducting due diligence on managers in China, Adveq adopt a top-down approach in order to evaluate whether a GP can satisfy several “success factors.” These are: a convincing strategy, including clearly defined target industries and investment stages; relationships with

eswtablished platforms; reliable internal support systems; and a strong track record.

By seeing positives in relationships with established platforms, Adveq is to a certain extent signaling its approval of spin-out GPs that maintain close ties with their former parent companies. Qian sees similarities between Japan and China in this context, and it doesn’t have to be a red flag – provided the structure is well-designed and the parent’s platform can offer significant value to the GP in terms of deal sourcing and exits.

This is not the only way Adveq goes against the grain in China: of the four success factors, track record is not ranked above all others. “In China, we don’t think a GP’s track record is the most important part because the track record reflects the past,” Qian explains. “We invest in a fund because we think the GP has a future.”

As for renminbi-denominated funds, he believes it is only a matter of time – 3-5 years – before the removal of currency convertibility restrictions breaks down the wall between US dollar and renminbi vehicles, which are currently in different parts of the market. As such, one of Adveq’s strategies is to back high-quality firms that have made their names in the renminbi space and are trying to raise their first US dollar funds.

Maison Capital, the most recent addition to the firm’s portfolio, fits this profile. The growth-focused GP was founded in 2004 and launched a US dollar fund last year, targeting $200 million. Qian praises Maison’s strong internal systems, notably incentive-linked performance review programs that cover staff at all levels. He sees this as essential to retaining talent – a key consideration in China, and in the renminbi fund space particularly, where there is a tendency for people to move around frequently.

“We have known them [Maison] for more than five years, since they started raising their second renminbi fund. We had a lot of discussions on their fund strategy and got to know them well. They have an investment thesis and internal

systems that we like, even though they are a traditional renminbi fund manager,” Qian says.

The nature of Adveq’s primary exposure – in addition to backing emerging US dollar managers, it also targets some smaller sector-focused managers in the healthcare space

– dictates the make-up of its co-investment and secondaries deal flow. Rather than participating in competitive processes or chasing GPs in search of transactions, the firm relies on friendly and collaborative approach.

“In many cases, China-focused GPs come to us and offer secondary opportunities as a means of building up a relationship with us because they want us to be an LP in their next fund,” says Qian. “We don’t do large secondary deals because everything is proprietary, sourced from within our network.”

The bigger pictureAdveq’s strategy in China is largely replicated in India and across Asia. The India portfolio is venture capital heavy with names like Mayfield and IDG Ventures, and there have also been co-investments in various start-ups. For example, towards the end of last year, Adveq participated in a funding round for baby and child-focused retailer FirstCry, a longstanding IDG portfolio company.

The firm’s own LP base includes pension funds, insurers, family offices and other financial institutions in Europe, the US and Asia. For Asia specifically, it is seeing more interest from global corporate pension funds, especially among those tied to companies that have business operations in the region. These kinds of clients are a potential source of separate account mandates.

“From our global AUM point of view, separate accounts have become a more and more important part, as LPs have become more sophisticated,” adds Qian. “Instead of being a general LP in our main fund, they want to pursue a particular strategy and so they request for tailor-made services,” adds Qian.

Small is beautiful Active in Asia for about two decades, fund-of-funds Adveq has a preference for China and India, and a relatively strong bias towards VC. Jun Qian, head of China investment, explains what he wants in a GP

“We invest in a fund because we think the GP has a future”

Vietnam 2017 Private Equity & Venture Forum

25 May 2017, Park Hyatt Saigon, Ho Chi Minh

Join your peers#avcjvietnam

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjvietnam.com

avcjvietnam.com

Registration Enquiries:Gavin Lam T: +852 2158 9675E: [email protected]

Sponsorship Enquiries: Anil Nathani T: +852 2158 9636E: [email protected] Enquiry

Stability and opportunities for private investors The first event of its kind in Vietnam, the inaugural AVCJ Vietnam Forum will offer in-depth analysis of the risks and rewards presented to private market investors looking to commit capital to the growing economy of Vietnam.

The Forum will provide a platform for attendees to showcase the latest alternative investments opportunities, share strategies for navigating the Vietnamese market whilst networking with a diverse audience of LPs, GPs and service providers.

Felix LaiDirector InvestmentsGAW CAPITAL

Henry NguyenManaging General PartnerIDG VENTURES VIETNAM

Dominic PiconeManaging DirectorTPG CAPITAL

Binh TranVenture Partner500 STARTUPS

Pete VoManaging DirectorCVC CAPITAL PARTNERS

Mark MobiusExecutive ChairmanTEMPLETON EMERGING MARKETS GROUP

Other speakers confirmed include:

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The 7th annual AVCJ Singapore Forum will provide an unrivalled in-depth analysis and debate on the latest trends, challenges andopportunities for private markets investors attracted to Southeast Asia, as the next destination in their quest for diversifying their portfolios and delivering alpha.

Southeast Asia: The next chapter in the Asia growth story

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Southeast Asia: The next chapter in the Asia growth storyAfter China and India, Southeast Asia is poised to become the next battleground for private equity and venture investors, as global players are looking to expand into the region. The investment thesis is brimming with potential but in practice market fragmentation and political instabilities have made barriers to entry problematic and minimised deal opportunity.

However, deal activity is increasing and investor appetite for exposure to Southeast Asia is on the rise. Strategically, companies in the region offer a number of opportunities serving the local market and as an exporter of goods in demand across the region.

The 7th annual AVCJ Singapore Forum will provide an unrivalled in-depth analysis and debate on the latest trends, challenges and opportunities for private markets investors attracted to Southeast Asia, as the next destination in their quest for diversifying their portfolios and delivering alpha.

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Singapore 2017 7th Annual Private Equity & Venture Forum

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