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Asia’s Private Equity News Source avcj.com April 08 2014 Volume 27 Number 13
FOCUS PORTFOLIO
Upping the dosageAre PE investors getting what they expected in Chinese healthcare? Page 7
Consumer complexGPs on the implications of Japan’s tax hike Page 11
Improved receptionCDH, Mekong and Vietnam’s Mobile World Page 14
Siguler Guff cements BRIC fund close
Page 13
Cathay launches third Sino-French vehicle
Page 13
DEAL OF THE WEEK
FUNDS
India’s Rabo Equity seeks nourishing returns
Page 12
Wolsely draws up consolidation blueprint
Page 12
Trial and error in private equity co-investment
Page 3
Baring Asia, Blackstone, BVCF, Everstone, Hopu, IFC, MSPEA, SAIF, Tata Capital, Temasek
Page 4
EDITOR’S VIEWPOINT
NEWS
GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY
Japan 2014 15th Annual Private Equity & Venture Forum
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CO. LTD
Takeshi Ito Senior Portfolio Manager AISIN EMPLOYEES’ PENSION FUND
Tatsuya Kubo Managing Director HARBOURVEST PARTNERS
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PARTNERS, ASIA
Yoshisuke Kiguchi Chief Investment Officer
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Number 13 | Volume 27 | April 08 2014 | avcj.com 3
EDITOR’S [email protected]
IS CO-INVESTMENT WORTH IT? Absolutely, provided the LP in question has sufficient willingness, experience and resources to conduct due diligence on a deal before the window of opportunity closes.
Andy Hayes, private equity investment officer at the Oregon State Treasury (OST), is part of a three-person team responsible for the $13.9 billion Oregon Public Employees Retirement Fund has allocated to the asset class, nearly 21% of the total corpus. The co-investment program is run jointly with Washington State Investment Board and management is outsourced.
Contrast that with Teachers’ Private Capital (TPC), the PE and direct investment arm of Ontario Teachers’ Pension Plan (OTPP). It has deployed C$12 billion ($11 billion) globally – split equally between fund and direct investments – with in-house experts to look at opportunities in different industries and satellite offices (including Hong Kong) to cover different geographies.
TPC favors the proactive co-underwriting deals alongside managers over passive downstream syndication where there is little participation in deep due diligence. OST, by the very nature of its set up, errs more towards the latter end of the spectrum.
It is in this context that the results of Altius Associates’ recent study on co-investment programs should be viewed. Relying on a sample of 886 realized US buyout and growth investments made between 1979 and 2010, the study found there is a substantial probability that a co-investment portfolio comprising 10 assets would generate an IRR below 0%.
Deal selection is one of the most important components of driving returns for investors, Dr. William Charlton, Altius’ head of US investment, noted. But even with good choices, portfolios may be subject to additional risk because a small number of transactions can move the returns needle substantially – positively or negatively.
The rationale has been explained before. If done correctly, co-investments offer LPs the opportunity to deepen their exposure to certain assets in a fund portfolio without incurring additional fees. But deploying capital in a single
transaction rather than across all the deals could also expose the LP to more downside.
One of the primary risks is adverse selection. GPs may not open up the best transactions for co-investment because they want to keep good deals within the fund structure and maximize their carried interest; or they open up potentially bad transactions by stepping beyond their comfort zone in terms of deal size.
LPs that recognize their limitations and either outsource co-investment or build up in-house resources (the OST approach versus the TPC approach) are less likely to get caught out. Industry participants warn that LPs who spread their staff too thinly and often end up being the last people to see deals and the last people to hear what is being said on the ground.
Given Altius’ findings are based on deals done in the US only, they may not reflect the fact that the predominantly US-based investor base is not as gung-ho globally as in their home markets.
Marcus Simpson, head of global PE at QIC, estimates there are only 15-20 LPs capable of underwriting co-investments in the manner of TPC. However, he accepts that post-deal syndication is the first step in a journey that may end in a more proactive approach.
According to Bain & Company, LPs participated in only 15% of US buyouts north of $1 billion between 2009 and 2013, typically as a co-underwriter. Canadian Pension Plan Investment Board, GIC Private, OTPP and Temasek Holdings were the most active co-investors.
In Asia as elsewhere, there is increased appetite for co-investment. But beyond a number of very large institutional players there is still more talk than action. Even among the big fish, experience varies hugely, and they will have their successes and failures – in part driven by whether their understanding of the resources required to participate matches the reality.
Tim BurroughsManaging EditorAsian Venture Capital Journal
Co-investment: Toe in the water
Managing Editor Tim Burroughs (852) 3411 4909
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Winnie Liu (852) 3411 4907
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GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY
Japan 2014 15th Annual Private Equity & Venture Forum
avcjjapan.com
avcjjapan.com
26-27 June, Conrad Tokyo
Secure your seat now, SAVE US$400 on admission
Prospering in the New JapanEarly confirmed LP speakers include:
For the latest programme and speaker line-up, please visit avcjjapan.com
Contact us
Asia Series Sponsor Co-Sponsors
Juan Delgado-Moreira Managing Director, Investment
Committee, Asia HAMILTON LANE
Hidekazu Ishida Investment Officer OSAKA GAS PENSION FUND
Kazushige Kobayashi Managing Director CAPITAL DYNAMICS
Soichi Sam Takata Head of Private Equity TOKIO MARINE ASSET MANGEMENT
CO. LTD
Takeshi Ito Senior Portfolio Manager AISIN EMPLOYEES’ PENSION FUND
Tatsuya Kubo Managing Director HARBOURVEST PARTNERS
(JAPAN) LIMITED
Zhan Yang Director BLACKROCK PRIVATE EQUITY
PARTNERS, ASIA
Yoshisuke Kiguchi Chief Investment Officer
OKAYAMA METAL AND MACHINERY PENSION FUND
Registration Enquiries: Carolyn Law T: +852 3411 4837 E: [email protected] Enquiries: Darryl Mag T: +852 3411 4919 E: [email protected]
Simultaneous translation between Japanese and English will be available throughout the event開催言語：日本語および英語通訳同時あり
7,506Join your peersScan the QR code with your phone to access
avcjjapan.comTweet #avcjjapan
avcj.com | April 08 2014 | Volume 27 | Number 134
ASIA PACIFIC
Baring Asia targets $3b for Fund VIBaring Private Equity Asia will seek to raise around $3 billion for its sixth pan-regional fund, its largest vehicle to date. Sources familiar with the matter told AVCJ that the fund is expected to launch within the next two months. The predecessor vehicle beat its original target of $1.75 billion when it reached a final close of $2.46 billion in January 2011 after just six months in the market.
BlackRock names new Asia headBlackRock has appointed Ryan Stork as head of Asia Pacific operations, replacing Mark McCombe who will relocate to the US to become the company’s global head of institutional client business and chairman of the alternative investment division.
AUSTRALASIA
Standard Chartered backs listed manganese minerStandard Chartered Principal Finance has provided a $50 million debt financing package for OM Holdings, an Australian Securities Exchange-listed mining company. The capital will be used to refinance debt and support the construction of a smelter in Malaysia that will supply silicon-based ferroalloys to steelmakers.
GREATER CHINA
BVCF raises $200m for third life sciences fundBVCF, a China life sciences-focused PE firm, has reached a final close of $200 million on its third fund. Investors include Adveq, Mayo Clinic Foundation, International Financial Corporation, Novartis, BlackRock and Munich Private Equity Partners. The vehicle, which launched in June 2011, is more than $100 million larger than its vintage predecessor.
IDG, Jafco make partial exits through Tarena IPOIDG Capital Partners and Jafco have made partial exits from Tarena International after the Chinese IT training services provider raised $137.7 million
through a NASDAQ IPO. The company sold 15.3 million shares at $9 apiece. The stock opened at $10.39 on Thursday and has since fallen by nearly 13% to trade just above the IPO price. Goldman Sachs did not exit any shares in the IPO.
Morgan Stanley PE Asia agrees two take-privatesTwo privatizations US-listed Chinese companies backed by Morgan Stanley Private Equity Asia (MSPEA) have won board approval. Noah Education Holdings and Sino Gas International Holdings are now a shareholder vote away from de-listing. The offers value the companies at $107.4 million and $74.9 million, respectively.
VC-backed package tour platform files for US IPOTuniu, a Chinese online package tour provider
backed by DCM, Temasek Holdings, Gobi Partners and Sequoia Capital, is seeking to raise up to $120 million through a US IPO. DCM owns 23.5% of Tuniu, while Temasek, Gobi and Sequoia hold stakes of 16.7%, 16.4% and 13.2%, respectively.
Intel Capital plans $100m China smart device fundIntel Capital, the VC unit of chipmaker Intel, has launched a $100 million China fund to help accelerate the growth of smart devices. The new fund - Intel Capital China Smart Device Innovation Fund - is the third China-focused fund the firm has established. It will reinforce Intel’s commitment to China and developing the China technology ecosystem by using its chips.
Kingsoft commits $90m to file-sharing service XunleiChinese software developer Kingsoft Corporation will invest $90 million in Xunlei, a file-sharing service backed by a string of VC firms including Morningside Technologies, IDG Ventures and Ceyuan Ventures. According to a regulatory filing, Hong Kong-listed Kingsoft will subscribe to approximately 39 million preferred shares in Xunlei at $2.82 apiece, giving it a 9.98% stake in the company.
MSPEA in another partial exit from Sihuan PharmaMorgan Stanley Private Equity Asia (MSPEA) has made another partial exit from Hong Kong-listed Sihuan Pharmaceuticals, generating up to HK$1.12 billion ($145 million) through a block trade. The PE firm, which supported management in a privatization of Singapore-listed Sihuan in 2009 before re-listing the business in Hong Kong the following year, sold 120 million shares at HK$9.36 apiece.
Online liquor retailer Jiuxian raises $68mJiuxian.com, a Chinese e-commerce site that sells wines and spirits, has raised RMB425 million ($68 million) across two rounds of funding. Return backers include Beijing-based Rich Land Capital, Shenzhen Oriental Fortune Capital and Sequoia Capital.
Chinese PE firm secures local pension fund tie-upPE firm China Treasury Wharton Capital Management has partnered with China Social Welfare Foundation, a government-backed
Blackstone’s Michael Chae to return to New YorkMichael Chae, head of international private equity at The Blackstone Group, will move back to New York after a four-year stint in Hong Kong. Chae will continue to oversee Blackstone’s Asia Pacific PE investments and while reassuming responsibility for firm’s media and
communications investments. He will also help oversee the firm’s $5 billion Tactical Opportunities Fund, which launched in 2012.
Chae arrived in Hong Kong in 2010 to replace former Asian
head Ben Jenkins. At the time, he was a senior partner in New York. A significant part of Chae’s remit was to build the Blackstone’s team in Asia, combining local hires with talent developed in the New York and London offices. During the last four years Blackstone has more doubled its Asian headcount to 225. This has included opening an office in Singapore last year with 30 people.
Ed Huang and Yi Luo will lead Blackstone’s PE investments in China and Jan Neilsen and James Carnegie will head the business elsewhere in Asia. Also, Gautam Banerjee, chairman of Blackstone Singapore, will become a senior managing director and co-chairman of Blackstone’s Asia operating committee.
NEWS
Number 13 | Volume 27 | April 08 2014 | avcj.com 5
public fund system, to develop an elderly care project. The Evergreen International Health Care City project, managed by Evergreen Fund, a wholly-owned pension fund of CSWF, aims to establish facilities such as hospitals, libraries, and healthcare centers.
NORTH ASIA
Jafco invests $2m in leisure booking siteGlobis Capital Partners and Jafco Ventures have invested JPY200 million ($1.95 million) in Catarizm, the Japanese start-up behind online leisure booking site Asoview. Set up in 2011, Catarizm provides online booking services for a range of weekend activities via its Asoview platform.
KKR, Affinity complete Oriental Brewery exitKKR and Affinity Equity Partners have completed their exit of Korea’s Oriental Brewery (OB) to previous owner Anheuser-Busch InBev (AB InBev) for $5.8 billion. The transaction represents the largest-ever trade sale exit in Asia by private equity investors in dollar terms, according to AVCJ Research. The money multiple is said to be around 5x.
SOUTH ASIA
SAIF-backed HomeShop18 files for US IPOHomeShop18, an Indian television shopping network and online market place backed by SAIF Partners and OCP Asia, has filed to go public on the New York Stock Exchange. The IPO will see CEO Sundeep Malhotra and parent company Network18 exit part of their stake in the company while SAIF, OCP and South Korea’s GS Home Shopping will retain their shares.
India Infoline buys majority stake in PE firmIIFL Wealth Management, a listed unit of India Infoline (IIFL) Group which is in turn backed by The Carlyle Group, has acquired a majority stake in PE firm India Alternatives Investment Advisors. IIFL has also made a contribution to the firm’s India Alternatives Private Equity Fund, which has received an initial INR2.3 billion ($38 million) in capital and focuses mid-stage growth capital deals.
Tata Opportunities Fund backs Varroc EngineeringTata Opportunities Fund has invested INR3 billion ($30 million) in Varroc Engineering, an Indian auto component manufacturer owned by Varroc Group. This is Tata Opportunities Fund’s first investment outside of the Tata group and its third transaction overall, having previously invested in Ginger Hotels and satellite TV player Tata Sky.
IFC to invest $85m in PepsiCo’s India bottlerInternational Finance Corporation (IFC) is investing $85 million in Varun Beverages, the largest South Asian bottler for soft drinks giant PepsiCo. Varun Beverage – a portfolio company of Standard Chartered Private Equity – holds bottling and distribution franchise rights from
PepsiCo for India, Sri Lanka and Africa.
CDC invests $28m in India’s Ratnakar BankCDC Group has paid $28 million for a 4.8% stake in India’s Ratnakar Bank, which specializes in lending to small businesses. The bank has been seeking to raise around $60 million ahead of an IPO. Ratnakar will use the fresh capital to support its expansion plans.
Temasek invests $40m in India’s StarAgriTemasek Holdings has invested INR2.5 billion ($40 million) in Indian agri-services provider Star Agriwarehousing and Collateral Management. Set up in 2006 by four former franchisees of rural lending products, StarAgri is one of the country’s largest post-harvest agri-solutions providers, offering rural supply-chain infrastructure including logistics services, warehousing, labs and collateral finance.
IFC to support Brummer’s second Bangladesh fundInternational Finance Corporation (IFC) plans to invest up to $20 million in Frontier Bangladesh II, a $100 million fund being raised by Swedish alternative asset manager Brummer & Partners. IFC also supported the predecessor fund, a 2009 vintage vehicle that raised $88 million. This was the first dedicated Bangladesh private equity fund. The new fund has a hard cap of $150 million.
Everstone invests $16m in fashion houseEverstone Capital has invested INR1 billion ($16.6 million) in Indian fashion label RituKumar in return for an undisclosed minority stake. Set up in 1969, Ritu Kumar produces a range of women’s clothing under three main brands: Ri, a premium bridal and formal wear line; Ritu Kumar, a line in ethnic every day and semi-formal wear; and Label, a Western-style designer brand.
LeapFrog invests $29m in IFMR CapitalLeapFrog Investments, a US-based specialist investor in financial services in growth markets, has invested $29 million in Indian non-banking finance company (NBFC) IFMR Capital. LeapFrong wants to leverage IFMR’s structuring expertise, reach and relationships across financial products and sectors in India.
Hopu supports $1.5b Noble Agri dealA consortium led by Hopu Investments will take a minority position in an agribusiness joint venture being set up by Chinese agricultural conglomerate COFCO Corporation and Noble Group, an agriculture and energy supply chain manager. The investment follows the private equity firm’s first close of $1.1 billion on Hopu Master Fund II, which is said to be targeting at least $2 billion in total. The fund focuses on the consumer, natural resources and financial services sectors.
COFCO has agreed to pay an initial $1.5 billion for a 51% stake in Noble Agri from Noble Group. The assets will then be spun out into a new joint
venture, in which Noble Group will retain a 49% interest. COFCO owns two thirds of the vehicle through which the acquisition is being made, with the Hopu consortium holding the balance.
Noble Agri had equity of $2.8 billion and net debt of $2.5 billion as of year-end 2013. The transaction values the equity portion at 1.15x book value for 2014.
NEWS
avcjchina.com
GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjchina.com
10-11 June • Park Hyatt, Beijing
13th Annual Private Equity & Venture Forum
China 2014
Linbo HeManaging Director and Head of Private Equity Investment Dept., CHINA INVESTMENT CORPORATION (CIC)
Early confirmed speakers include:
Roy KuanManaging PartnerCVC CAPITAL PARTNERS
Robert HuManaging DirectorINFINITY GROUP
Gordon ShawManaging Director, ShanghaiBARING PRIVATE EQUITY ASIA
Jixun FooManaging PartnerGGV CAPITAL
JP GanManager PartnerQIMING VENTURE PARTNERS
Richard HsuManaging DirectorINTEL CAPITAL
David H. LiuMember & HeadKKR CHINA
Weichou SuPartnerSTEPSTONE
Alex ZhengChairmanSHENZHEN COWIN VENTURE CAPITAL CO.
KEYNOTE
Hiro MizunoPartnerCOLLER CAPITAL
John QuVice General ManagerCHINA RE ASSET MANAGEMENT CO., LTD.
Sally ShanManaging DirectorHARBOURVEST PARTNERS (ASIA) LIMITED
James MiCo-Founder and Managing DirectorLIGHTSPEED CHINA PARTNERS
Contact us
For the latest programme and speaker line-up, please visit www.avcjchina.comCo-SponsorsAsia Series Sponsor VC Legal Sponsor
Jonathan ZhuManaging Director BAIN CAPITAL ASIA, LLC
Hurst LinGeneral PartnerDCM CHINA
Pak-Seng LaiManaging Director and Head of AsiaAUDA
Registration: Pauline Chen T: +852 3411 4936 E: [email protected]: Darryl Mag T: +852 3411 4919 E: [email protected]… and many others!
Shiming JiangDirector, Private Equity Investment Dpt., NATIONAL COUNCIL FOR SOCIAL SECURITY FUND
Toshiyuki KumuraCo-head of Private Equity InvestmentsTOKIO MARINE ASSET MANAGEMENT CO., LTD.
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Number 13 | Volume 27 | April 08 2014 | avcj.com 7
COVER [email protected]
CORD BLOOD MIGHT TURN OUT TO BE the ultimate life insurance policy. Samples of around 60 milliliters are taken from the umbilical cord shortly after birth and placed into storage. Should the child later be stricken by a serious illness, stem cells extracted from the blood can be used to treat more than 80 diseases, notably leukemia, lymphoma and anemia.
Stem cell research remains a relatively nascent area of science and it is not certain that cord blood contains sufficient stem cells to be successfully used in treatment. Storage has also yet to become habitual for Chinese parents. Of the 60-80 million children born in the country each year, samples are collected in just 1% of cases, compared to 15-20% elsewhere in Asia.
The investors that have backed US-listed China Cord Blood Corporation (CCBC), the leading domestic blood banking operator, are betting on the long game. KKR committed $65 million in 2012, making its first foray into the country’s health services sector. Hao Capital invested six years earlier, when the market was very much in its infancy.
Cord blood collection in licenses are closely held in China. The government only permits the practice in 10 provinces and municipalities and CCBC has exclusive rights in three of them. Elaine Wong, a partner and co-founder of Hao Capital, notes that these local monopolies were necessary to attract investors.
The PE firm fully exited its holding last year with a reasonably high return and can therefore endorse the business model. But the investment thesis has little in common with perceptions of Chinese healthcare.
“It’s more of a consumer play – cord blood storage is like health insurance. The focus of the company was on storage rather than research and development of stem cell therapies,” she says.
Hype and realityChina has become a magnet for healthcare investors, apparently at the expense of developed economies. According to London-based research firm GlobalData, PE investment in the sector came to $19.8 billion last year, well short of the 2007 peak of $57.7 billion. Activity in Europe fell by 30.5% year-on-year and North America saw growth of just 2.5%. Asia, on the
other hand, has witnessed a 125.8% jump investment between 2011 and 2013, led by interest in China and India.
However, it is still unclear what form the China opportunity will take and how big it can become, and by extension, whether these investments will deliver the anticipated returns.
“Investing in China’s healthcare sector is like wondering around in an antique flea market where it is difficult to tell if the products are real or not,” says Dr. Zhi Yang, founder and managing director at BVCF, a China-focused life science PE firm. “People may regret over-blowing the market in the future, especially if they don’t know the industry well.”
AVCJ Research breaks down PE investment in the sector into three categories: service providers, pharmaceuticals and medical devices. Only the service provider segment saw an uptick in
activity last year, with eight deals totaling $202 million, nearly double the 2012 figure.
The most dramatic shift was in commitments to pharmaceutical firms, which came to $441 million, compared to $1.6 billion in 2012 and close to $1 billion in each of the two years before that. This was the primary reason healthcare investment as a whole dropped to $688 million in 2013, from $1.8 billion the previous year.
The pharmaceuticals slowdown is blamed on two factors. First, the Chinese government launched an investigation into multinational
pharma player GSK over allegations of bribery. This made PE investors turn cautious, for fear of inadvertent association with individuals and companies that may be sucked into the scandal.
Second, as part of broad healthcare reforms, more drugs are being added to the list of treatments deemed essential to meeting basic medical needs. Those drugs are made available to all grassroots healthcare services providers, with the cost fully reimbursed through the insurance system. As such, prices are set deliberately low.
In 2012, the list expanded from 307 to 502 products, including 317 conventional drugs and 203 traditional Chinese medicines (TCMs). It includes Bayer’s Glucobay, Pfizer’s Norvasc and Novartis’ Diovan.
“The government’s expansion of the essential drug list will inevitably put pressure on pharmaceutical companies’ growth margins.
Once drugs are on the list, price cuts range from 5% to even half the original level,” says Nisa Leung, managing partner at Qiming Venture Partners.
Other optionsIn this context, investing in generic drugs manufacturers might not be as attractive as it once was. On the flip side, healthcare reforms have given impetus to PE firms looking at other parts of the sector, notably service providers. The government’s decision to relax curbs on foreign
Innovation issuesThere is plenty of buzz about investment in Chinese healthcare but the pharmaceuticals segment has yet to fulfill its promise as an R&D hub. Should PE and VC investors be looking for different angles?
PE investment in China’s healthcare sector
Source: AVCJ Research
2,000
1,500
1,000
500
0
60
50
40
30
20
10
0
US$
mill
ion
Dea
ls
No. of deals, healthcare services No. of deals, biopharma No. of deals, medical devices
2007 20092008 20112010 2012 2013 2014YTD
Value (US$m), biopharma Value (US$m), medical devices Value (US$m), healthcare services
avcjchina.com
GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjchina.com
10-11 June • Park Hyatt, Beijing
13th Annual Private Equity & Venture Forum
China 2014
Linbo HeManaging Director and Head of Private Equity Investment Dept., CHINA INVESTMENT CORPORATION (CIC)
Early confirmed speakers include:
Roy KuanManaging PartnerCVC CAPITAL PARTNERS
Robert HuManaging DirectorINFINITY GROUP
Gordon ShawManaging Director, ShanghaiBARING PRIVATE EQUITY ASIA
Jixun FooManaging PartnerGGV CAPITAL
JP GanManager PartnerQIMING VENTURE PARTNERS
Richard HsuManaging DirectorINTEL CAPITAL
David H. LiuMember & HeadKKR CHINA
Weichou SuPartnerSTEPSTONE
Alex ZhengChairmanSHENZHEN COWIN VENTURE CAPITAL CO.
KEYNOTE
Hiro MizunoPartnerCOLLER CAPITAL
John QuVice General ManagerCHINA RE ASSET MANAGEMENT CO., LTD.
Sally ShanManaging DirectorHARBOURVEST PARTNERS (ASIA) LIMITED
James MiCo-Founder and Managing DirectorLIGHTSPEED CHINA PARTNERS
Contact us
For the latest programme and speaker line-up, please visit www.avcjchina.comCo-SponsorsAsia Series Sponsor VC Legal Sponsor
Jonathan ZhuManaging Director BAIN CAPITAL ASIA, LLC
Hurst LinGeneral PartnerDCM CHINA
Pak-Seng LaiManaging Director and Head of AsiaAUDA
Registration: Pauline Chen T: +852 3411 4936 E: [email protected]: Darryl Mag T: +852 3411 4919 E: [email protected]… and many others!
Shiming JiangDirector, Private Equity Investment Dpt., NATIONAL COUNCIL FOR SOCIAL SECURITY FUND
Toshiyuki KumuraCo-head of Private Equity InvestmentsTOKIO MARINE ASSET MANAGEMENT CO., LTD.
关注我们：
Book before 25 April to save up to US$300
avcj.com | April 08 2014 | Volume 27 | Number 138
investment in state-owned hospitals is seen as indicative of a more favorable environment.
Notable deals in the 18 months include: GIC Private and Goldman Sachs’ $100 million investment in medical examinations provider iKang Healthcare, which recently listed in the US; the $49 million commitment to Meinian Onehealth Healthcare Group, a leading independent provider of preventive check-up services, by The Carlyle Group, Cathay Capital and Ping An Insurance; and Warburg Pincus’ investment in the maternity-focused Amcare hospital chain.
“In the provider space, there are still some assets available in the market for financial investors to land on. Those specialty chains, such as dental care and eye care, are focused on the repeatable model. They are preferred to general
hospitals in tier-one and tier-two cities because they are less differentiated and have a lot of complexities,” says Phil Leung, a Shanghai-based partner with Bain & Company, who also leads the firm’s China healthcare practice.
It is not for everyone, though. Public hospitals can be a turn-off because, without strong policy support or a clear turnaround opportunity, they are inherently low-growth and hampered by bureaucracy. Even the private specialty chains are generally off limits to VCs and mid-cap PE players because of the amount of capital required.
“The hospital sector is overheating and valuations are being pushed up,” says BVCF’s Yang. “Furthermore, some investors will come to regret their involvement if they don’t have the right management skill sets. It isn’t like investing in a hotel or shopping mall. You need capable
professional skills to manage doctors and nurses, who are highly educated.”
A model apartIn contrast to recent patterns in China, the pharmaceuticals segment has consistently been the most popular among investors in the US, followed by medical devices and providers.
The power of the US Food and Drug Administration (FDA) is the critical differentiating factor. Once a new drug receives regulatory approval, large-scale production usually begins and the technological and chemical patents that underpin and protect its value ensure high margins.
This kind of product innovation is one area in which China is decidedly lagging. While TCM and biological pharmaceuticals are faring well, chemical drugs represents the problem area, with generics manufacturers seeing slower growth as a result of the essential drugs list. It is suggested the Hony Capital-backed management buyout of US-listed generics player Simcere Pharmaceutical Group last year was in part driven by expectations that American investors wouldn’t respond well to more moderate growth.
However, Bain & Co’s Leung notes the slowdown in investment is going to be temporary. He foresees a wave of industry consolidation, especially when new regulations come into force.
“Injectable drug manufacturers must implement a revised set of good manufacturing practices (GMPs) by January 2014, and the manufacturers of other drugs must do so by January 2016,” Leung says. “That will be a milestone or hurdle and some local pharma firms will actually need either to shake-up or get out of business.”
This may well result in opportunities for financial investors to partner with managers of renminbi-denominated funds, creating reasonable size generic pharma companies through series of roll-up investments.
Regardless of whether or not roll-ups prove to be strong investment thesis, a dependency on generic drugs manufacturing does not represent an attractive long-term goal for China’s pharmaceutical industry. The product innovation issue must be addressed with a view to generating higher value, patent-protected treatments.
“There is a lot of talk about innovative drugs. However, few people know how to be innovative and even fewer people understand the value of being innovative. Finding good projects in China is like looking for a needle in a haystack, taking a lot time to find,” says BVCF’s Yang.
His firm recently reached a final close of $200 million on its third China life sciences fund. The
COVER [email protected]
TCM: A local cure Traditional Chinese medicine (TCM) was identified as one of the nation’s seven strategic
industries under the 12th Five-Year Plan, a document outlining government policy for 2011-2015. Buoyed by this support, the industry is expected to grow from $18.6 billion last year to more than RMB550 billion ($87 billion) by 2015.
TCM remedies now account for 203 of the 502 drugs on the list of treatments deemed essential to meeting basic medical needs. This is a reflection of the government’s desire to support the use of TCM in lower tier cities and rural areas where it generally popular. Drugs on the list are available to grassroots healthcare services providers at low prices, with costs reimbursed through the insurance system.
TCM providers are also being encouraged to expand globally, with 10 companies expected to set up such branches in Southeast Asia, Europe and the US by 2015. However, given alternative treatments are less recognized in Western countries, how far can these drug makers go?
“There is no standard procedure to produce Chinese medicine and so it will be a challenge expanding TCM globally. A lot of lobbying work should be done with regulators such as the US Food & Drug Administration to prove that TCM actually works,” says Mei Dong, a partner with KPMG China. “I think TCM will be more focused on Asia because people here understand it more.”
Indeed, it is the domestic strength of TCM that is attracting private equity investors.Shandong Buchang Pharmaceuticals, a TCM manufacturer specializing in heart disease
formulas, has received several rounds of funding from Morgan Stanley Private Equity Asia, AIF Capital, TDR Capital, ARC Capital and Hao Capital. Having developed strong local distribution channels, the company has started supplying foreign traditional drugs, such as those developed in Japan, says Elaine Wong, a partner and co-founder of Hao Capital.
Foreign strategic investors are also interested. Two months ago, Germany’s Bayer HealthCare bought Dihon Pharmaceutical Group, a TCM manufacturer based in Yunnan province. The deal facilitated the exit of Legend Capital, an investor in the firm since 2010.
The acquisition is part of Bayer’s ambition to become the leading multinational in the Chinese over-the-counter market, of which TCM accounts for about half. Several other multinationals have also expressed an interest in herbal treatments, with Sanofi buying BMP Sunstone for $520.6 million in 2010.
“We’re optimistic on the growth prospect for TCM in China. Since it has a long history in Chinese culture, many people believe in its pharmacology and will combine Western and Chinese medicine to recover from sickness,” says Nisa Leung, managing partner at Qiming Venture Partners.
The VC firm committed a Series A round for Jun He Tang last October with a view to scaling up the company’s chain store business. “Jun He Tang provides standardized services and operates in the same business model as Western clinics, which is easier to expand and manage,” Leung adds.
COVER [email protected]
portfolio already includes Kunshan RiboQuark Pharmaceutical Technology, a joint venture established by US-based Quark Pharmaceuticals and Suzhou Ribo Life Science, and MicuRX Pharmaceuticals, a biopharma firm developing next-generation antibiotics.
Yang expects cross-border transactions – using joint ventures with overseas pharmaceutical and medical devices companies to bring innovative products and technologies to China – to feature strongly in the fund. BVCF also hopes to generate deal flow through
partnerships with US venture capital firms .
Positive signs?BVCF’s activity is representative of more VC money flowing into early-stage companies. It didn’t happen much in the past because the development cycle is long and risky and regulatory barriers are high.
Taking a new drug from clinical tests to commercialization often takes 7-10 years and the success rate in China is less than 1%. For investors to consider such opportunities, a product
pipeline should already be in place.“In our experience, even though a product
may have received FDA or Europe’s CE Mark licensing in other geographies, it can still take several years to obtain China Food & Drug Administration licensing. Very few venture capital funds have the fund life and expertise to invest in new drug development,” says Hao Capital’s Wong.
She sees the biotech ecosystem evolving in China, with increased demand for pre-clinical medical equipment and services indicated a higher level of interest in early-stage drug development. But the market is still very small. Joint venture-type investments like those endorsed by BVCF are only just moving from thought to execution and no one is anywhere near producing the next blockbuster treatment.
“R&D has become an area of focus for Chinese companies, but it is not yet comparable to Western countries,” says Mei Dong, a partner with KPMG China. “Meanwhile, I think most of the Sino-foreign joint ventures may only focus on domestic market. When a foreign firm comes in, it needs local distribution channels – that is the main purpose of forming a JV.”
These firms come with drugs ready to sell, not awaiting development. It is a model comparable to that of China Cord Blood: an investment in the consumer, rather than technology itself.
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Deal Report
NASDAQ listed Focus Media has received a non-binding tender offer of $5.4 per share, or $27 per ADS, of its entire outstanding
common shares from a consortium of investors, including company chairman Nan-chun Jiang, CDH Investments, China Everbright
Limited, CITIC Capital Partners, FountainVest Partners and The Carlyle Group. The consideration would be approximately $2.88
billion based on the 532.95 million common shares outstanding and not held by the chairman.
Announced Date:
Announced (US$mln): Previous Stake:
Deal Stake:
Final Stake:
Company Name Deal Role Industry
Private Equity Buyout
Buy-outs (MBO/MBI/LBO)
Deal Type:
Deal Status:
Stage:
Nationality
17.56%
Involved Companies
82.44%
100.00%
Agreement in Principle
Acquisition Technique:
Acquisition Attitude:
Leveraged Buyout
Neutral
Closed Date: n/d
Aug 12, 2012
Amount(US$mln) Deal Stake
$2,877.9400
Closed (US$mln): n/d
United StatesCarlyle Asia - China Investor n/d n/d Private Equity
Hong KongCDH China Management Co.,
Ltd.
Investor n/d n/d Private Equity
Hong KongChina Everbright Ltd. Investor n/d n/d Finance
Hong KongCITIC Capital Partners Ltd. Investor n/d n/d Private Equity
China (PRC)FountainVest Advisors Ltd. Investor n/d n/d Private Equity
China (PRC)Nan-chun Jiang Investor n/d n/d Unclassified
China (PRC)Focus Media (China) Holding
Co., Ltd. (FocusMedia)
Investee n/d n/d Advertising
China (PRC)Fosun International Ltd. Seller n/d -17.20% Steel
United StatesUndisclosed Shareholder(s) Seller n/d -65.24% Unclassified
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (Carlyle Asia
- China)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (CDH China
Management Co.,
Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (China
Everbright Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (CITIC
Capital Partners Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor
(FountainVest
Advisors Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (Nan-chun
Jiang)
n/d n/d Securities/Investment
Banking
United StatesJP Morgan & Co Inc. Financial Adviser,
Investee (Focus Media
(China) Holding Co.,
Ltd. (FocusMedia))
n/d n/d Securities/Investment
Banking
United StatesMorgan Stanley - Beijing
Representative Office
Financial Adviser,
Investor (CITIC
Capital Partners Ltd.)
n/d n/d Securities/Investment
Banking
United KingdomConyers Dill & Pearman Legal Adviser,
Investor (Nan-chun
Jiang)
n/d n/d Legal Services
1
Copyright 2012 AVCJ Group Ltd. All rights reserved.
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Number 13 | Volume 27 | April 08 2014 | avcj.com 11
JAPANESE SUPERMARKET CHAIN SEIYU exhibits a curious rallying cry to customers on its website: a muscle-bound manga character with burning eyes calls upon shoppers “not to give in to the consumer tax raise,” while a banner message in Japanese cries out “Shop with courage!”
On April 1, the Japanese government increased the consumption tax from 5% to 8%, the first hike in 17 years. It will rise again, to 10%, in October next year. Seiyu is one of a number of retailers encouraging customers to buy in bulk ahead of the next stage in the tax hike – imploring them to stock up on a one-month supply of chocolate bars or three months’ worth of instant noodles before shops start raising prices.
While in the short-term some companies are looking to make the best of the situation many anticipate a slowdown in spending. Across the board, Japan’s consumer-focused businesses are bracing themselves for the pinch and private equity portfolio companies operating in this sector are no exception. The logic goes that a drop in consumer spending will have a negative impact on balance sheets and consequently impact investor appetite in the sector. But is this necessarily the case?
“The tax is an inevitable measure as there is a need to reform the Japanese government’s fiscal structure,” says Satoru Arakawa, a partner with local mid-market buyout firm J-Star. “It is too early to say what the effect will be, we have to wait several months. If anything the impact so far has been that consumers have been on a shopping spree ahead of prices going up.”
According to AVCJ Research, consumer-related companies have accounted for a fairly significant portion of private equity investment in Japan over the past few years. Of the 2,404 PE and VC deals announced since the beginning of 2008, 562 have been in consumer-related sectors. Among buyouts alone, the consumer portion is much higher – accounting for one third (75) of the 230 buyouts to take place during the period.
Several of the largest transactions seen in Japan in recent years have focused on the sector, including: Bain Capital’s acquisition of a 50% a stake in Jupiter Shopping Channel for JPY85 billion (just over a $1billion in June 2012); Permira’s acquisition of a majority stake in sushi
chain Akindo Sushiro for $1 billion; and, more recently, MBK Partners’ JPY43 billion purchase of restaurant chain Komeda Coffee.
Fears that the tax will have an adverse impact on these consumers businesses, or could even derail the country’s fragile economy recovery, are by no means unfounded. The consumption tax was first introduced at rate of 3% in 1989. The only previous increase – to 5% – was in 1997.
“If you look back to 1997 it was a very similar story to today,” says Jonathan Stuart-Smith
Asia Pacific Leader with Ernst & Young’s global tax network. “Back then the economy was starting to recover from a previous slump, but when the consumption tax increase came in, it was widely blamed for causing the slump into recession thereafter.”
Recovery plans However, it could equally be argued that the tax hike should be viewed in the context of economic reforms taking place in Japan.
It is part of the broader “Abenomics” policy package – Prime Minister Shinzo Abe’s three-pronged strategy comprising monetary, fiscal and structural measures. Together they aim to tackle Japan’s three economic problems of slow growth, deflation and a dependence on deficit spending. The hope is that the extra revenue generated by the consumer tax increase will help the government tackle its mountainous public debt, which currently stands at 240% of GDP.
“The consumer tax will probably lead to an increase in the nominal and real inflation rate,
which would be supportive to the Bank of Japan’s current policy,” says Joji Takeuchi, CEO of Tokyo-based consultancy Brighttrust. “That is unless weaker demand pushes down pre-tax prices of goods and services in the next few months.”
Even if the economy is able to absorb the impact of the hike, there is still a question mark over whether consumers and businesses could stomach that further scheduled increase to 10%. Ernst & Young’s Stuart-Smith explains that currently there is a get-out clause: if the economy stutters the move can be deferred. Abe is due to make a decision at the end of this year.
“Next year will be problematic,” reflects J-Star’s Arakawa “We should check for real consumer spending recovery before accepting another tax increase.”
A lot of the spending recovery will depend on the success of other policy objectives, chief among them a push to increase wages. According to Japan’s Ministry of Health, Labor & Welfare, the average wage has dropped 15% over the past 15 years. In the 11 months through November 2013, it rose only 0.2%, while base wages fell for the 19th consecutive month last December. At the same time, real household income also fell 1.7% year-on-year in December.
“If people’s expectation for stable growth is positive, then the additional 2% hike is less of a concern,” says Tatsuo Kawasaki, co-founder of Unison Capital. “But if the government pushes for the hike without any tangible growth prospect or stability in the economic outlook then you can only wonder what might happen.”
Taxing tactics Investors are concerned about the potential repercussions for the economy – and their portfolio companies – of Japan’s staged consumer tax hike. Could it really derail the country’s fragile recovery?
Computer related / IT 24Consumer / retail 75Financial services 22Manufacturing/ construction 35Media/ Telecommuncations 5Medical 13Services 31Transportation/ Distribution 18Other 4
Japan PE buyouts 2008 - 2014ytd by sector
Source: AVCJ Research
avcj.com | April 08 2014 | Volume 27 | Number 1312
VALUED AT AROUND INR720 BILLION ($11.9 billion), India’s pharmaceutical market continues to be a popular destination with private equity investors, but the sector has seen better days. A recent report by PricewaterhouseCoopers shows a tightening regulatory environment – in particular new rules on drug pricing – led to sector growth slowing to 9.8% in 2013 against 16.6% the year before.
Contrast this with nutraceuticals – the burgeoning market for nutritional food and beverage supplements – which has not suffered from the same constraints. The sector continues to see compound annual growth of 18.46%, according to India’s Ikon Marketing Consultants.
Beloorbayir Biotech, the Bangalore-based drug developer that recently received INR750 million from Rabo Equity Advisors, was one of the early movers in this space.
Set up in 1981, the company produces a range of drugs that address high blood pressure, heart disease, obesity and diabetes. It also has a fast-expanding nutraceutical business, manufacturing ingredients for food
and beverage brands targeting the health and wellness market.
“Nutraceuticals has been one our favorite sectors, and we have been tracking it for a number of years,” explains Rajesh Srivastava, a managing director with Rabo. “It is growing fast in India but it still has a small base. So far, the biggest opportunity has been in supplying developed countries.”
The global nutraceutical products market is expected to expand from $175 billion in 2013 to $204.8 billion in 2017, by which point the nutraceutical ingredients market will be worth $29.5 billion. Asia Pacific is set to become the second-largest geography with a 30.4% share, trailing North America’s 39.2%.
According to Srivastava, Beloorbayir will use part of Rabo’s capital to further expand the business into overseas markets. The company plans to set up a new facility in the US and invest more in research and development and
marketing in order to support brand building. There will be a simultaneous effort to tap growing domestic demand.
“Beloorbayir currently supplies the big manufacturers, so it does not produce consumer-
facing nutraceutical products, and it can be difficult to launch a brand in US or Europe,” says Srivastava. “However, the company will look at launch a few brands in India within the next 18 months.”
Beloorbayir represents the last investment from Rabo Equity’s first India Agribusiness Fund,
which is now fully deployed, having committed capital to 12 companies. Previous investments include Maharashtra-based Prabhat Dairy, Super Agri Seeds, Daawat Food, Sri Biotech Laboratories and National Collateral Management Services.
Rabo Equity is currently nearing a $100 million first close on its second India Agribusiness Fund, which launched in December 2012 with a target of $200 million.
IT IS DIFFICULT TO CAPTURE THE SCALE OF Australia’s printing industry given the amount of activity that takes place outside of the traditional silos. The data points highlighted by the national industry association, however, do not make for comforting reading.
A total of 120,000 people were employed across the pulp and paper manufacturing, printing and support services, and publishing in 2007-2008. By 2011-2012 it had fallen to 106,000. Industry EBITDA dropped by one third to A$4 billion ($3.7 billion) over the same period. Small players still dominate, with the vast majority of participants employing less than 20 people.
In early 2011, around the time Blue Star Group, one of the market leaders, was exploring the options for restructuring its debt, insolvency firm Ferrier Hodgson estimated that 500 printers had shuttered over the previous six years in the face of weak consumer spending and overcapacity. Further consolidation was seen as inevitable and Blue Star, now recapitalized and under new ownership, is playing a role in it.
“We held a view that this business was
making money, had a good offering to the market but needed a different balance sheet and management team,” says Angus Stuart, a director at Wolseley Private Equity. “We also held the view that there would be further consolidation and there was a prize for the player who could lead that.”
Wolseley acquired Blue Star from CHAMP Private Equity in November 2012, following a restructuring effort. It partnered with printing industry veterans Geoff and Paul Selig – the former previously served as CEO of Blue Star’s Australian operation.
A portfolio of assets was picked up last year from distressed printer Geon and then last week Blue Star agreed a merger with Independent Print Media Group (IPMG).
The combined entity will have revenues of A$700 million, becoming Australia’s largest printer. It will have operations all along the eastern seaboard, encompassing printing, distribution, print management and logistics, and
creative content, which now ranges from graphic design to augmented reality services.
Stuart contends that Australian customers are not necessarily buying fewer printed products but becoming more specialized in
their requirements. “In the past it was sheet-fed printing, going into web offsetting and digital offsetting,” he says. “Now we have variable imaging whereby a retailer’s catalogue can be tailored based on big data knowledge of particular consumers.”
Blue Star’s merger with IPMG is being funded from its own balance sheet. Wolseley has not disclosed how much it put into the company, but it falls within the firm’s typical range of A$30-120 million in enterprise value.
“We don’t look for distressed players per se but if there is an underperforming player where the right management and the right balance sheet can transform performance then we are interested,” Stuart adds.
DEAL OF THE [email protected] / [email protected]
Rabo Equity’s India nutrition play
Blue Star on consolidation path
Pressing ahead: Blue Star
Healthy additives: Beloorbayir
Number 13 | Volume 27 | April 08 2014 | avcj.com 13
[email protected] / [email protected]
SIGULER GUFF FACED TWO PARTICULAR challenges when raising its third BRIC opportunities fund: one foreseen and well prepared for; the other more out of leftfield.
The first was the departure of Patricia Dinneen, longstanding portfolio manager for the firm’s investments in emerging markets. Dinneen had made no secret of her plans to leave and the handover to Ralph Jaeger was effectively a three-year process, but there was still a degree of investor uncertainty. “Although it was text-book succession planning, some investors said they wanted to see how the performance shapes up and what the portfolio looks like and then be a candidate for the next fund,” Jaeger tells AVCJ. “It’s an understandable approach.”
The second challenge came last summer as the US indicated it would begin a gradual scaling back of quantitative easing measures. Prophecies of emerging markets struggling due to capital flight and currency volatility became self-fulfilling – for a few months, at least – and this gave prospective LPs pause for thought.
Siguler Guff BRIC Opportunities Fund III had
already been in the market for more than two years and the firm decided against waiting until the storm passed. A final close came last week on $650 million, short of the $1 billion target and also smaller than the previous BRIC fund, which closed in March 2009 on $893 million.
“We had made extensions, but when the crisis happened we didn’t want to hold off any longer,” Jaeger says. “With the commitments already achieved I am confident we will be in the market again soon and able to convince people that momentum continues to be strong, opportunities continue to be plentiful and performance continues to be as attractive.”
Jaeger and his team have already committed nearly 100% of the comingled corpus to a range of GPs and co-investment opportunities. The $650 million also includes three separate accounts for large investors; once these are factored in, the fund is two thirds committed.
The expected allocation for the previous BRIC vehicle was at least 50% China, 15-20% India, 5-10% Russia and 15-20% Brazil. While Siguler Guff is scaling back its exposure to India – local
managers will receive less than 10% of Fund III – it plans to maintain a significant commitment to China. Jaeger says China has outperformed India and is on a par with Brazil and Latin America. Russia has been one of Siguler Guff’s best geographies for a number of years.
The fund has also begun to embrace non-BRIC geographies, with Creador II – a primarily Indonesia- and Malaysia-focused fund – among the beneficiaries. However, it retains a mid-
market sweet-spot, with an average underlying fund size of $300-400 million, and keeps a close eye on consistency across vintages.
“We are mindful of avoiding managers where you see size and strategy drift,” says Jaeger. “We also want managers to be primarily motivated by carry generation rather than fees.”
IT IS 50 YEARS SINCE FRANCE BECAME THE one of the first European countries to officially recognize the People’s Republic of China. The anniversary of that event was marked in Paris last month by Chinese President Xi Jinping and his French counterpart Francois Holland. During the meeting, the two leaders to signed off 50 bilateral deals worth EUR18 billion ($24.7 billion).
Around the same time China Development Bank (CDB) and Bpifrance, a subsidiary of French state-owned bank Caisse des Dépôts, announced a EUR100 million commitment to the fund launched by Sino-French PE firm Cathay Capital.
The EUR500 million vehicle, the firm’s largest to date, will support the international expansion of mid-cap French and Chinese companies. Cathay Midcap Growth Fund III carries the same core investment theses as its predecessors, but there have been a few strategic tweaks.
“The first distinction is the size of the companies we will invest in,” says Mingpo Cai, Cathay’s president. “We are going to invest around EUR30-50 million per company, with an enterprise valuation above EUR120 million. It is
a continuation of what we do, but with a bigger ticket size.”
Cathay currently has EUR420 million in assets under management. This latest fund is more than seven times the size of Cathay Capital I, a EUR70 million vehicle that launched in 2007 and invested in 18 French and Chinese companies between 2008 and 2011. The 2011 vintage Fund II received commitments of almost EUR190 million and is still being deployed.
LPs in Fund I mainly consisted of French family offices and a small group of institutional investors. It wasn’t until September that CDB and Caisse des Dépôts came on board, creating a EUR150 million vehicle to invest in cross-border small- and medium-sized enterprise (SMEs). This was subsequently rolled into Fund II.
Cai argues that the cross-border expansion of Chinese and French companies still represents a largely untapped opportunity and one that appeals to LPs. He is confident that the fund will reach a first close of EUR350 million by June.
Fund III will focus on the same sectors that have previously benefited from this cross-border
strategy, such as healthcare, veterinary medicine, consumer goods, distribution and cleantech. Cai is particularly interested in providing Chinese companies access to French technologies, whether this is through partnerships in China or acquisitions in France.
However, another key distinction is that Cathay is no longer limited to France. While previous vehicles split their corpuses equally
between French and Chinese companies, Fund III is expected to deploy 40% of its capital in China, 40% in France, and 20% elsewhere in Europe.
“We have essentially positioned ourselves is as very local firm which a very international scope “says Cai. “Our aim to make our European entrepreneur feel at home in China and our Chinese entrepreneurs feel at home in Europe.”
Siguler Guff closes third BRIC fund
Cathay forges Sino-French ties
BRICs: Emerging opportunities
Cathay: A cross-border play
avcj.com | April 08 2014 | Volume 27 | Number 1314
PLENTY OF RETAIL CHAINS IN CHINA have failed after failing to achieve scale. With a commanding provincial position, the ambitious entrepreneur sets his sights on establishing a nationwide franchise but the challenges of taking on new local competitors in unfamiliar geographies – while hamstrung by middle management that lacks either quality or empowerment – prove too great.
There are also examples of retailors that have made the grade with the assistance of PE capital and expertise. Several companies in CDH Investments’ historical portfolio went from regional bit-part player to Hong Kong-listed heavy hitter and now the Chinese GP is looking to ride a similar evolutionary wave as it branches out into Southeast Asia, notably Vietnam.
“We find a huge number of similarities between China and Vietnam in the consumer sector, driven by similarities in political systems, religious attitudes, consumer behavior, and entrepreneurial mindset,” says Thomas Lanyi, deputy head of Southeast Asia at CDH. “When we present an opportunity in Vietnam, the team shares feedback from what they have seen in China. It’s a bit like looking into the future.”
For its debut investment in Vietnam, CDH bought a 19.88% stake in Mobile World – a mobile phone and consumer electronics retailer – in March 2013 for approximately $20 million, allowing partial exits for company management and existing investor Mekong Capital.
The private equity firm was entering familiar territory. Mobile phone retailer Digitone and consumer electronics business China Paradise are current and former portfolio companies, respectively. And then there was Lanyi, who before joining CDH in 2012 spent four years at Mekong, where he was responsible for the Mobile World investment.
The transition to organized retail and resultant shift from fragmentation to industry consolidation that has characterized the company’s 10-year history invites comparisons with China and other emerging markets.
Mobile World CEO Nguyen Duc Tai explains the motivation to start the business as follows: “I tried to buy a mobile phone but couldn’t find a proper shop with good service and a trustworthy environment. There were only mom-and-pop operators selling out of small kiosks. Customers
didn’t know if the products were real or fake, new or old, with warranty or without.”
But there are two critical differences between the countries’ respective retail sectors that explain why Mobile World has carved out a dominant market position, increased revenues more than threefold over the last four years, and is now set for a public listing that will value the business at $280 million.
First, Vietnam is a fraction the size of China so achieving nationwide scale is a less time-consuming task, letting operators realize economics from better bargaining power more quickly. Second, retail sector consolidation is not happening as quickly in Vietnam as in China, which Lanyi believes is in part due to the relative scarcity of good management teams.
Collective decision-makingTai is one of five co-founders of Mobile World and three remain actively involved in the business – a rare dynamic in Vietnam and one that drew Mekong to the company in the first place.
This was no patriarchal, family-led governance structure. With the exception of the chairman, the co-founders were in their mid-30s and came from relevant professional backgrounds; their CVs include stints with Japanese and Korea multinationals in Vietnam, such as SK Telecom and Sony Ericsson, as well as sales and marketing experience with local companies.
“They were entrepreneurs,” says Chris Freund, partner and founder at Mekong. “There was a
lot of open debate and discussion and they didn’t always agree with each other, which was a positive.”
The private equity firm invested $3.5 million in Mobile World in 2007, taking a 32.5% stake, which was subsequently reduced to 25.8% when CDH entered. Back then the company – which operates under the The Gioi Di Dong (TGDD) brand – had just seven stores in Ho Chi Minh City but Mekong was emboldened by the strong performance it was seeing from consumer-related companies in its portfolio.
There was also the expected explosion in mobile phone demand and the belief that a professionally-managed outfit could take market share from the mom-and-pop players.
According to the Vietnam Ministry of Information & Communications, there were 18.9 million mobile phone subscribers in 2006. This became 131.6 million by 2012. Mobile World, meanwhile, received a shot in the arm from Mekong. The founders provided initial start-up capital and each new store was financed through
cash generated by existing outlets. No longer dependent on this cycle, the number of stores rose to 31 in 2008 and then 211 in 2011.
Mekong helped the company recruit middle management and introduce modern reporting systems, such as measurable targets through which to set out clear long-term goals – although the goalposts had to be moved several times as growth came in faster than expected.
Mobile World expects to have 253 stores by
Retail reformerEarly investor Mekong Capital and recent addition CDH Investments have guided Mobile World through rapid growth and growing pains. Now the Vietnam-based mobile phone retailer is about to go public
Mobile World store growth
Source: Mobile World
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Dien May (consumer electronics) The Gioi Di Dong (mobile phones)
Number 13 | Volume 27 | April 08 2014 | avcj.com 15
the end of this year. It established a foothold in Vietnam’s six largest cities and now covers all 63 provinces. The company controlled more than 20% of the mobile phone retail market in 2013 – the next largest player, VTA, is on less than 10% – and wants to be at 30% by 2016 as the mom-and-pop share is further eroded.
“Several chains have followed us, such as VTA and FPT, but we had a few years’ head start
and have expanded our lead over time,” says Tai. “We estimate about 50% of the market is now controlled by modern retailers and most of the other 50% is in the countryside. We plan to attack that market segment this year and next, and consolidate further.”
He also wants to boost Mobile World’s online business. While the market leader, only 6% of revenues come via e-commerce and the goal is to double it by 2015.
Three years ago the company expanded into the consumer electronics space, under the Dien May brand, and has built up a network of 13 stores. Twelve more will be opened this year, and although Dien May is unlikely to match TGDD for market share, it will likely become a larger revenue contributor simply because consumer electronics is a broader space.
Mobile World recorded $452.3 million in revenue for 2013 and the company is looking to reach at least $600 million this year and $900 million by 2016. Profit is forecast to come in at $21 million for 2014 – up from $12.3 million last year – and then $32.1 million by 2016.
Growing painsProgress has not been entirely smooth, however. After a period of rapid expansion, Mobile World’s profits began to tail off, falling from $7.5 million in 2011 to $6 million in 2012. This underperformance stems from a struggle to accommodate the growth spurt of the previous few years: New stores were opening at a faster pace than the supporting systems and
infrastructure they required. Inventory selection and management were
the root cause of the problem, and it took the best part of a year to bring holdings costs back under control, work out poor purchasing decisions and ensure the best-performing products were displayed in the best places. By August 2013 a more streamlined and consumer-oriented Mobile World was back on form.
Mekong’s Freund argues that these growing pains would be more keenly felt by other retailers that don’t have the same quality of management.
“There might be five areas in which you have to manage growth and Mobile World can handle 3-4 of those concurrently whereas the typical Vietnamese company might only be able to deal with 1-2 concurrently,” he says. “Opening new stores, for example, can be handled by the regional teams and requires no top-level approval. In the typical retailer, the CEO would be intensely involved in opening every new store.”
More recently, consumer electronics business Dien May has required some recalibration. The unit was not meeting its potential so the independent management team was absorbed by the mobile phone division in January, resulting in a number of personnel changes.
Store layout and category management were again at the forefront of reforms. Freund describes a transformation from “what looked like a discount store that was kind of messy and wasn’t clear what it was trying to be” to a more compelling brand strategy with “televisions and home appliances as the key broad categories and no halfway categories like alarm clocks and power adaptors.”
Mobile World’s management team is supported by Robert Willett, a retail veteran who previously served as CEO of Best Buy International, where he was chairman of CarPhone Warehouse, Europe’s largest mobile phone retailer. Originally introduced by Mekong to consult on Mobile World, Willett was invited
to join the board as a non-executive director and became a shareholder in early 2013. He now also sits on Mekong’s advisory board.
“He has been a tremendous resource to Mobile World,” says CDH’s Lanyi. “Many companies in Vietnam are not open to that at all – they are worried about people interfering in their business practices.”
First at Mekong and now at CDH, Lanyi has busied himself establishing ties between Mobile World and other retailers across the region so the business can learn from the experiences of counterparts. Executives from Digitone have visited Vietnam on two occasions. There have also been exchanges with consumer electronics retailers Edion of Japan and Courts of Singapore, as well as two mobile phone players, India’s Univercell and Indonesia’s Erajaya.
At time of publication, the Mobile World team was in Indonesia for an Erajaya site visit. The company is seen as particularly important because it has successfully managed to roll out a network of small stores in rural areas, a key area of focus for Mobile World this year.
“CDH, because of its network in Asia, is able to introduce us to many potential partners in the region,” adds Mobile World’s Tai. “Several times each year we travel somewhere to meet someone in a similar industry to learn from each other and explore possible cooperation.”
Long-term plansMekong and CDH are in process of selling a small portion of their holdings ahead of the IPO on the Ho Chi Minh exchange in order to meet free float requirements. The placement is said to be substantially oversubscribed with both local and international investors interested. Another partial exit will come with the IPO itself but neither PE firm is in any hurry to fully sell down their interests once public trading begins.
Mobile World’s past growth has been entirely organic but now domestic M&A options are being examined – and PE investors can help by conducting initial diligence and discussions, saving the company from making a direct approach immediately. Beyond that, expansion into new geographies is a possibility, with Laos and Cambodia under preliminary consideration.
More retail concepts are also likely once Dien May has been scaled up.
“We have a team of people that looks into new ideas, which we can develop over time. Our basic assumption is that retail in Vietnam continues to be below both its potential and the global standard. This is our opportunity,” says Tai. “The key question when we choose our next category is always ‘How big can we grow this business?’ We want to serve the masses, not some niche market.”
GDP per capita (US$)
Vietnam mobile phone usage vs GDP per capita
Source: Vietnam Ministry of Information & Communications; World Bank
150
100
50
0
2,000
1,500
1,000
500
Subs
crib
ers
US$
mill
ion
Mobile phone subscribers
2006 20082007 2009 2010 2011
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