deal of the week funds gsr, go scale get $1b …at least three independent directors by recruiting...

Asia’s Private Equity News Source avcj.com July 28 2015 Volume 28 Number 28

FOCUSDEAL OF THE WEEK

Recovery positionsHow private equity firms can take action when investments go wrong Page 7

Wishing upon a star Do China’s start-ups need celeb support? 4

India’s missing link Sequoia backs genetic research business Page 10

DEAL OF THE WEEK

GSR, Go Scale get $1b for China cross-border deals

Page 11

NSI Ventures serves up kitchen robotics deal

Page 10

What companies want from board directors

Page 3

Allegro, Blackstone, Carlyle, DCM, GLP, IVFA, L Capital, Orios, Paine & Partners, PEP, Temasek, Warburg Pincus

Page 4

EDITOR’S VIEWPOINT

NEWS

FUNDS

DEG’s Marcus Bracht on targeting emerging Asia

Page 15

LP INTERVIEW

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18 September | Renaissance Hong Kong Harbour View Hotel

ESG FORUM2015

The first event of its kind in the region, the inaugural AVCJ PRI Responsible Investment Forum will provide a platform for education, benchmarking and the exchange of ideas on how GPs operating in Asia can incorporate Environmental, Social and Governance (ESG) principles across the companies in their portfolio.

Mitigate risk and maximize exit returns with responsible investing

Ken MehlmanMember & Global Head of Public AffairsKKR

Leading GPs and LPs confirmed are:

View the full list of speakers at avcjesg.com

Keynotespeaker

Co-Sponsor

Adam BlackPartner, Head of SustainabilityDOUGHTY HANSON & CO PRIVATE EQUITY

Melissa BrownPartnerDAOBRIDGE CAPITAL

Chris ChiaManaging PartnerKENDALL COURT CAPITAL PARTNERS

Doug A. CoulterPartnerLGT CAPITAL PARTNERS

Darren MassaraManaging PartnerNEWQUEST CAPITAL PARTNERS

Brian LimPartnerPANTHEON

Steven R. OkunPublic Affairs DirectorKKR

Frederick J. LongFounding Managing DirectorOLYMPUS CAPITAL ASIA

Jessica RobinsonChief Executive OfficerASrIA

Nicholas ParkerFounding Managing PartnerGLOBAL ACCELERATION PARTNERS INC.

Ed NortonSenior Advisor, ESGTPG CAPITAL

Co-hosted by:

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Number 28 | Volume 28 | July 28 2015 | avcj.com 3

EDITOR’S [email protected]

JUST OVER EIGHT YEARS AGO, I PENNED an article for another publication on the role of independent directors at Chinese state-owned enterprises (SOEs). This was mid-2007, and China Construction Bank (CCB), Bank of China (BoC) and Industrial & Commercial Bank of China (ICBC) had all completed Hong Kong IPOs in the past 18 months or so.

Having been technically insolvent a few years earlier, the state-owned banks wanted to convey a sense of stability to investors as they prepared to go public. High-profile foreign investors were brought in as a source of expertise and credibility, and the banks met Hong Kong’s requirement for at least three independent directors by recruiting various corporate heavyweights.

ICBC got John Thornton, former Goldman Sachs president, and Antony Leung, former Hong Kong financial secretary. BoC appointed Peter Cooke, previously of the Bank of England, and Anthony Neoh, former head of Hong Kong’s Securities and Futures Commission, to its board. Ian Wilson, ex-Standard Chartered CEO, and Tom Manning, former CEO of Cap Gemini Asia Pacific, went to CCB.

“Many companies in China are now paying greater heed to the need for good corporate governance and the fact that things like transparency can increase shareholder value,” said Manning. He estimated there were still less than 50 Western independent directors with the top 50 or so Chinese firms.

Given that the banks dance to Beijing’s tune, it was unclear whether they really believed in the shareholder value angle or were simply paying lip service to it. Independent directors could never hope to have much sway on issues such as appointments, and board meetings were said to be so crowded with members and assistants that opportunities for insightful dialogue were limited.

Independent directors with these and other Chinese companies noted that they could only bring their experience to bear by fully understanding the challenges and opportunities the businesses faced. And this was often best achieved by making visits outside of meetings and building relationships with management on site.

This article was nudged from the depths of my memory at the recent AVCJ Singapore Forum, which featured a panel discussion on private

equity value-add. Nick Nash, group president of consumer internet platform Garena – and formerly of General Atlantic, an investor in Garena – suggested that fewer than 50% of the people PE firms appoint to boards are actually people portfolio companies want to hear from.

Aik Meng Eng, CEO of TE Asia Healthcare Partners, added that the last thing competent management teams want is investors who spend board meetings firing off countless questions and telling them why they are doing a bad job. In this sense, investors are best served nominating an operations executive who understands the industry or geography and can forge a constructive relationship with management.

“If the company gets into trouble you want the CEO to reach out to the shareholders or the board. You need board members who are engaged and can be trusted,” Eng said.

There is a huge gulf between the average Chinese state-owned bank and the average Asian PE-backed company, particularly when GPs are making minority investments in private enterprises. But in order to perform his role effectively – whether it is representing public shareholders or a single private investor – a director must convince management that he can contribute.

It is not just about being a technical resource; in executing their fiduciary responsibilities, directors may perform the role of traffic cop, diplomat, older sibling, objective arbiter or well-intentioned catechizer. But in order to do this, they must find a way of working with management and other stakeholders, adapting to circumstance and corporate culture as necessary.

In recent months, Japan has also emphasized the link between corporate accountability and performance. Part of this effort involves encouraging listed companies to appoint more independent directors. It remains to be seen how readily such changes are implemented and the extent to which directors are willing and able to prove their value to management.

Tim BurroughsManaging EditorAsian Venture Capital Journal

Graybeards Managing Editor Tim Burroughs (852) 3411 4909

Staff Writers Andrew Woodman (852) 3411 4852

Winnie Liu (852) 3411 4907 Holden Mann (852) 3411 4964

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Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow

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Join your peers#avcjesga v c j e s g . c o m

Registration Enquiries:Pauline Chen T: +852 3411 4936E: [email protected]

Sponsorship Enquiries: Darryl Mag T: +852 3411 4919E: [email protected] Enquiry

18 September | Renaissance Hong Kong Harbour View Hotel

ESG FORUM2015

The first event of its kind in the region, the inaugural AVCJ PRI Responsible Investment Forum will provide a platform for education, benchmarking and the exchange of ideas on how GPs operating in Asia can incorporate Environmental, Social and Governance (ESG) principles across the companies in their portfolio.

Mitigate risk and maximize exit returns with responsible investing

Ken MehlmanMember & Global Head of Public AffairsKKR

Leading GPs and LPs confirmed are:

View the full list of speakers at avcjesg.com

Keynotespeaker

Co-Sponsor

Adam BlackPartner, Head of SustainabilityDOUGHTY HANSON & CO PRIVATE EQUITY

Melissa BrownPartnerDAOBRIDGE CAPITAL

Chris ChiaManaging PartnerKENDALL COURT CAPITAL PARTNERS

Doug A. CoulterPartnerLGT CAPITAL PARTNERS

Darren MassaraManaging PartnerNEWQUEST CAPITAL PARTNERS

Brian LimPartnerPANTHEON

Steven R. OkunPublic Affairs DirectorKKR

Frederick J. LongFounding Managing DirectorOLYMPUS CAPITAL ASIA

Jessica RobinsonChief Executive OfficerASrIA

Nicholas ParkerFounding Managing PartnerGLOBAL ACCELERATION PARTNERS INC.

Ed NortonSenior Advisor, ESGTPG CAPITAL

Co-hosted by:

SAVE US$200 Book before 31 July 2015

avcj.com | July 28 2015 | Volume 28 | Number 284

ASIA PACIFIC

Temasek, UOB to offer $500m in venture debtSingapore’s government-sponsored investment fund Temasek Holdings and United Overseas Bank (UOB) have agreed to form a joint vehicle which will offer $500 million in venture debt financing to start-ups in China, India and Southeast Asia. UOB will purchase a 50% stake in InnoVen Capital, a wholly-owned subsidiary of Temasek. Each group will then commit an initial $100 million to the venture.

DCM closes second Android fund at $100mDCM has raised $100 million for its second Android-focused fund, which will target start-ups building apps for Google’s mobile operating system. The vehicle, A-Fund II, received commitments from existing LPs including Tencent Holdings, Gree and Naver, as well as new investors such as Baidu, Softbank Group, and Qualcomm.

Blackstone’s Michael Chae named CFOThe Blackstone Group has appointed Michael Chae – its international private equity head, who spent four years in charge of Asia PE operations – to be CFO. He will replace Laurence Tosi, who will become CFO of Airbnb.

AUSTRALASIA

Costa slips below IPO price after $401m offeringCosta Group, an Australia-based fresh fruit and vegetables producer controlled by Paine & Partners, is trading below its IPO price following a $550 million ($401 million) offering. The company sold 244.7 million shares at A$2.25 apiece. As of July 27, the stock was at A$2.17. The PE firm has taken A$204.5 million off the table and the value of its remaining interest is A$84 million.

Allegro buys controlling stake in Carpet CourtAustralasia distress specialist Allegro Funds has announced the third investment from its second fund with the acquisition of a controlling stake in Carpet Court, a New Zealand-based flooring retailer. The GP will restructure and recapitalize

Carpet Court, making the business free of bank debt on completion of the deal.

GREATER CHINA

GLP forms $7b China logistics fundSingapore-listed warehouse operator Global Logistic Properties (GLP) has launched a $7 billion fund for developing logistics facilities in China. GLP China will hold a 50% stake in the fund, called CLF II, and will also serve as the manager. A total of $3.7 billion has been committed to the vehicle so far.

PE-backed CICC files for Hong Kong IPOChina International Capital Corp. (CICC), which is backed by KKR, TPG Capital and Singapore’s GIC Private, among others, has filed for a Hong Kong IPO. The company is said to be looking to raise around $1 billion.

VC-backed parenting site Babytree raises $300mChinese online beauty products retailer Jumei International has led a $300 million round of funding for Babytree, a Chinese parent-focused social platform backed by several VC investors. Jumei invested $250 million in the round, comprising a $120 million convertible loan and $130 million in revolving credit.

CDB invests $242m in eHi Car ServicesChina Development Bank (CDB) has agreed to provide RMB1.5 billion ($242 million) to eHi Car Services, China’s second-largest automotive rental services provider, which is backed by several VC investors. EHi, which went public in the US last year, has more than 1,200 service centers across 100 cities in China.

App testing platform Testin raises $54.9mTestin, a Chinese mobile apps testing platform, has raised $54.9 million in its latest round of funding led by Haiyin Capital, followed by IDG Capital Partners and Banyan Capital. Founded in 2011, the firm allows app developers, especially games operators, to test products before launch.

China P2P lending site Firstp2p raises $41mFirstp2p, a Chinese online peer-to-peer (P2P) financing site, has raised a $41 million Series B round of funding from San Shan Capital, CITIC Capital and China Equity. The start-up previously secured Series A funding from CCB International and China Equity.

Leading Capital backs take-private for Mecox LaneChina health, beauty and lifestyle products retailer Mecox Lane has received a take-private offer from majority shareholder Cnshangquan in conjunction with private equity firm Leading Capital. It values the business at approximately $52 million.

PEP to sell Energy Developments for $1.4bPacific Equity Partners (PEP) has agreed to sell Energy Developments, an Australia-based provider of distributed power, to utilities business Duet Group for an enterprise valuation of A$1.92 billion ($1.4 billion). The two companies have entered into a scheme of arrangement whereby Duet will pay A$8.00 in cash for all outstanding shares in Energy Developments.

PEP-owned Greenspark Power Holdings

has a 67.1% interest in the company, while Investors Mutual holds 9.6% and Coopers Investors has 4.6%. PEP acquired a 79.6% interest in Energy Developments in early 2010, paying approximately A$343 million, or A$2.75 per share.

Energy Developments operates a network of power stations in Australia, the US, the UK and Greece from fuel sources such as landfill gas, waste coal mine gas, natural gas and liquefied natural gas. It provided 4 million megawatt hours of energy - enough to power over 650,000 homes - in the year ended June 2015.

The A$1.92 billion valuation comprises an acquisition equity value of $1.41 billion plus net debt of A$512 million. The offer equates to 8.8x Energy Developments’ unaudited EBITDA of A$218 million for the 2015 financial year.

NEWS


China after-school tutoring app raises $24mEntstudy.com, a Chinese after-school tutoring mobile app, has raised $24 billion in an extended Series B round from two domestic VC firms: Kun Ling Capital and Sharing Capital. Last month, the company raised $20 million in Series B funding from Tencent Collaboration Fund.

NORTH ASIA

Carlyle registers $775m for third Japan fundThe Carlyle Group has registered just over $775 million for its third Japan fund - Carlyle Japan Partners III. The amount includes $550 million under a second vehicle named Carlyle Japan International Partners III. The fund is targeting a final close of JPY100 billion ($807 million).

VC-backed Metaps files for IPOMetaps, a Japanese mobile software developer backed by a slew of VC investors, has filed for its Tokyo IPO and is expected to raise as much as JPY3.8 billion ($30.6 million). The company - which has received $52.5 to date - closed a $36 million Series C round in February.

Korea launches another attempt to sell Woori stakeThe Korean government is once again trying to sell its controlling stake in Woori Bank, this time dividing the asset into multiple tranches so that there is no one dominant shareholder. A 30-40% interest will be sold in blocks of up to 10% each. Domestic pension funds and private equity funds are among those to have expressed an interest.

Former Japan Exchange head joins KKRKKR has named Atsushi Saito, former head of the Tokyo Stock Exchange (TSE) and the Japan Exchange Group (JPX), as the non-executive chairman of KKR Japan.

SOUTH ASIA

L Capital Asia exits India’s PVRL Capital Asia has fully exited its remaining stake in Indian cinema chain operator PVR Cinemas for

INR4.8 billion ($76 million). The firm sold its 6.2 million shares in a series of block deals. L Capital originally bought its stake through two separate investments in 2012.

IVFA commits $30m to restaurant chain operatorIndia Value Fund Advisors (IVFA) will invest $30 million in India’s DeGustibus Hospitality, the owner and operator of several popular restaurant

brands. DeGustibus, which was founded in 1996 by renowned chef Rahul Akerkar and whose brands include Indigo, Neel, and Moveable Feast, currently has 15 locations across Mumbai and Delhi.

Orios launches $150m India early-stage fundIndian VC firm Orios Venture Partners has launched a new $150 million fund to support start-ups in various branches of the technology sector. The launch of the new fund comes less than a year after the firm’s first fund closed at $50 million.

Warburg Pincus invests $284m in Piramal RealtyWarburg Pincus has agreed to invest INR18 billion ($284 million) in Piramal Realty, the real estate development arm of Indian conglomerate Piramal Group. Piramal will use the funds to expand its portfolio and to acquire more land for development in and around Mumbai.

Tiger Global, Flipkart commit $12m to NestAwayIndian e-commerce giant Flipkart and its backer Tiger Global have together invested INR760 million ($12 million) in online home rentals start-up NestAway. Bangalore-based Nestaway is an online marketplace for home rentals predominantly aimed at young professionals seeking inner city accommodation.

SOUTHEAST ASIA

Singapore’s Qoo10 raises $82.1m Series ASingapore-based Giosis, which manages e-commerce site Qoo10, has raised $82.1 million in a Series A round led by Singapore Press Holdings (SPH). Giosis is a subsidiary of eBay, which participated in this round, along with Saban Capital Group, UVM 2 Venture Investments, Brookside Capital and Oak Investment Partners.

Sequoia leads $3.25m round for Malaysia’s KFitMalaysian online fitness platform KFit has raised $3.25 million in a funding round led by Sequoia Capital. KFit, which launched in May with an undisclosed amount of seed funding, allows users to find and join fitness facilities in their area, including gyms, studios, and sports grounds.

PE firms must think more deeply about value-addPE and VC firms should think more carefully about how they can add value to portfolio companies, using their board representation as a tool for constructive guidance as much as oversight, industry participants told the AVCJ Singapore Forum.

Nick Nash, group president of consumer internet platform Garena, a company he invested in while at General Atlantic and then left private equity to join, said he often asked entrepreneurs whether they really value the contribution of directors PE firms place on their boards. “If we are brutally honest, less than 50% are people the

companies would actually want on their boards,” he said. “It’s very important that the person on the board who represents the capital is truly adding value to the company.”

Aik Meng Eng, CEO of TE Asia Healthcare Partners, added that the last thing competent management teams want is investors who spend board meetings firing off countless questions and telling them why they are doing a bad job. In this sense, investors are best served nominating an operations executive who understands the industry or geography and can forge a constructive relationship with management.

“If you have a good CEO he likes to be left alone,” Eng explained. “If the company gets into trouble you want the CEO to reach out to the shareholders or the board. You need board members who are engaged and can be trusted.”

NEWS

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COVER [email protected]

THE DETERIORATION IN RELATIONS between CVC Capital Partners and Lan Zhang, founder of Chinese restaurant chain South Beauty, went from rumor to media reports to publicly disclosed legal action within the space of a few weeks. The GP has now exited the investment, with nothing to show for it, and creditors have brought in restructuring experts to see what they can recover from the situation.

Before that, in March, it emerged that CVC and Zhang were involved in arbitration over the transaction, which last year saw the PE firm pay around $300 million for a majority stake in South Beauty. CVC also obtained a court injunction to freeze the founder’s assets. Upholding the injunction against Zhang and two other entities, a Hong Kong judge noted that “very substantial sums had been paid by them [CVC] and it is still unknown where those sums now are.”

The ruling did not explain the nature of the dispute between the parties. However, it has been suggested that South Beauty’s earnings were artificially inflated ahead of the deal closing – just as other restaurant chains were beginning to feel the pinch of Beijing’s efforts to rein in spending by government officials. If there has indeed been fraudulent activity, CVC will want its money back and freezing a person’s assets is one way of encouraging them to pay up.

The circumstances are far removed from those under which the transaction was struck. Zhang said that CVC’s vision “highly aligns with ours in respect of brand positioning, future growth areas, corporate culture and values.” Francis Leung, managing partner at CVC, in turn praised the South Beauty management team for its “deep industry insights and knowledge as well as strong execution capabilities.”

The language is not unusual for investment announcements. At this point in the process interests are aligned and there are hopes of future growth. But during these halcyon days, how many GPs think carefully about what happens if the deal turns sour? This has implications for transaction structuring and how PE firms can recover value in a worst case scenario.

Taking actionAccording to Velisarios Kattoulas, CEO of The Poseidon Group, which provides due diligence,

risk analysis and consultancy services, one in five failed investments are the victims of market conditions. In the other four cases, the problem is the management team. A good management team, even when paired with a poor business idea, can deliver strong performance. The converse is not true.

“A bad management team and a good idea – that is where people encounter the most trouble. They fall in love with the idea but the management team isn’t up to snuff and things go wrong,” Kattoulas says. “I know a PE firm that invested in bricks and mortar retail not long ago. It shouldn’t work – we are all shopping online now – but it’s been a brilliant investment because the management team is great. I’ve seen other funds go into China healthcare with a bad management team and it’s been a disaster.”

There is often a common factor driving these deals: PE firms are under pressure to deploy capital in a highly competitive Asian landscape. This may lead investors to overlook weaknesses,

compromise on terms and cut corners on due diligence in order to win over the entrepreneur and get the transaction closed quickly.

GPs can be divided into three broad categories as to the aggression with which they seek a resolution. First, distress investors are used to dealing with problems and unafraid of getting adversarial. Second, credit and special situations players tend to be highly attuned to downside protection and how the capital structure can be used to secure their interests. Third, generalists, particularly minority investors, are sometimes reluctant to get their hands dirty.

“PE investing is about having one or two really good hits, which more than make up for ones that aren’t so good,” says Chris Leahy, co-founder at Blackpeak Group, a strategic advisory firm. “If

something is bad or unlikely to be resolved, so there is a sense they might be throwing good money after bad and damaging their reputation in the market, they might decide enforcement is not the best use of their LPs’ capital.”

In this context, there is a general desire for resolutions negotiated outside of the public domain. Arbitration is therefore an attractive proposition. Unlike litigation, it is private and there are typically no appeals. However, arbitration can also be expensive and may limit an investor’s options. While an international arbitration award is enforceable in China, for example, it can take time, and some industry participants advocate going through the mainland courts directly.

Swift action is particularly important, given the local party might have transferred assets out of a joint venture company by the time a court endorses an arbitration ruling made overseas. “You go through a very extensive legal process and you don’t know what is going to

be left of the company at the end,” says John Lees, managing director at JLA Asia, a forensic accounting and insolvency management consultancy.

David Mahon, managing director and CIO at Mahon China, which advises or represents investors in distress situations, adds that where the Chinese legal system is lacking, relationships must come to the fore. Although the courts have become far more efficient, local government officials are often best positioned to encourage counterparties to reach a settlement.

“You have to bring in official support at the very beginning, during the investment and certainly when there are problems. Too many foreign investors look at it and say, ‘Here’s the contract, if we have a problem we can go to

Worst case scenariosThere are various ways for PE investors to seek legal recourse against portfolio companies that have behaved improperly – provided they have structured deals properly and don’t mind getting their hands dirty

“You look for evidence of property ownership in enforceable jurisdictions – moveable assets, lifestyle assets like fine art, jewelry, luxury cars, boats – and try to build a picture of what assets might be available in a valid claim” – Chris Leahy

To understand how AVCJ Research can help you with your data needs, please call: 852-3411 4961 or email [email protected]

AVCJ Research can provide your firm with timely and accurate research support to help you simplify and expedite your workflow. We conduct in-depth research and provide insightful analysis in a bespoke report that fully meets your data requirements.

avcj.com

Asian Private Equity Data Made Simple

✔Pan-Asian Industry Reviews/Regional Reports – timely updates✔Specific industry and financing stage research✔Comprehensive statistics on investments and funds ✔Exits strategic analysis✔Market peers comparison

AVCJ’s industry standard data is used by the world’s leading firms in their fundraising, investor relations communications and deal due diligence activities. AVCJ Customized Data Service includes:

Customized Research Report


court.’ And too many of them try to establish arbitration outside of China, which often does nothing to help in China.”

In addition, arbitration agreements are bound by their wording. There are situations in which clauses do not clearly define the dispute that has arisen and then they only apply to the people who are party to them.

PE investors enter investments with a broad idea of their potential exit routes. The same

strategic thinking should go into how to recover value when things turn sour. If a GP ends up in litigation or arbitration, how can it maximize its ability to win the argument and recover any damages that might be awarded? It is not only a case of whether an arbitration clause should be used and how it is worded, but also the jurisdiction in which a dispute will be resolved.

“Sometimes not enough attention is paid to the dispute resolution clause generally. That is partly the lawyers’ fault. The people who put these agreements together are not normally litigators so they come at things from a different perspective,” says Mark Johnson, a partner and member of Debevoise & Plimpton’s international dispute resolution group. “There is a lot more coordination between corporate and litigation lawyers than there used to be, but there are still occasions where people simply pull something off the shelf and it might not be the right clause for a certain type of agreement.”

The standard downside protection for minority investors is a put option – redeeming a position and taking the assets held as security.

For China investments, this security often takes the form of shares in the offshore vehicle pledged by the founder; and so enforcement hinges on a local court accepting that the foreign party can enforce against a wholly foreign-owned enterprise (WFOE). Alternatively, the investment might be structured as a Sino-foreign

joint venture, which means action can be taken directly onshore.

On top of this, there might be unsigned letters of resignation from the founder’s representative board members and share transfer agreements held in escrow and released to the investor if there is a desire to claim the security and assume control of the company.

The threat of legal action is intended to encourage founders to negotiate. For example,

once a shareholder in a small company is forced to consider the financial implications of contesting a court case – the costs might amount to the value of the company itself – he is likely to appreciate the merits of a settlement.

“We are always ready to talk and get a solution rather than rely on a process,” says Mahon. “In China, once you have engaged with the court then often there is a reluctance to talk. There is either a belief that the process will go on for a long time and the foreign investor won’t get the satisfaction they expect, or there is a polarization in the relationship itself. Litigation is a last resort.”

Forcing the issueThere are, however, cases in which PE firms have gone to great lengths in order to achieve a desired outcome. Warburg Pincus pumped $215 million into Titan Petrochemicals, a Hong Kong-listed shipping and oil storage company, only to see the business struggle in the wake of the global financial crisis. The GP also found evidence that senior executives had secretly provided unauthorized guarantees to subsidiaries in order to keep them afloat, leading to significant damages and potential liabilities.

These details emerged in a 2012 Hong Kong court filing that was part of a multi-jurisdictional effort. Warburg Pincus exercised redemption rights on securities issued by a Titan subsidiary

in the British Virgin Islands, and then asked a court to liquidate the business. It also announced plans to redeem shares in Titan and later asked a Bermuda court to start liquidation proceedings.

Titan was also looking for solutions, lining up oil and commodity trader Guangdong Zhenrong Energy as a buyer for a controlling stake in the Hong Kong-listed business and for Warburg Pincus’ interest in several other assets. The agreement was conditional on the lawsuit being dismissed and court approval of a debt restructuring plan. Warburg Pincus duly exited and the restructuring proceeded.

“The exit was planned before we took the first step towards enforcement,” says one lawyer who worked on the deal. “No one should go into these situations blind, without identifying who are the potential investors to take you out. The enforcement process was executed in a relatively short space of time – 2-3 months.”

More recently, L Capital Asia took portfolio company Jones the Grocer all the way into insolvency in order to secure a desired outcome. The gourmet food retailer has operations in Australia and Singapore and so proceedings were instigated in each jurisdiction, with the private equity firm successfully bidding for both sets of assets out of administration.

According to a source familiar with the situation, L Capital “partnered with the wrong guy,” and he remained CEO after the PE firm invested in Jones the Grocer in 2012. The parties were unable to work together and the structure of the investment agreement made it difficult to replace him, hence the decision to enter administration and start again.

“This is a means by which a shareholder can take control of the investment in circumstances where another shareholder is mismanaging it,” notes Randall Arthur, a partner at Kobre & Kim who specializes in insolvency litigation. “We acted for the provisional liquidators of a company that had two directors, one of whom wasn’t pulling his weight and wasn’t financially stable. The other director wanted to take over the business, but they couldn’t reach an agreement. So he called on some loans he had made to the company, forced it into liquidation and made an offer to the provisional liquidator.”

In situations where a founder has misappropriated assets from the company and placed them under new entities in his own name, investors can ask the courts to unwind these transactions. Similarly, if it is possible to prove fraudulent activity, personal assets held by the founder might be attached to the case and used as leverage, or even seized. This often involves identifying assets in jurisdictions where enforcement is seen as easier.

“You look for evidence of property ownership


Dispute resolutions at major Asia arbitration centers

Source: HKIAC, CIETAC, SIAC

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Singapore International Arbitration Centre

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in enforceable jurisdictions – moveable assets, lifestyle assets like fine art, jewelry, luxury cars, boats – and try to build a picture of what assets might be available in a valid claim,” says Blackpeak’s Leahy. “A mareva [asset freezing] injunction is helpful because it can flush out where cash deposits or significant assets are held.”

It is also possible to take action against directors of a company who are engaged in conduct that is in breach of their fiduciary duties. Kobre & Kim’s Arthur was previously involved in a case in which the directors of a Singapore company passed resolutions to pay themselves dividends as shareholders despite the business being insolvent. The directors owned properties in Hong Kong and there were indications these would soon be sold, so an injunction was obtained to freeze the assets.

“It wasn’t enough for the full claim in Singapore but it covered a substantial amount of it,” says Arthur. “And it did cause the directors to approach them and ask to do a deal.”

Be preparedWhen consultants are brought in to provide advice on troubled investments, they are not just looking for assets to pursue. A fraud investigation must begin with an understanding of what

exactly has gone wrong and who is at fault. The counterparty’s misbehavior could have been prompted by any number of factors, ranging from financial distress to third-party litigation to family problems, and the investor can only decide how to proceed towards a settlement once in possession of the relevant facts.

There is a striking resemblance between the issues that emerge during these processes and the areas of examination in deep pre-deal due diligence: how the business was founded and achieved scale; the founder’s track record, including how he has treated partners, creditors and employees, particularly in times of stress; the management style and how the company is perceived by customers, suppliers and competitors.

It raises the question of how many distressed situations and dispute resolutions could be avoided by investors doing their homework before putting any capital to work. “It is a good step to do as much due diligence as possible on the entities and individuals being invested pre-acquisition so you know any potential obstacles,” says Keith Williamson, head of the global forensic and dispute services team in Hong Kong and China at Alvarez & Marsal.

The consensus view is that most private equity firms, wearing the scars of past mistakes,

are willing to spend more on minimizing their downside in this respect. Investigative due diligence is increasingly seen as part of the standard process alongside legal, financial and operational analysis. More attention is also being paid areas such as political and regulatory risk and competitor analysis.

With larger sums at stake – and in an environment of slower growth and rising valuations, which means that private equity firms must work harder for their returns – there is greater willingness to give third-party services providers the resources and time to perform tasks to an appropriate level of detail. That said, industry participants say there remains a divide between those firms that ask for a completely non-jaundiced assessment of management teams and those that reduce due diligence to a box-check, affirmation exercise to be completed in two weeks.

“Once things have gone wrong there is not a lot you can do to turn things around. You need to be very lucky, and generally people aren’t lucky enough,” says Poseidon’s Kattoulas. “The far smarter thing is to limit the possibility of these things happening in the first place. You have to be very rigorous going into relationships and transactions and then using sufficient resources to monitor things properly.”

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THE OLD PROVERB IS THAT NECESSITY IS the mother of invention, but in an age of robotics it seems that simple inconvenience is enough to give birth to the next great innovation. Such is the case with the Rotimatic, a “robot” invented specifically to make whole wheat Indian flatbreads or rotis.

“Even in today’s technologically advanced world, [women] still have to come home after long day of work to the tedium of roti-making,” explains Pranoti Nagarkar, co-founder and CTO of Singapore-based Rotimatic maker Zimplistic, explains in a polished promotional video. “I have been through it and I have seen so many of my friends go through it.”

But not anymore, she adds. Her answer to this problem sits at a convergence of three technology trends – hardware, robotics, and the internet-of-things (IoT) – while simultaneously tapping into the wants of a fast-growing middle class.

A perfect blend for NSI Ventures, which has decided to invest $11.5 million in the company alongside RBVC, the venture capital arm of

German electronics multinational Robert Bosch, in Series B round of funding.

“Zimplistic is in the sweet spot of our thesis: that innovative products and services for the emerging middle class are going to be rising opportunities in Asia,” says Hian Goh, founder and general partner at NSI. “The fact that Zimplistic is making a robotic hardware device to fulfill the needs of a rapidly urbanizing population is core to the way we think about our portfolio and the companies we invest in.”

Zimplistic was set up by Nagarkar, a product designer, in 2008. Its first product claims to be the world’s first fully automatic flatbread maker, using a patented technology to mix the correct ratio of flour and water to make one roti per minute. Despite its high price tag – $599 (excluding shipping) – sales of the Rotimatic reached $5 million within the first week of its launch last year.

The waiting list is now said to be worth more

than $72 million, with over 5,000 distribution partnership requests.

“As an investor in robotics, IoT and hardware-related companies, we believe that Southeast Asia is a preferred place to start a company focused on such activities,” says Goh. “The

manufacturing heritage of Singapore as well as its closeness to the manufacturing chain meant that we were bullish on finding great companies here.”

The proceeds of the investment will mainly be used to scale up the production capabilities, testing and ultimately the distribution of the

Rotimatic. The core technology that underpins the product also has significant potential to be developed for use in further products.

“The opportunity to build a world-class consumer electronics company is there for us to capitalize and we intend to work closely with Robert Bosch VC as well as the management team to achieve this aim,” Goh says.

INDIA’S VAST ASSORTMENT OF ETHNIC groups represents a golden opportunity for MedGenome. The 2,000 groups that inhabit the subcontinent are a treasure trove of information waiting to be harvested and put to work.

“You have these distinct population groups that have evolved for 30-100 generations in a fairly homogeneous setting, which makes it the ideal playground to do genetics research,” says Dr. Kartik Kumaramangalam, chief of global products and services at MedGenome.

Sequoia Capital sees the potential in India’s ethnic bonanza as well. The GP recently committed $20 million as the sole sponsor of MedGenome’s Series B round. The company plans to use that funding to build on its strong starting position as the leading provider of next-generation sequencing (NGS) services in India.

MedGenome entered the market at an opportune time. A report issued by KuicK Research in 2012, a year after the company’s founding, warned that congenital malformations and genetic disorders were the third most common cause of infant mortality in India’s

major cities. It called for the expansion of genetic testing, along with research into genome sequencing to identify the roots of prominent disorders.

MedGenome has since partnered with over 100 hospitals to provide testing material to understand how the genetics of India’s various ethnicities contribute to their health. “We’re beginning to understand disease,” says Kumaramangalam. “We have access to patients and populations, and we can enable pharma and biotech companies in other parts of the world to develop better drugs and better insights into disease.”

Beyond scientific research, MedGenome emphasizes the practical side of its testing. To combat the problem of infant mortality, the company has recently introduced the Panorama Non-Invasive Prenatal Test for expecting mothers, which was developed by US-based Natera. MedGenome is the only provider in India.

While MedGenome’s US connections are

one of its chief strengths, the firm remains focused on extending its reach and knowledge

in Asia. “We’re getting samples not just from India now,” says Kumaramangalam. “We’re getting samples from other parts of Asia, and even as far afield as Russia.” The more samples it collects, the better the picture the company can build of the populations in the region.

Unlike in China, where BGI has become a leader in genome sequencing, India has no world-class homegrown genetic research enterprise. MedGenome intends to overturn this state of affairs, and give the country the scientific institutions that nearly a quarter of the world’s population deserves.

“When you think of genomics in India, there’s no natural answer that comes to mind,” says Kumaramangalam. The goal of MedGenome is to become that answer. “To fill in the blanks, and say India plus genomics is MedGenome. I think that’s the mission.”

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NSI Ventures in robot kitchen play

MedGenome aims to fill the sequencing gap

MedGenome: India champion

Rotimatic: Making bread

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BRINGING OVERSEAS TECHNOLOGY TO China is a popular investment thesis among GPs. However, while the likes of Fosun International and Hony Capital have completed several cross-border deals, this is not their sole proficiency. GSR Capital is therefore an exception.

The firm started out as an early-stage VC investor and recently entered the growth-stage space under Go Scale Capital. Now it is targeting control deals on a global basis, raising $1 billion for the GSR Global M&A fund. Chinese billionaire Kin Ming Cheng, who has previously collaborated with GSR and Go Scale on other deals, is among the investors.

“We have raised $1 billion and have sufficient commitments to do $5 billion worth of deals,” says Sonny Wu, co-founder of GSR Ventures and chairman of GSR Capital and Go Scale. “We haven’t decided which deals to do yet, but we’re targeting transactions that could be worth $5-10 billion.”

There will be no more than three deals, each one worth several billion dollars. GSR will either buy companies or acquire minority stakes in sectors such as clean energy, bio-pharmaceuticals and life sciences, bulk commodity investment, traditional and internet finance, wireless communication and the cultural industry.

“Everyone understands cross-border arbitrage. Enterprise valuations in China are higher than overseas, especially for high-end tech companies. But a lot of people don’t know technology arbitrage. You really need to understand technology in order to source the best deals,” Wu says. “I have been investing in technology and operating tech firms for over 22 years. We’re the

most tech-focused investor in China.” The GP, GSR Go Scale Capital, will work closely

with Hong Kong-listed investment company Good Resources on management of all M&A deals from the fund. The two parties will co-invest in certain transactions. Good Fellow is controlled

by Cheng, while Wu owns more than 15%. Prior to the launch of the new fund, GSR Go

Scale acquired an 80.1% interest in Lumileds, the LED components and automotive lighting unit of Dutch electronics giant Philips, in a deal worth $3.3 billion.

In May, the GP led a transaction whereby a majority stake in its Chinese portfolio company, Lattice Power, was sold to Hong Kong-listed Shunfeng International Clean Energy (SFCE). Go Scale and its fellow investors in Lattice, which include GSR, Asia Pacific Resources Development (APRD), Crescent Point, Temasek Holdings and Mayfield, received HK$2.04 billion ($263 million) worth of shares in SFCE. Cheng is a shareholder in both APRD and SFCE.

Wu says those two transactions were made on deal-by-deal basis and they shouldn’t be seen as emblematic of the coming buyout deals. “New investments will be in different sectors. We are not only looking in the US, but also Israel, Germany and Sweden. I can bring a new market to the portfolio companies. That’s our value creation angle,” he says.

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KEYNOTES

SNAPSHOT OF EXPERT SPEAKERS INCLUDES

Stephen Pagliuca Managing Director,

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Charles R. Kaye Co-Chief Executive Officer,

WARBURG PINCUS

Howard Marks Co-Chairman, OAKTREE CAPITAL MANAGEMENT, L.P.

Niklas Zennström CEO and Founding Partner, ATOMICOCo-Founder, SKYPE

Marcus Simpson Head of Global Private EquityQIC

Katja Salovaara Senior Portfolio Manager, Private EquityILMARINEN MUTUAL PENSION INSURANCE COMPANY

Andy Hayes Private Equity Investment OfficerOREGON STATE TREASURY

Hemal Mirani Managing DirectorHARBOURVEST PARTNERS (ASIA)

Jonathan Lavine Managing Partner and Chief Investment OfficerSANKATY ADVISORS

Joseph Y. Bae Member and Managing PartnerKKR ASIA

H. Chin ChouChief Executive Officer and Managing DirectorMORGAN STANLEY PRIVATE EQUITY ASIA

Kok Yew Tang Chairman and Managing PartnerAFFINITY EQUITY PARTNERS

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FOR CHINESE START-UP HEYJUICE, AN investment from Hong Kong actress and model Angelababy is worth far more than the dollar value of her commitment. The company now has ties to one of the cast of upcoming Hollywood blockbuster Independence Day 2, and can capitalize on the attention this brings.

Born Ying Yang, the 26-year-old actress shot to fame on the popular Chinese reality show Running Man, where contestants take part in missions at various landmarks. Angelababy has over six million followers through her Weibo microblog and has put her name to a number of coffee shops and nail salons in Hong Kong.

Last month she launched a venture capital firm – AB Capital – and made two investments: Chinese cross-border e-commerce site Ymatou and health drinks maker HeyJuice.

HeyJuice targets the young adult female demographic, supplying fruit and vegetable-based juices that assist dieting. The company plastered Angelababy’s face on its website, proudly announcing that it has China’s most attractive actress as a product manager. “Angelababy has tried all the drinks and helped us improve the vegetable juice. The new series of products will be available within a week,” it said.

Having raised funds from Sequoia Capital, Ceyuan Ventures, VenturesLab, and the founders of Focus Media and JD.com, HeyJuice has added a celebrity endorser to its investor roster.

Angel rushIt should come as no real surprise that celebrities have hopped on to China’s angel investment bandwagon. They are high net worth individuals with capital to deploy and they have seen the frenetic wealth creation in the technology space. Celebrities are making independent investments or setting up funds with others in the entertainment industry. Their endorsement could take years off a brand-building process, but is it just a flash in the pan?

“Celebrity funds’ involvement can bring value to portfolio companies,” says Ge Jin, investment director at China retail-focused fund Telescope Investments. “However, the impact they can have relates to the time and resources they can devote to promoting these companies.”

Yang’s AB Capital is not an isolated phenomenon. Her husband Xiaoming Huang is

also an actor turned angel investor. Last July, he launched a super angel fund – StarVC – together with actress Bingbing Li and actor Quan Ren. The debut fund was understood to be worth RMB80 million and a successor vehicle of RMB300 million has now been fully deployed.

On the launch of Fund I, StarVC said it received over 3,000 emails from entrepreneurs asking for capital. Early investments included e-commerce site Handu and video app Miaopai. The latter went on to raise a $50 million Series C round led by KPCB, alongside Sina Corporation and Redpoint Ventures.

Announcing its participation in the Series C, StarVC plugged Handu: “Zara belongs to Spain; H&M is from Sweden; Uniqlo is from Japan; C&A

is from Holland. StarVC asks you to shout: Handu belongs to Chinese!” The company has since seen rapid growth in its user base.

Over the past 12 months, StarVC has backed 10 companies, including peer-to-peer (P2P) lending platform Wangcai.com and luxury online retailer Hichao.com. The VC firm no longer announces its investments with great fanfare; rather, the portfolio companies post pictures of the StarVC team to promote themselves.

Celebrity cachet has also been used to source deals. When Qihoo360 Technology launched an Android-focused start-up accelerator program several months ago, it invited angel investor Xiaoping Xu, actor Chao Deng and movie director Baimei Yu to serve as mentors. Hongwei Zhou, CEO of Qihoo360, said: “Deng’s involvement brings us a good supply of high quality start-up projects.”

“The core value of the celebrities is to leverage their fame to generate attention. When they post online to promote the brands, hundreds of thousands of fans will follow.

Start-ups can save a lot advertising fees because of that,” says Desmond Marshall, managing partner of Rouge Ventures, which specializes in reinventing consumer brands in Greater China. “To maximize the celebrity effect, founders should consider how to match the target market with the right star.”

Jin wants Telescope to partner with celebrity funds in order to save on marketing costs, although he admits that celebrities’ value-add is still very limited.

“Based on the investments announced, celebrities haven’t put sufficient resources into boosting companies’ images. They are more like passive investors, creating a bit of news around the investment and that’s it. We know about the investments because we’re in the industry, but most consumers do not,” he explains.

Sustainability issuesIt is worth noting that angel investment is not a full-time job for these celebrities. By acting as a brand endorser for an investee company, they may be in violation of agreements with authorized media agencies if there is no sharing of commissions. For this reason, and because she is contracted to promoter other drink brands, Angelababy cannot pose with a bottle of HeyJuice in her hand.

Moreover, their fame is very tangible. “There’re always pros and cons. If the actress is really famous and the portfolio company suddenly becomes well known, the founder should bear in mind that thousands of paparazzi will follow the star every day. You can’t predict the consequences and that is the risk,” Marshall says.

Ultimately, the question is whether media exposure is meaningful to the portfolio company. A celebrity might help a start-up achieve rapid growth in the first few months, but can this be sustained over several years?

“The most important area for a start-up is its core operation and developing a sustainable business model,” says Joe Wu, founder of early-stage VC fund M Fund, previously CEO of 91Wireless. “Celebrities might not be able to offer this kind of help. Entrepreneurship is a long-term process; short-term success or failure is meaningless. If the start-up can only generate sales through Angelababy’s endorsement, I wouldn’t invest in it.”

Profile booster Chinese celebrities are entering the venture capital space, offering start-ups endorsement as well as financial support. But can a pop star’s cachet translate into long-term sustainable growth?

“The impact they can have relates to the time and resources they can devote to promoting these companies” – Ge Jin


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FEW EUROPEAN INVESTORS CAN CLAIM to have a history in Asia as long as DEG, whose unabbreviated name translates to German Investment Corporation. As the emerging markets arm of KfW, Germany’s government-backed development bank, DEG has been investing in the region since its launch 1962.

“Private equity has been an important part of our investments for decades,” says Marcus Bracht, vice president at DEG’s representative office in Singapore. “The original idea was to promote the private sector by mainly assisting German medium-sized companies with their investments in developing countries.”

Bracht explains that historically the group’s investments were mainly in debt finance. It later branched out into equity and mezzanine financing. From 1990 onwards much of this activity had naturally been focused in Eastern Europe, as countries of the former Soviet Union transitioned from planned to market economies.

Today, however, Asia plays a much larger role across the whole of DEG’s investment portfolio. The fund has five offices in Asia and the region accounted for more than 31% – or EUR2.4 billion ($2.6 billion) – of its portfolio in 2014. The second-largest region after Asia is Africa, which accounts for 24%, or EUR1.86 billion.

Early moverDEG has been making sporadic PE investment in Asia, directly and through fund commitments, for decades. The earliest LP investment recorded by AVCJ Research, however, go back to around 1998 when DEG made commitments to the INR650 million ($10 million) Indian Auto Ancillary Fund managed by IL&FS Investment Managers. The auto components sector-focused fund generated an 18% gross return and a 2.1x multiple.

DEG did not set up a dedicated private equity group until 2004. Since then Bracht says the fund has seen a significant increase in its PE investments. Last year around 45% of DEG’s new commitments were in risk capital finance. The majority of these are direct equity investments.

“The focus of DEG’s investments has been on small and medium-sized companies and projects in emerging markets,” says Bracht. “These companies are usually faced with a low capitalization and consequently have restricted access to long-term finance which they need to

realize their expansion plans and modernizations.” Still, around one quarter of the risk capital

activity took the form of commitments to private equity funds. DEG’s fund program typically focuses on mid-cap funds, which may be generalist, sector-focused or dedicated to SME impact investing. Like many development finance institutions (DFIs), DEG often serves as a vital source of capital to first-time managers, or managers in frontier markets, who otherwise struggle to attract institutional investors.

“First-time funds mostly need support from DFIs as a result of the still-challenging fundraising environment in most Asian countries,” says Bracht. “Our experience and cooperation with new, professional and like-minded fund managers is generally very positive and encourages us to continue with this strategy.”

While the performance across DEG’s private equity investments is quite broad – which is to

be expected given the markets in which it invests – the asset class has met expectations.

“Portfolio diversification in terms of number of investments, industries and regions is an important factor in this success. Partner selection is also key to our due diligence and investment decisions,” says Bracht. “Under regulatory, legal

and cultural aspects, each market has its own challenges. However, our long experience in these markets allows us to deal with them.”

A broader remitChina and India have been the largest Asian markets for DEG’s PE investments to date, but in the last couple of years the group has become increasingly active in Southeast Asia, particularly Indonesia, Thailand, Vietnam and the Philippines.

DEG’s fund commitments in the region over the past 24 months include Armstrong Asset Management Southeast Asia Clean Energy Fund, which reached a $164 million final close in November 2013, and CapAsia’s ASEAN Infrastructure Fund III, which launched in 2013 with a $350 million target.

Meanwhile, recent direct investments in Southeast Asia include Indonesian pharma player Soho Global Health, which raised an undisclosed sum from DEG and Quadria Capital in January, and MAXpower Group, an Indonesian power plant developer. The company raised $12.5 million from a consortium of investors that included DEG, the Asian Development Bank, and the International Finance Corporation (IFC), among others, last year.

“Those early-stage markets benefit from an attractive economic growth and lower valuation expectations as an outcome of less competition among only a few investors,” Bracht adds.

DEG plans to maintain a good geographical mix in Asia, but it will consider ramping up activity in countries like Cambodia, Laos and Myanmar. The group’s two most recent fund commitments focus on the edges of South Asia: Zephy Partners’ $42 million Emerald Sri Lanka Fund and Aavishkaar’s recently launched $45 million Frontier Fund, which targets Indonesia, Bangladesh, Sri Lanka and Pakistan. DEG is anchor investor for the latter vehicle alongside Germany’s Federal Ministry for Economic Cooperation and Development (BMZ).

“These markets are very much underpenetrated by private equity, but offer attractive investment opportunities and are part of our future markets strategy in Asia,” says Bracht. “A sector, which we have a special focus on, is renewable energy and, looking forward, we think of intensifying investments in healthcare as well as in the insurance sector.”

Frontier veteran Active in Asia for 50 years, German development finance institution DEG can claim a role in the emergence of PE in the region. Singapore-based Marcus Bracht explains how its strategy has evolved since then.

Africa (Sub-Saharan) 24.0%Asia 31.3%Latin America 25.9%Europe 15.0%North Africa / Middle East 1.5%Supra-regional 2.3%

DEG’s portfolio distribution, 2014

Source: AVCJ Research

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