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The new breeds06/12/2006. Source: Asia Private Equity Review (APER).
 Two different profiles of private equity managers are emerging in China and Indian, says APER, while, they discover, the Asian private equity party is still in full swing.
In the first quarter of the year, the industry recorded an astounding US$5.6 billion of fresh capital; while the investment sums directed to 82 companies across the region aggregated to a staggering US$11.3 billion. Excluding the exceptional US$1.3 billion raised by the Macquarie Road Korea Infrastructure Fund for South Korea through its public debut, China and India were the undisputed magnets to institutional capital, attracting US$448 million and US$212 million respectively.
It is the deal consummation profile that bespeaks the mesmerising allure of these two markets. In the first three months of the year, 20 China-based operations attracted US$4 billion, representing 34.7% of the transaction total. Although India clocked up an aggregate US$699 million, due to its relatively smaller average deal size, with details of 37 transactions known, the country is by far the busiest market for private equity investors. Together, China and India accounted for 70% of the 82 deals consummated in the first quarter (fig.5).
As China and India assume paramount positions in the Asian private equity landscape, revolutionary movements are taking place in these two markets, with each having its own set of characteristics that portend the future path of private equity in their respective universe.
China
After a series of remarkable investment results in technology companies, the myth that profitable venture capital investment in China is a chancy bet has been quashed. It began with the public debut of Ctrip.com on NASDAQ in late 2003, in which of the travel and hotel reservation portal have been richly rewarded. The Carlyle Group boasted an internal rate of return that exceeded more than 1,000%. When Baidu.com, China’s largest search engine, was listed on NASDAQ, its early investors reaped phenomenal returns in over a 100-fold, further affirming a sharply different investment climate in China this time around.
Silicon Valley icons and those located further on the East Coast of the USA are convinced that China will be the playground for their future “home runs”. To them, in addition to China’s alluring potential, the country, for the first time, is endowed with a pool of managers who have proven leadership and operational skills. They were the pulse behind some of the most lauded technology companies in China. The credentials of this outstanding group of new talent have not only met the lofty standards demanded by elite USbased venture capital firms, but also provide the latter the vital link to the local community.
These, fused with the extensive capital and direct equity investment experience from the west, are a powerful formula of success (fig.6). The Silicon Valley-based Doll Capital Management (‘DCM’) was one of the very first to test the East and West formula. In April 2005, it announced a strategic partnership with Legend Capital, the corporate investment arm of Legend Holdings, China’s leading technology company.
The alliance was cemented through a US$3 million commitment made by the Silicon Valleybased venture capital firm. Mayfield Fund, Greylock Partners and New Enterprise Associates also employed the same approach. They have chosen to be the US allies for China’s young and aspiring local venture capital firms. Mayfield Fund joined hands with Gold Sand River, a local fund management firm formed by three partners. Greylock Partners and New Enterprise Associates have decided to journey with two local entrepreneurs in partnership and set up Northern Light Venture Capital.
Both Accel Partners and Ignition Partners are ready to manage their respective dedicated China funds, while teaming up with local venture capital firms. In early March, Accel Partners and IDG Technology Venture Investment, China’s longest venture capital corporate investor, announced the final closing of their joint venture fund, IDGAccel China Growth Fund. Institutional investors expressed their overwhelming faith in this kind of partnership, as IDGAccel China Growth Fund was oversubscribed and closed at US$290 million, compared to an original target of US$250 million. Ignition Partners joined hands with Qiming Venture Partners, a newly-formed local venture investment firm, and made a pledge to plough no less than US$200 million into China’s venture capital market. Significantly, these foreign venture capital firms have successfully recruited some of China’s most outstanding entrepreneurs.
Mr Hurst Lin, formerly founder and chief operating officer of Sina.com joined DCM, appointed as its partner. For a brief period, Mr Zhou Hongyi, formerly president of China Yahoo! and founder of 3721, served as partner of IDG Venture Technology Investment, which is Accel Partners’ China ally. Even though both Sequoia Capital and Draper Fisher Jurveston had decided to establish their respective China-focused funds, they have chosen those endowed with entrepreneurial spirit and proven operational expertise to be their key men to steer the rudder of their China ships. Sequoia Capital has appointed Mr Neil Shen, the founder and president of Ctrip.com to be its managing partner. Northern Light Venture Capital recruited Feng Deng as its key man, former founder of Netscreen in Silicon Valley.
To some of China’s most talented managers, being a partner in a venture capital fund management firm is the most aspired occupation. The former president and chief operating officer of Sohu.com, Mr Victor Khoo has decided to set up his own venture capital fund, christened as Search Fund. Most recently, Mr Edward Tian, the man who is responsible for the ascendancy of China Netcom, gave his blessing to set up a broadband fund for China (fig.7).
India
Although the Indian private equity industry is also witnessing a pool of talent joining its burgeoning market, a vastly different trend is taking place. Unlike China where foreign houses have been the catalyst to recruit the pool of dynamic venture capital managers who have been icons of China’s technology companies, Indian private equity is enlisting a different crop of managers. The high profile appointment of Mr Akhil Gupta, currently managing director of Blackstone Group’s Asian operations, who was formerly in charge of Reliance Industries’ corporate development, is the exception rather than the rule.
Instead, the fund management firms hanging up their signs are those who are veterans in the fund management industry, either abroad or at home. Significantly, however, this new breed of fund managers prefer an independent status and are confident of being able to achieve their respective ambitious fund targets. Mr. Vinod Khosla, a doyen of Silicon Valley and an Indian national, formerly a partner of Kleiner Perkins Caufield & Byers, has set up his own venture, Khosla Ventures. Described by others as the first global venture capital fund management firm by an India national, Khosla Ventures has already made commitments in India. It has teamed up with the Small Industries Development Bank of India, and other investors to invest US$2.5 million in venture investors SKS Microfinance. Another prime force in Silicon Valley’s non-resident Indian community is Mr Kanwal Rekhi. An angel investor, Mr Rekhi had previously invested in Exodus Communications, has decided that the time is ripe to launch an India-focused fund, Inventus Capital which has a target of US$150 million to US$175 million. Its focus is to fund Indian startups.
Although both Messrs Khosla and Rekhi have been resident in Silicon Valley, it is noteworthy that they are confident of seizing opportunities in India without setting up alliances with local parties.
At home, India witnesses the mushrooming of a host of new and independent fund management firms. They are led by partners who have discarded the institutional cushion that provides comfortable fringe benefits, to assume full responsibility for their fund management journeys. Two of IL&FS Investment Managers’ former senior managers, Messrs Muneesh Chawla and Hetal Gandhi, are setting up their separate fund management firms. Mr Chawla’s Blue River Capital is a partnership between himself and Mr Shujaat Khan, who was formerly a partner at ChrysCapital. Once limited partners shunned first time fund management teams, but Blue River Capital proves the mood has changed. Its maiden fund has received commitments of just over US$100 million (fig.8).
Mr Hetal Gandhi is teaming up with Mr Charles Johnson, former co-president of Franklin Templeton Investments and chief executive officer of Templeton Worldwide, as well as Mr Carlton Pereira, formerly with KPMG India, to form Tano Capital. Its first fund has already received US$55 million of commitment and the team is confident to reach the goal and secure institutional commitment for an additional US$100 million.
The pursuit to assume an independent status is in vogue in India private equity. Hardly a month has gone by without announce of new fund management teams. Most recently, three former Morgan Stanley executives have teamed up and launched Old Lane. Messrs Guru Ramakrishnan, Vikram Pandit and John Havens have left their previous prestigious employing institution and launched a private equity fund with a target size of US$500 million. This investment vehicle shall principally seek opportunities in the infrastructure segment.
Observation
Two very different kinds of new fund managers are emerging in the Asian private equity industry. China is likely to be home to the next generation of venture capital fund managers. This development augurs well with Beijing placing the promotion of science and technology as priority in the country’s next 5- year plans. By 2020, China hopes to commit 2% of the country’s gross domestic product for research and development in science and technology, so its dependence to foreign technology would be reduced to no more than 30%. India has an environment that breeds both venture capital and growth/expansion fund managers.
Bangalore continues to be the hotbed of technology companies, while the vast pool of listed companies that have very little trading movements offer a unique window to advocates of growth/expansion capital. It is, however, the pool of budding independent fund managers who will define the future market dynamics in India, absent any institutional interferences. For the first time in the history of private equity, Asia’s two giant emerging markets are endowed with their respective pool of managers with proven track records. This, together with their indepth knowledge of the local market and access to sizeable pool of capital, are formidable qualifications. Their rising profile could either complement or threaten pan-Asian or global houses’ ability to consummate deals in these markets.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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