focus deal of the week choose your modelasia’s private equity news source avcj.com august 25 2015...

Asia’s Private Equity News Source avcj.com August 25 2015 Volume 28 Number 31

PORTFOLIODEAL OF THE WEEK

Choose your modelAssessing strategies for the next wave of Asian e-commerce start-ups Page 6

Driving disruptionsTata Capital backs Uber’s India expansion 2

Mainland maneuverMSPEA helps AMTD target China market Page 14

China strategics offer debt funding to start-ups

Page 9

DEAL OF THE WEEK

FOCUS

SCPE goes unusually early to back Dianrong

Page 12

Singapore’s RedMart set for overseas expansion

Page 13

Nominations open for the 2015 AVCJ Awards

Page 3

CIC, Ekuinas, Goldman Sachs, IDG, IFC, Kerogen, Legend, Lightspeed, Matrix, Religare, Sequoia, SoftBank, Tiger Global, TPG, Yunfeng

Page 4

EDITOR’S VIEWPOINT

NEWS

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

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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

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Adam BlackPartner, Head of SustainabilityDOUGHTY HANSON & CO PRIVATE EQUITY

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Chris ChiaManaging PartnerKENDALL COURT CAPITAL PARTNERS

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Darren MassaraManaging PartnerNEWQUEST CAPITAL PARTNERS

Brian LimPartnerPANTHEON

Steven R. OkunPublic Affairs DirectorKKR

Frederick J. LongFounding Managing DirectorOLYMPUS CAPITAL ASIA

Nicholas BloyCo-Founder and Managing PartnerNAVIS CAPITAL PARTNERS

Nicholas ParkerFounding Managing PartnerGLOBAL ACCELERATION PARTNERS INC.

Ed NortonSenior Advisor, ESGTPG CAPITAL

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Number 31 | Volume 28 | August 25 2015 | avcj.com 3

EDITOR’S [email protected]

FOLLOWING A SIGNIFICANT CHANGE IN format last year, the 2015 – and 15th – AVCJ Private Equity & Venture Capital Awards features just one new prize. The venture capital deal of the year category has been split in two: early stage technology and late stage technology.

This is intended to acknowledge the proliferation of sizeable transactions in the technology space that would more accurately be described as growth capital than venture capital. To qualify as late-stage technology, the target company must have an enterprise valuation of $500 million or above. The cut-off for the mid cap and large cap deal awards remains $100 million.

Exits are also unchanged: IPO, mid cap (investment size below $100 million on entry), and large cap (above $100 million). For fundraising, there is one tweak. The dividing line between mid cap and large cap has been raised to $1.5 billion – a nod to the fact that fund sizes are, in general, rising – while venture capital funds continue to be defined by strategy rather than size.

Nominations for the AVCJ Awards are now open and will remain so until September 18. For more information and to submit nominations, please go to: www.avcjforum.com/static/home. They should relate to investment, exit and fundraising activity in the last 12 months, i.e. October 1, 2014 to September 18, 2015. Nominations can also be made by email ([email protected]).

The AVCJ Editorial Board will evaluate the entries and submit a long list in each category to a select panel of industry judges. The judges will make their recommendations and final shortlists will then be drawn up. The shortlists will be posted online for the entire private equity and venture capital community to vote on from October 5 until October 20.

Voters must register – providing name, firm and contact details – so as to avoid vote packing. No more than 10 votes will be accepted from

employees of a single firm. The AVCJ subscriber base has a 50% say in the final result, with the judges and the AVCJ Editorial Board each accounting for 25%.

As was the case last year, two categories are not subject to a public vote. The Operational Value Add Award is presented at the discretion of the AVCJ Editorial Board with input from a separate judging panel of industry professionals who work on the operations side. The AVCJ Special Achievement Award is presented solely at the discretion of the AVCJ Editorial Board, although suggestions from the private equity and venture capital community are considered and valued.

The winners will be announced at an invitation-only gala dinner in Hong Kong on November 2, preceding the AVCJ Forum, which runs from November 3 to November 5.

THE CATEGORIES• Fundraising of the Year – Venture Capital• Fundraising of the Year – Mid Cap• Fundraising of the Year – Large Cap• Deal of the Year – Early Stage Technology• Deal of the Year – Late Stage Technology• Deal of the Year – Mid Cap• Deal of the Year – Large Cap• Exit of the Year – IPO• Exit of the Year – Mid Cap• Exit of the Year – Large Cap• Venture Capital Professional of the Year• Private Equity Professional of the Year• Operational Value Add Award• Firm of the Year• AVCJ Special Achievement Award

Tim BurroughsManaging EditorAsian Venture Capital Journal

Nominations open for the 2015 AVCJ Awards

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avcj.com | August 25 2015 | Volume 28 | Number 314

AUSTRALASIA

TPG’s Ben Gray to start his own PE firmBen Gray, managing partner at TPG Capital, is preparing to set up his own private equity firm focused on investment opportunities in Australia. Gray will continue working with the company’s Asia team until TPG Asia fund VI is invested, which it anticipates will be in 2017.

GREATER CHINA

VCs exit Meilele to strategic buyerLightspeed China Partners, Vertex Ventures and China Renaissance K2 Ventures will exit Meilele as Shanghai-listed Guangdong Yihua Timber Industry agreed to buy an 18.21% stake in the online furniture retailer. Yihua Timber will purchase 11 million shares in Meilele from existing shareholders at $6 apiece and subscribe to 2 million newly issued shares at $9 apiece, for a total of $84 million.

IDG, JD back Shanghai Pharma e-commerce unitChinese online retailer JD.com and IDG Capital Partners have participated in a RMB1.11 billion ($174 million) Series A round of funding for Shanghai Pharmaceuticals’ online drug distribution platform. JD.com has invested RMB100 million in cash and RMB51.5 million worth of online platform resources in exchange for a 12.5% stake in the business while IDG committed RMB60 million for a 5% interest.

Qihoo to acquire HK-listed Vision ValuesChinese internet security software provider Qihoo360 Technology, which recently received a take-private offer from its management and VC investors, intends to acquire a majority stake in Hong Kong-listed Vision Values alongside The People’s Insurance Company of China. It is suggested Qihoo might seek to re-list in Hong Kong via a reverse merger.

Taiwan plans $609m M&A fundTaiwan’s National Development Council (NDC) will launch a NT$20 billion ($609 million) fund to assist domestic companies with mergers and

acquisitions. The goal is to encourage industrial consolidation and also to assist local companies that want to acquire foreign peers. Up to 30% of the money needed for an eligible merger can be provided from the fund.

La Chapelle, Legend Capital launch PE fundHong Kong-listed Shanghai La Chapelle Fashion, a ladies’ apparel maker backed by a string of PE investors, has partnered with Legend Capital to set up a PE fund worth RMB153 million ($24 million). La Chapelle will contribute RMB150 million, with Legend putting in RMB3 million.

Sequoia, CBC back Airbnb to expand in ChinaUS-based online vacation home rental marketplace Airbnb has forged a partnership with China Broadband Capital (CBC) and Sequoia China to expand into the Chinese market. Two VC firms will help Airbnb recruit a CEO for its operations in the country and localize the technology in the Chinese market.

Kerogen to invest in North Sea gas developerKerogen Capital, a Hong Kong-headquartered energy investor, has committed up to $100 million to Zennor Petroleum, an exploration and production company that focuses on the UK’s North Sea area. The company could receive as much as $400 million from Kerogen and its LPs over the course of the investment.

Online convenience store gets $31mShenzhen Capital Group has led a RMB200 million ($31 million) pre-Series B round of funding for 59store.com, a Chinese online convenience store focused on serving students. Legend Capital, online finance platform 9Fbank.com and Chinese enterprise O.R.G. also participated.

Chinese event venues search portal raises $20mHotelGG.com has raised $20 million in a Series B round of funding from existing investors, including Matrix China Partners, Chengwei Ventures and SIG China. The Shanghai-based company provides a booking platform for events and meeting venues, such as hotel conference centers, resorts and convention centers.

Second-hand car platform Youche raises $18mYouche.com, a Chinese online trading platform for second-hand cars, has raised an $18.2 million Series B round led by Galaxy Capital, followed by IDG Capital Partners, ZhenFund and China Growth Capital. The transaction came after the firm raised a Series A round from IDG last year.

Yunfeng leads Series C for logistics appYunfeng Capital has led a Series C round of funding for Yunmanman, a Shanghai-based mobile logistic distribution platform. Existing

Chang Sun targets $1b China agribusiness fundBlack Soil Capital Partners, a private equity firm newly formed by Chang Sun, formerly Asia managing director at Warburg Pincus, is looking to raise $1 billion for its debut China agriculture-focused fund. The fund, which would be by some distance the largest in China’s agribusiness space, comprises two vehicles – a US dollar-denominated fund and a renminbi fund – each with a target of $500 million.

Chinese agriculture is highly-fragmented and challenged by inefficiency and low productivity. One of the root causes is the dominance of small-scale farms, usually family-operated. Black Soil plans to achieve consolidation by securing long-term leases over land from farmers and developing a US-style industrialized agriculture model.

The firm will focus in particular on the northern Chinese province of Heilongjiang, one of the world’s three major soil zones with favorable organics for farming. Major crops include corn, soybeans, rice and wheat. Sun has recruited several agriculture experts to his team. Among them is David Liu, who previously served as China country manager for DuPont Pioneer and focused on promoting hybrid seeds to improve crop yields.

NEWS


investors Sequoia Capital and Lightspeed China Partners also participated.

NORTH ASIA

Nikesh Arora commits $482 million to SoftBankSoftBank President and COO Nikesh Arora has invested JPY60 billion ($482 million) in the firm in a personal stock market transaction. Arora, who replaced founder Masayoshi Son as president in May, said that he decided to make the investment as a show of commitment to the firm’s future.

SOUTH ASIA

SoftBank, Foxconn, Alibaba lead round for SnapdealSoftBank Group, Foxconn Technology Group and Alibaba Group have led a $500 million investment in Indian online marketplace Snapdeal. Existing backers Temasek Holdings, BlackRock Private Equity Partners, Myriad Asset Management and PremjiInvest also participated in the deal, which is said to value Snapdeal at $5 billion. As part of the deal, eBay is also selling a part of its stake in the company.

Religare in $78m final close on first debt fundReligare Credit Advisors has announced a final close of the domestic tranche of its first debt fund at INR5.1 billion ($78 million). The vehicle has a target of INR10 billion – with a INR2.5 billion overallotment option – the rest of which will be raised from overseas investors.

Goldman Sachs invests $150m in Piramal RealtyGoldman Sachs has invested $150 million in the Piramal Group’s real estate development arm, Piramal Realty, less than a month after Warburg Pincus committed INR18 billion ($284 million) to the company. The new funds will be used to expand Piramal’s current real estate portfolio and to buy new properties in and around its base of Mumbai.

India’s IIFL to raise $153 million VC fundIIFL Wealth Management, the Indian financial services firm backed by Fairfax Holdings and the

Carlyle Group, will raise a seed venture fund of up to INR10 billion ($153 million). The fund, IIFL Seed Ventures Fund I, will invest in start-ups at the Series A and B stages, with some exposure to Series C and D rounds.

Tiger invests $15m in fashion site RoposoTiger Global has invested $15 million in Indian fashion-oriented social network Roposo. The company claims to have more than one million active users, predominately women aged 16-35 in Indian cities and towns.

Kalaari leads funding round for YourStoryIndian tech business news website YourStory has raised a Series A round led by Kalaari Capital, with participation from Qualcomm Ventures, Ratan Tata and T.V. Mohandas Pai. The capital will be used to support the upcoming local-language version of the website, planned to launch in October.

One97 to split e-commerce, payments unitsIndian mobile services One97 Communications – which sold a 25% stake to Alibaba Group for $550 million earlier this year – will spin off its electronic payment service Paytm into a separate entity under One97’s co-founder Shekhar Sharma. The split was triggered by the conditional approval of Sharma for a payment bank license.

SOUTHEAST ASIA

IFC to back Jungle Venture’s second fundInternational Finance Corporation (IFC) will invest up to $10 million in Singapore-based Jungle Ventures’ second venture capital fund, which is targeting $100 million. It will also commit $10 million to a co-investment vehicle that will operate alongside the fund.

Ekuinas sells Southeast Asia Burger King assetsEkuinas, the Malaysian government-backed private equity investor, has sold the Burger King franchises in Malaysia and Singapore, generating proceeds of MYR74.6 million ($17.7 million). The divestment – which is part of a restructuring that will see Ekuinas exit the quick service restaurant business – has delivered an IRR of -28.1% and a multiple of 0.45x the capital invested across two direct investment funds.

Philippines targets 500 tech start-ups by 2020The Philippines government has outlined plans to achieve 500 domestic technology start-ups with a combined valuation of $2 billion by 2020. This is expected to lead to the creation of 8,500 high-skilled jobs and 1,250 start-up founders, and the accumulation of more than 15 million users and over 719,000 paying customers. It is estimated there are currently about 100 tech start-ups operating locally.

Didi Kuaidi, CIC join $350m round for GrabTaxiDidi Kuaidi, the largest of China’s mobile ride-hailing platforms, and China Investment Corporation (CIC) have participated in a $350 million funding round for Southeast Asia-focused mobile taxi-booking app GrabTaxi. US-based Coatue Management and other existing investors also took part in the round, which brings GrabTaxi’s total funding to approximately $700 million. This includes a $250 million investment from Japanese tech giant SoftBank Corp. in December.

GrabTaxi said it will use the new funds to expand its two new businesses: motorcycle taxi-booking service GrabBike and private hire service GrabCar. The GrabCar service is available in all countries in which GrabTaxi is operates, while GrabBike is currently in Vietnam, Indonesia and Thailand.

“Diversifying into private cars and motorbikes has allowed us to touch people of varying income levels and commuting needs,” said CEO Anthony Tan, who set up GrabTaxi in Malaysia in 2012 with Hooi Ling Tan. “We are the only app in the region that has such an extensive network and range of transportation choices.”

The company has also received funding from Tiger Global Management, GGV Capital and Temasek Holdings-owned Vertex Venture.

NEWS


COVER [email protected]

“MY PARTNER AND I HAD ONE DELIVERY van, and we had to do deliveries ourselves every night, and go to [supermarket chains] FairPrice and Cold Storage when we ran out of stock,” RedMart co-founder Roger Egan told the AVCJ Singapore Forum in July. “Having to do it ourselves was probably the best thing that happened to us, because we built a core competency in the grocery business.”

The Singapore-based online grocer has come a long way from its humble beginnings, having raised $54 million since its inception in 2011, including a $26.7 million bridge round that closed last week. RedMart developed an inventory-led grocery business and is now in the process of building a marketplace through which customers can purchase a wider variety of products from third-party retailers.

But its ability to do this hinges on a delivery network devised in those tough early days. “You have to have the vertically integrated supply chain and keep the cold chain,” Egan says. “No third-party logistics companies can do that well, and we’ve built it into a competitive advantage.”

RedMart’s story is indicative of the explosive growth potential of e-commerce in Asia. The company has combined the marketplace model followed by Alibaba Group’s B2C Tmall platform in China with the inventory-led approach displayed by Tmall rival JD.com. It is a sign of what the future could hold as the sector moves into the next stage after the consolidation of the current reigning giants, but finding a balance between scale and service quality is difficult.

The existence of both models is a boon to investors, since it means they have a number of options they can draw on rather than being limited to just one. However, they still need to pick the right approach for the right market.

Spending on steroidsRising disposable incomes and rising mobile internet use has turned e-commerce into a powerhouse in emerging Asia in recent years, with all three principal regions showing consistent strong growth. China has seen gross merchandise volume (GMV) rise from just under $1 trillion in 2011 to nearly $2 trillion last year, and GMV is projected to increase to $3.3 trillion by 2017.

India has shown similarly impressive growth, though an order of magnitude lower, with the estimated e-commerce market size rising from $3 billion in 2009 to $10 billion in 2013; projections have it reaching $86 billion by 2018. While figures for Southeast Asia as a whole are harder to come by, in Indonesia, the largest country in the region, transaction value has risen from $67 million in 2010 to $776 million in 2014.

Along with the growth in market size has come a torrent of growth capital. AVCJ Research data indicate that since 2010, VC and PE investors have committed more than $17 billion to e-commerce companies in China, nearly $6 billion in India, and $1.5 billion in Southeast Asia.

The investment figures represent some huge transactions, including two separate deals for India’s Snapdeal that netted the company more than $1 billion. Snapdeal’s rival Flipkart has benefited even more from the surge in investor interest, raising $1 billion in a single round in 2014. That round was both bigger than all of the company’s previous funding rounds combined, and was the single largest investment for an Indian internet company.

Each market can boast a few major successes. China has Alibaba Group and JD.com, both of which are now listed in the US; Southeast Asia, though more fragmented than the other two regions, still has Lazada and the rest of the Rocket Internet stable. However, e-commerce encompasses more than a few established giants. There is plenty of activity outside of those few record-breaking rounds – between 2010 and 2014 there were an average of 81 deals per year in China, 40 in India, and 20 in Southeast Asia.

Tarun Davda, a Mumbai-based director at Matrix Partners, sees the investor interest in e-commerce as having reached a kind of critical mass – but care is needed to ensure that investor support is not wasted. “I’m sure that today, anyone in their right mind has a stake in an

e-commerce company,” he says. “But we find for a lot of companies coming in, the founders think they’ll build out an e-commerce brand, but the level of understanding surrounding how you take care of every single cross item is lacking.”

Wide or deep?The rivalry of Snapdeal and Flipkart in India, along with that of Alibaba and JD.com in China, spotlights the attractions of the two competing e-commerce business models, marketplace and retail. Each has its proponents, and there are plenty of examples of successful businesses using either one. However, a start-up has to weigh the advantages and disadvantages and

ultimately decide which one to pursue.The retail model – most readily attached to

US-headquartered Amazon.com – is perhaps the most easily grasped, because it is in many ways an adaptation of the traditional offline approach. A company stocks goods in its own warehouses, takes money from consumers and handles shipping and logistics itself.

Several advantages of the retail model relate to the ability of a company to build a solid reputation. The more control it has over the overall customer experience, the better able it is to make that experience a positive one. “The Amazon model is an upgraded Wal-Mart model. It still sells globally, and offers limited choice,” says David Wei, founding partner and chairman of Vision Knight Capital. Customers who are familiar with traditional offline shopping will find the retail model easy to adopt.

But the control offered by retail comes at a high price. The model is cash-intensive, requiring significant investment not just in maintaining a stock of inventory, but also in storage space and fulfillment costs. It is often also low-margin, since suppliers have to take their cut as well.

The alternative is the marketplace approach, in which the company is simply an intermediary,

The next generationMost of emerging Asia’s e-commerce giants faced a binary choice between the asset-heavy online retail and asset-light marketplace models. Now, though, investors have a more nuanced opportunity set

“If you look at history, barring eBay, in many cases marketplaces have evolved from inventory-led models” – Nikunj Jinsi


providing a platform for buyers and sellers to connect to each other. The most prominent examples of this model are Tmall and Snapdeal, but many firms can be found that pursue the approach, due to its lower barriers to entry. The marketplace model in its most fundamental form does not require any investment in physical storage space or in logistics.

“If you look at history, barring eBay, in many cases marketplaces have evolved from inventory-led models,” says Nikunj Jinsi, global head of venture capital at the International Finance Corporation (IFC). “And so, when anyone wants to get involved in a vertical, let’s say, furniture or shoes, people start off collecting some inventory, but eventually move into a marketplace.”

In addition to the relatively light investment requirements, the marketplace model allows for much higher variety in the units offered for sale. Whereas retailers can only offer as many goods as they can afford to buy themselves, marketplaces face no such barrier. Inventory is restricted by the capacity of the sellers on the platform.

There are some ways for retail operators to shore up their margins. One common approach is to launch self-owned private label brands. Just as offline retail stores sell generic, non-name brand merchandise, online merchants will often contract with manufacturers to produce less expensive products for their customers.

BigBasket, one of India’s largest online grocery retailers, is one example of this approach: the company has three private brands, for which it claims it earns four times the profits of resale brands. Another example is India’s online pet supply store DogSpot, which carries more than 400 items under its own brand. Even Chinese retail giant JD.com also offers electronics under its private dostyle label. The move offers clear benefits; however, it does require significant initial investment as well.

“If you’re a reseller, you’re probably a 15-20% margin business. If you’re in electronics, you’re probably a 1-5% margin business. Whereas if you’re doing private label, you can be a 60-70% margin business,” says David Gowdey, managing partner at Jungle Ventures. “But out of that 60-70%, you have to go out and build not only the marketing for your site but also your private label brands. So in the short term, most of the expense is acquiring customers and building brand recognition around your private label.”

Geographical obstaclesRegional differences also play a role in start-ups’ preference for one model over another. In India, the country’s relatively undeveloped warehouse sector makes it difficult for companies to get access to storage space. This, in turn, makes business models that do not require storage and

shipping more attractive to entrepreneurs.In China, one advantage for the marketplace

model is the proximity of sellers to the country’s large manufacturing base. Goods can be acquired quickly, and shipped cheaply, particularly since import tariffs and duties do not need to be paid. Of course, those same suppliers can also sell to retailers and get their cut that way.

“If you look at the supply side, China is still the world’s largest factory for almost everything. So, in other words, every factory is a supplier, and the merchants are looking for different channels to connect to consumers directly,” says Vision Knight’s Wei. “That offers the chance to have millions of merchants, while if you look at the US or Europe, they have to import most of the products they sell to consumers.”

Southeast Asia presents special challenges for e-commerce start-ups, no matter what approach they use. While some market watchers point to increasing smart phone penetration and internet connectivity as an indicator of future positive development, the low revenue and investment figures clearly indicate wariness about the possibility of achieving region-wide scale.

One difficulty that seems unlikely to be overcome quickly is the fragmentation of the

region. Unlike China and India, each of which is a single land mass with a unified political system, Southeast Asia is split on a geographical, political and cultural level.

“I think that if I was going to build an e-commerce business, I would much rather do it in China or India today,” says Jungle Ventures’ Gowdey. “In Southeast Asia, Lazada, which is the biggest e-commerce player in the region, has a warehouse in every single country, a website in the language of that country, and its selling products and transacting in the local currency, which makes that business so much more complex than a business that’s just operating in China, in a single language, in a single currency.”

With the many arguments for and against each model, investors may have a hard time deciding which model to support. Understandably, industry professionals see many other factors at play as well. A particular model may be better suited for one region or industry over another.

Start-up founders must be intimately familiar with the market in which they will be operating. They need to know what frustrates consumers about the current offline shopping options, and how to take advantage of that when appealing


PE and VC investment in e-commerce

Source: AVCJ Research

2010 2011 2012 20142013 2015 YTD China India Southeast Asia

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Retail e-commerce sales in China and India

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900

600

300

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20

15

10

5

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to potential users – what Hans Tung, managing partner at GGV Capital, calls “the lousiness of the offline shopping experience.”

“In Hong Kong, it’s hard for e-commerce to really dominate, because shopping overall is much easier in a very concentrated, dense area,” he says. “The worse the experience, the greater the pain a user is willing to put up with initially to let a start-up try something in this space.”

When it comes to retail outlets, management must also have a plan to take advantage of the supply side of the equation. Each industry follows different rules, and a business model that worked for one industry will need adjustments to work in others. For instance, Meilele – a furniture retailer from which several venture capital investors recently secured an exit as a strategic investor bought in – sells its goods online, but also manages a chain of shops that customers can visit to try out the wares themselves.

Favoring flexibility As for the future of the sector, the current dominant players seem unlikely to go anywhere. IFC’s Jinsi says that in e-commerce, early success provides a useful buffer that can insulate a company from later pitfalls. “This is very much a first-mover kind of business, unlike many other businesses,” he explains. “As long as the first

mover can execute decently and grab enough land, then its relative advantage of being so much ahead will cover up for the fact that the number two and number three guys are executing in a better way.”

If there is an established order at the top of the food chain, investors will look for opportunities that are part of this ecosystem without copying it. These start-ups can still take business from the major players, but by identifying areas in which they fall short rather than copying their approach.

As a result, some companies have found success participating in the e-commerce ecosystem in a tangential way, rather than buying and selling items directly. Mogujie, a Chinese start-up that created a social network around Taobao, Alibaba’s C2C platform, is one such company. It raised a $200 million Series D round last year at a valuation of $1 billion.

“A lot of time, when you go shopping, even if it’s offline, really you’re just browsing and you don’t know what you’re looking for,” says Andrew Teoh, founder and managing partner at Ameba Capital, which backed Mogujie in a 2011 seed round. “Mogujie solved that problem. It had a recommendation engine behind it whereby you help the young ladies on the platform to find the styles, the trends, what people are buying, and

help them to filter through that and close the transaction on Taobao.”

With the number of players in the market, and the variety in their models, it is not clear whether the retail or the marketplace approach will achieve preeminence in the long term. Indeed, the question itself may be flawed – certainly, the lesson from the last generation seems to be that flexibility pays off. Amazon, for instance, has offered a marketplace for second-hand goods for years, while Alibaba recently bought a 20% stake in Suning, a predominantly offline electronics retailer that wants to build its business online.

RedMart is also pursuing both strategies, albeit on a smaller scale. The test is can it size up, given the obstacles presented by different industry, geographic and competitive dynamics. For Egan, though, presenting the two models as being in competition is to miss the point. What matters is that the company provides the best possible experience for its customers.

“The customer doesn’t care. They just want the best products at the cheapest price,” he says. “And if you are able to offer that – the best selection, the cheapest price, the most convenience – whether you’re doing it or a marketplace partner is, if you offer all of those choices to them, they’re going to come right to your platform.”

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China 2015AVCJ private equity and venture capital report

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A FIERCE BATTLE IS BEING CONTESTED IN China’s childcare space. At least five online start-ups offering a combination of baby products and social networking have received funding so far this year, with three raising $100 million or more.

Of these deals, BabyTree – which is backed by Matrix China Partners, SIG China and China Broadband Capital (CBC) – stood out. Not only was its $300 million round the largest ever seen in the space, but it was also mostly in debt provided by Jumei International, a US-listed Chinese online beauty products retailer.

While debt-dominated rounds are commonplace in the US, they are rare in China’s venture market.

“Part of the reasons is that debt financing isn’t suitable for private companies,” says Hurst Lin, co-founding partner at DCM China. “Usually we see companies using such debt instruments after public listings because they have sizable market capitalization, sufficient cash flows and shares can be pledged as collateral. Private firms don’t have this kind of liquidity.”

Nevertheless, with the BabyTree deal proving it is possible and some Chinese entrepreneurs reluctant to dilute their holdings by selling equity, demand for debt-based funding could rise. It raises various questions and their VC backers.

Equity-driven In China, relatively small convertible note financings tend to be found prior to a Series A or seed round, largely because it means the issue of a start-up’s valuation can be deferred until the first institutional round. “If a start-up raises equity and the valuation isn’t as high as the CEO wants, the company may consider using debt to bridge between the institutional rounds,” says Ron Cao, co-founder of Lightspeed China Partners.

In return for coming in early, convertible bond investors often receive a discount of 10-30% to the Series A round price. Meanwhile, the bonds qualify for a Series A round as debt-to-equity funding within a certain timeframe. Another advantage of debt is that creditors rank ahead of equity holders in the event of a liquidation.

“I have started to see some funds also invest in a post-Series A company using a combination of equity and debt,” notes Thomas Chou, partner and co-head of the China PE practice at Morrison & Foerster (MoFo). “There may be different

rationales for doing so, but they will have seniority over all preferred equity in a liquidation, and potentially security or guarantees over the debt. For example, founder shares are often pledged.”

Convertible loans are a preferred mechanism for strategic players because, much like angel investors, they may not have the ability or desire to set the valuation of an equity funding round. They therefore participate through debt with a view to equity conversion.

As one venture debt specialist suggests, Jumei’s investment in BabyTree doesn’t make

sense as a straight loan because the interest rate isn’t very high. Rather, the company is seeking a higher return post-conversion when BabyTree goes public or is acquired. In this sense, it is a pre-IPO round at cheaper price.

This is a viable approach because the two companies complement each other operationally. BabyTree has more than 10 million daily active users in a niche market – young mothers – and this appeals to Jumei, which has ambitions to become the dominant female online platform in China. It can offer BabyTree access to a robust e-commerce infrastructure with a cross-border element.

The combination of the size of the round – BabyTree’s previous investment, which came in January, was worth RMB 150 million ($25 million) – and the synergies with Jumei could offer rich rewards. The company said in a statement that the $300 million would enable its e-commerce business “to rapidly grow to become number one in the baby and maternity sector.”

According to Analysis International, parents in China spent more than RMB1 trillion ($163 billion) on childcare products in 2011. The total is

expected to reach RMB2 trillion this year. However, plenty of other industry participants

are also eyeing the opportunity. In March, online retailer Vipshop led a $100 million Series C round for Lamabang, a social networking platform focused on mothers. US-listed Vipshop is a direct rival of Jumei following its acquisition last year of domestics and fashion products site Lefeng.com.

Risk factorsThis presents an element of risk that not all companies appreciate. “Every entrepreneur at this stage is optimistic and tells investors, ‘We don’t have to pay your money back as a loan because our equity is going to be worth so much later,’” the venture debt specialist observes. But in reality these loans appear on start-ups’ balance sheets. If an IPO or other exit fails to materialize, they could be left with a mountain of debt that can’t be serviced and VC investors could get burnt.

Should BabyTree ran into trouble and Jumei enforced a default, the creditor would ask for the equity to be converted at much higher discount. In that case, the existing VC investors – Matrix, SIG and CBC – would see their shareholdings significantly diluted.

“In some of these loans, there is no incremental payment. However, if a repayment is due and it’s not paid, an investor can call for the loan to be accelerated and repaid in full,” MoFo’s Chou says. “In China PE and VC transactions investors usually have the right to approve any significant debt financing. So the VCs will typically need to approve the company agreeing to be bound to such financing.”

More Chinese technology companies are raising ever-larger private rounds at ever-higher valuations. If the phenomenon continues, the market is likely to follow in the footsteps of the US with equity and debt combinations becoming increasingly popular. This not only applies to later-stage deals worth hundreds millions of dollars, but also to earlier transactions as venture debt gains traction in the market.

“Given valuations have been getting higher in general, especially in the later stages, it makes sense for companies to have debt or convertible bonds or some sort of equity-debt combination in funding rounds. It means investors have more downside protection,” says Lightspeed’s Cao. “I think there is a trend here.”

Loan or own?As Chinese start-ups raise larger, later-stage rounds, strategic investors are looking to participate through structured debt products rather than through equity. This approach presents its own risks

“I have started to see some funds also invest in a post-Series A company using a combination of equity and debt” – Thomas Chou

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TATA OPPORTUNITIES FUND (TOF) HAS deployed $400 million of its $600 million corpus over the last two years, with two thirds of that capital going to India-based companies that have global operations. The recent investment in ride-hailing app Uber Technologies is not only the fund’s largest commitment, but also its first in a company headquartered outside India.

“Usually we’re supporting Indian companies as they expand overseas. This is the first global company we’re actually helping expand in India,” says Bobby Pauly, a partner at TOF. “This is a partnership with a global company where we’re leveraging the networks and relationships that Tata Group has in the country. It is something we are going to do more going forward.”

Pauly adds that although Uber is a late comer to India, it has demonstrated strong growth. With a base of more than 150,000 drivers and business expanding 40% month-on-month, Uber

has gained a market share in India of over 35%. The company now operates in more than 330 cities across 60 countries, of which India is largest individual market outside of the US with services available in 18 cities.

Prior to TOF’s investment, Uber announced plans to invest $1 billion in India by early next year. It is taking the fight to local rivals like Ola,

a taxi-booking service that recently raised $315 million and claims to operate in over 100 cities with a network of 200,000 drivers. Interestingly, both Uber and Ola have received individual investments from Ratan Tata, chairman emeritus of Tata Group holding company Tata Sons.

While industry consolidation has already taken place in countries like China, Pauly says India has enough rooms for multiple players to grow, particularly as mobile internet penetration remains below 20%.

“India is a huge market where there are 45-50 cities with populations of more than one

million people,” he says. “I think it’s useful to have multiple players in the market – especially a combination of global and local players – because it will create fair competition.”

Despite Uber’s global ambitions in private car services, it has run into regulatory obstacles in a number of jurisdictions. In India, several state governments – first Dehli National Capital Territory and then Maharashtra, Uttar Pradesh, Karnataka, Chandigarh and Telangana – banned Uber’s services after one of the company’s drivers, who operate as independent contractors, was accused of raping a passenger. The ban was lifted last month.

“We feel comfortable that Uber provides safe, convenient and cost-effective services to drivers and passengers. Current regulation has yet to catch up with the pace of technology and new applications, and this creates problems,” Pauly says. “Uber has experience operating in 330 cities, working with regulators and confronting issues. We are confident that they have the capability as well as the willingness to work with regulators and deliver real solutions.”

REGULATORS ARE CATCHING UP WITH China’s booming online peer-to-peer (P2P) lending industry. Last month the People Bank of China (PBoC), in conjunction with nine other government agencies, issued the first guidelines for policing internet finance. P2P lenders fall under the purview of the banking regulator.

“It’s much clearer than one year ago,” says Soul Htite, CEO and founder of Chinese online P2P lending site Dianrong.com, and before that co-founder of US-listed Lending Club.

Last week, Dianrong had a funding breakthrough, completing a $207 million Series C round co-led by Standard Chartered Private Equity (SCPE) and China Fintech Fund – a PE fund launched by Guangfa Securities, China Minsheng Investment and L.R. Capital. Shanghai-listed Bohai Leasing and exiting investors also participated.

It is unusual for SCPE, primarily a growth and expansion stage investor, to support a firm at so early a stage. Wei Zhu, global co-head at SCPE, stressed that Dianrong is an exception, adding that his form would “only like to back the best and most differentiated company in the industry.”

In the US, it is also unusual for traditional banks to invest in emerging online financial players because they are in competition with one another, according to Htite. However, there appears to be a degree of compromise in China.

“This is the first time a traditional bank has invested in an internet platform. They have witnessed the fast growth of the sector. I feel they want to partner with us, otherwise there would be a big fight between the internet players and offline institutions,” he says. “We can leverage their networks and customers, as well as their understanding of the market and regulatory environment. The strategic value is much important than the capital.”

Dianrong plans to the use the funds to boost its operations, products and brands. It will hire another 2,500 employees, double its current 18 branches and enter the personal wealth management space. The company wants to facilitate at least RMB1 billion in monthly

transactions by October. Dianrong will also work with Standard Chartered bank to build an online finance platform in China and then expand it to other markets in the region.

The three-year-old start-up connects individual lenders with small-scale borrowers,

meeting the needs of small and medium-sized enterprises that can’t get bank financing. It differs from many Chinese P2P practitioners in that it is a pure intermediary – sourcing borrowers first and then putting them in front of prospective lenders – rather than behaving

like a bank without a proper license. Hence Htite’s positive response to the regulatory reforms.

“We have never collected money from the lenders without securing borrowers. Today as a lender on our platform, even if you want to invest just RMB1, you have to sign in a contract,” Htite explains. “Lenders can also track payments and other information. Therefore they don’t have to worry about where their money has gone.”

DEAL OF THE [email protected]

Tata Capital bets on Uber in India

SCPE invests in exceptional Dianrong

Uber: Aggressive in India

P2P lending: Now regulated

AMAZON.COM IS THE WORLD’S LARGEST online retailer, but it retains fleetness of foot that defies its size. This is based on the ability to embrace not only new technology but also innovative approaches to management. The “two-pizza rule” devised by founder and CEO Jeff Bezos is a case in point.

No team should be so large that two pizzas are insufficient to feed all the members, according to Bezos. The idea is that, while some corporate functions can be centralized, others are overwhelmed by the number of voices involved. Better to create small clusters in which communication is swift, accountability is clear, and therefore is progress swifter.

“We will implement this at RedMart in our own way,” says Roger Egan, co-founder and CEO of the Singapore-based online grocery retailer. “The free-wheeling, chaotic start-up approach only gets you so far, and then you need to become a real company. You need mechanisms to help you scale up in an efficient manner.”

RedMart hopes to tap directly into the Amazon DNA with the appointment of Colin

Bryar as COO. He spent 12 years at the online retail giant, including two as technical advisor to Bezos. “We could keep on going and probably make some of the same mistakes Amazon made as it grew, or we could short-cut that by having someone really experienced on our team,” Egan explains.

Bryar joined RedMart shortly before it closed an oversubscribed bridge round of $26.7 million, which primarily came from existing backers such as Garena Online, SoftBank Ventures Korea and Visionnaire Ventures. The one newcomer was Far East Ventures, a division of Far East Organization, one of Singapore’s largest property developers.

RedMart, which has now raised $54 million, owes its early success to filling the online grocery vacuum in Singapore and serving as a local equivalent of US-based FreshDirect. It now offers more than 15,000 products, providing an end-to-end delivery service so that customers receive goods on time and in good condition.

The next step is entering other markets in Southeast Asia and also leveraging the existing logistics infrastructure to move deeper into a world beyond groceries. RedMart wants to grow its marketplace, described by Egan as

“an on-demand marketplace that delivers almost anything to anyone instantly.”

Achieving scale means partnering up with sellers that offer a wider variety of product categories. The mark of success is when a critical mass of retailers wants to join the platform, recognizing that they can’t achieve the same level of efficiency and

service quality through in-house efforts. Egan cites Amazon’s cloud-computing

division as an example. “Amazon Web Services had such scale and expertise that no individual brands, retailers or marketplace partners could do it as cheaply or as efficiently,” he says. “They would rather just partner with the platform rather than build their own servers.”

DEAL OF THE [email protected]

RedMart channels the Amazon spirit

Roger Egan: RedMart CEO

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THE MANIC SELLING OF CHINESE STOCKS on “Black Monday” sparked contagion around the world, and Hong Kong was no exception. Having gained 21% between January and the end of April, the Hang Seng Index (HSI) closed down 9.5% for the year on August 24. China’s immature equity markets, ever prone to volatility, can be unforgiving.

The delicate upturn that became a surge in both the HSI and its Shanghai counterpart can be traced back to mid-March. While the latter’s trajectory is steep but relatively steady, peaking in the second week of June, the former shot up 11% in the space of seven trading days in early April. It wasn’t until the end of June that these gains began to be substantially pared, culminating in the recent, heavy fall back.

The HSI’s rapid ascent was prompted by mainlanders taking advantage of the Stock Connect program that enables investors in Hong Kong and Shanghai to trade in each other’s markets. Overall turnover reached a record high of HK$252.4 billion ($32.6 billion) on April 8 as investors consumed the entire RMB10.5 billion ($1.64 billion) daily quota for the program.

This underlines the appetite for international diversification in China. With the launch of a mutual recognition scheme that allows direct distribution of funds to retail investors in Hong Kong and the mainland, and a Stock Connect program between Hong Kong and Shenzhen in the pipeline, there are an increasing number of ways in which the appetite can be met.

“Chinese individuals want to diversify their wealth,” says Kingsley Chan, a managing director with Morgan Stanley Private Equity Asia (MSPEA). “This is a market that is developing rapidly and we are seeing a lot of groups – corporates and financial institutions – trying to establish a presence in Hong Kong as the most logical offshore wealth management center.”

When MSPEA acquired a majority interest in AMTD last year, asset management was central to the investment thesis. Hong Kong-based AMTD established itself as an independent financial advisor (IFA) and then branched into insurance broking, but investment services for mainland high net worth individuals (HNWIs) is seen as the company’s future.

“In the next 5-10 years asset management will take off in Greater China,” says Alan Tsang,

CEO of AMTD. “There will be more demand from clients wanting to do global asset allocation, and the expertise and service level in China will not be enough to satisfy this demand. In our first meeting with MSPEA it was clear we shared the same vision.”

Follow the moneyThere were 758,000 HNWIs in China with investable assets of at least $1 million or more as of year-end 2013, more than twice the number in 2008, according to the 2014 Asia-Pacific Wealth Report published by Capgemini and RBC Wealth Management. They had total assets of $3.77 trillion, up 125% from five years earlier.

The report also found that HNWIs in China have a higher level of trust in wealth managers and wealth management firms than any other jurisdiction in the region. They also expressed the

strongest preference for seeking out professional financial advice. A separate study by HK IFA and Nielsen estimated that 2.4 million mainland travelers stayed at least one night in Hong Kong in 2013; 16% of them had assets of HK$5 million or more, and a large proportion came for investment purposes only.

AMTD’s sweet spot is clients with investable assets of $1-5 million. While the international private banks tend to focus on HNWIs with at least $10 million to their name, the lower tier is covered by semi-customized retail banking services provided by global commercial banks. MSPEA’s Chan suggests that the market is both

broad and underserved, given the growing sophistication of Chinese customers.

At the same time, it is becoming more contested, with banks, insurance companies, asset managers, and brokerages entering the space. These are domestic players that are essentially following client demand. There have been at least seven transactions in the last two years in Hong Kong’s non-banking financial services space, driven by mainland companies seeking to create or enlarge an offshore footprint.

In 2015 alone, China Minsheng Banking Corporation agreed to buy brokerage and wealth management business Quam for more than HK$7.5 billion, while Everbright Securities took a majority stake in Sun Hung Kai Financial at a valuation of approximately HK$4 billion.

Leading Chinese technology firms are getting in on the act as well In May, a consortium led by

Jack Ma, founder of Alibaba Group, acquired 81% of Hong Kong brokerage Reorient Group, while Tencent Holdings has also invested in the space.

MSPEA sees AMTD’s competitive edge as its unique blend of entrepreneurship and industry experience. The business was set up in 2003 by Cheung Kong Group, which wanted to leverage its wealth of consumer data in the financial services space. Tsang and his team were hired to execute this strategy from scratch, drawing on skills honed with Chase Manhattan Bank and American Express. Prior to joining AMTD, Tsang was head of American Express in Hong Kong.

Cheung Kong, which owned 61.25% of

The wealth vortexHong Kong-based financial advisor AMTD wants to meet the needs of mainland investors looking to access international markets. Morgan Stanley Private Equity Asia is helping the firm best position itself

Total assets (US$ billion)

Mainland China high net worth individuals (HNWIs)

Note: HNWIs are defined as those with investable assets of at least US$1 millionSource: Capgemini-RBC Wealth Management Asia-Pacific Wealth Report 2014

800,000

600,000

400,000

200,000

0

4,000

3,500

3,000

2,500

2,000

1,500

HNW

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US$

mill

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No. of HNWIs

2008 20102009 2011 2012 2013


[email protected]

the business, and management brought in Commonwealth Bank of Australia (CBA) as a strategic partner with a 30% stake. This was because the IFA model in Australia – which comprises tax advice, insurance and investment services – was deemed most relevant to Hong Kong. “At that time IFA in Hong was very different to what it is now,” Tsang recalls. “It was about using consumer data to develop cross-selling models and find who is likely to buy what kind of product.”

An evolving modelFocusing solely on IFA in Hong Kong, AMTD turned profitable within nine months of launch. Insurance broking followed and then asset management was introduced two years ago. The three areas now make roughly equal contributions to overall income. The company, which employs around 500 people, also has a mortgage-broking and money-lending business.

Eight years after inception, AMTD’s China exposure began with a data collection initiative across multiple first and second tier cities. The company is not licensed to market or sell products in the mainland so its efforts continue to be based on investor education: explaining financial planning and asset management in a Western context, and relying on prospective clients reaching out for advice when they are in Hong Kong.

“When we started the China business in 2010, 99.9% of our income was from Hong Kong, based on source of customer,” Tsang says. “As of last year, income from China exceeded Hong Kong by a big margin.”

CBA subsequently exited Hong Kong and sold its stake to Cheung Kong and the management team. AMTD began looking for a replacement partner that would be a good fit for a business model that was becoming more about asset management. MSPEA, for its part, has made numerous financial services investments across the region – including CreditEase in China, E.Sun Financial in Taiwan, and Landmark ITC in Korea – and was attracted to the AMTD business model.

“We have spent a lot of time and resources developing investment themes in the sector, and wealth management is an area we like a lot – it is asset light, primarily a distributor business, and it can scale,” says Chan. “However, making investments in Asia is ultimately about the management team. We have known Alan for a long time and AMTD has built up a strong management team.”

MSPEA was keen to take control and structure the deal as a management buyout, giving the AMTD team more operational autonomy as it developed the business. As a result, Cheung Kong swapped its majority position for a minority

one. The size of the deal was not disclosed.Following the investment, the private

equity firm helped AMTD arrange additional bank financing and has helped enhance its governance structure. MSPEA has also leveraged its affiliation with Morgan Stanley – one of the world’s largest investment managers – to help strengthen AMTD’s product range and industry best practices.

“We want to make sure we are up to world-class standards on compliance and control,” says Tsang. “While the majority of the management

team has a US banking background, this is an area in which the Morgan Stanley connection can support us.”

To this end, AMTD has a direct point of contact within Morgan Stanley’s legal and compliance department, and training is being provided to staff on risk management and compliance so they stay up to speed in an increasingly stringent regulatory environment.

On the product side, parts of Morgan Stanley’s offering can now be distributed by AMTD. Specifically, the portfolio company has formed a business alliance with Morgan Stanley Huaxin Securities, the bank’s China brokerage joint venture. This gives mainland clients the option of accessing Hong Kong stocks through AMTD’s channels under the stock connect program.

Brand-buildingWhile MSPEA is not yet considering an exit, a majority position in a Hong Kong financial services company at a time when many mainland strategic players want to enter the market is an enticing trade sale target. Potential buyers would want AMTD to continue its current strategy of developing a mainland China customer base.

This will not be realized through an aggressive nationwide roll-out, however. When AMTD first entered the market it opened offices in nine cities at once, its headcount soaring past

1,000. Unsure whether the first-tier cities would prove a fertile source of business given so many multinationals were already on the ground, the company essentially hedged its bets by covering key second-tier centers as well. The plan was to spend 24 months collecting data and establish which areas could deliver sustainable demand.

The initiative was expensive, with high rental costs in the largest cities and rapid staff turnover in a competitive market for talent. AMTD has shown consistent top-line growth – Tsang says compound annual growth has been double-

digit since the company was founded – but the operating costs of the China strategy meant the bottom line was choppy. With the experiment over, and AMTD committed to a smaller number of high-value locations, the economic benefits are now being reaped.

“They have learned the best way to expand their customer pool is to work with more partners in China, whether it is local financial institutions that lack the ability to offer offshore products or simply working with immigration agents and wealth management firms that only have a local presence in China,” say Chan. “This helps reduce the fixed costs and it doesn’t really slow down growth.”

Tsang’s immediate objectives are threefold. He wants to introduce more products – he notes that single product solutions no longer satisfy clients – and deliver them online as well as offline. Most importantly, though, there is a desire to build the AMTD brand, to which end an association with an international bank does no harm at all.

“You hear stories about people trusting the wrong people and making the wrong investments,” he says. “One of the key considerations is making customers understand who we are, what our company background is, and who our shareholders are. Branding – and the trust and perceived security that comes with it – is the number one priority.”

HNWI con�dence levels in �nancial advisors

Note: HNWIs are defined as those with investable assets of at least US$1 millionSource: Capgemini-RBC Wealth Management Asia-Pacific Wealth Report 2014

SingaporeMalaysia IndonesiaIndiaHong KongChinaAustraliaJapan

Wealth managers Wealth management �rms

%

100

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