by Raffi Amit
I have just returned from Jakarta, Indonesia where we held our 42nd Wharton Global Alumni Forum attended by over 500 alums from around the world. Having studied the evolution and transformation of the Chinese VC/PE market over the past decade, I was tasked with moderating a VC and PE panel that focused on East Asia. In a standing-room-only ballroom, our panelists, representing global players as well as leading domestic players in various countries, shed light on the investment environment in several markets.
I learned that the VC/ PE market in Vietnam is a rapidly growing and relative large market dominated by a very strong central government. Vietnam is gradually opening up as the regulatory framework is developed along with its capital markets. The takeaway here is that Vietnam is a country to watch closely, as it may well present attractive opportunities for those investors who wish to capture some of the first mover advantages by buying into companies at relatively low valuations.
China is another story all together, since the markets are going through rapid transformations–from being dominated by foreign funds to being dominated by domestic RMB-denominated funds managed by local GPs. For example in 2011 alone, there were 604(!) new RMB-denominated funds created, in contrast to the creation of only 67 foreign funds. There are many new players that are entering the PE markets including domestic security companies, commercial banks, investment banks, insurance companies, angel investors, and local- and central-government-backed funds. All of these new players are competing for the same deals and are thereby raising the cost basis for which PE investors buy into an investee company. As well, the huge gap between money raised and money invested drives up the cost of investment and thereby drags down the rate of return for the VC/PE firms. Also, the relatively new ChiNext market in Shenzhen, where young, VC-backed companies are often listed, has all but collapsed: PE ratios are currently 1/3 of what they were about a year ago. Lastly there are new challenges for foreign investors wishing to invest in mainland China companies. The now famous Variable Interest Equity (VIE) mechanism is being challenged by the central government as a result of the dispute between Yahoo, Softbank and Jack Ma with respect to the ownership transfer of Alipay and the termination of VIE contracts. It has put VIE-based structures in the spotlight and raises concerns over the feasibility of VIE in China. With this background in mind, I asked Joe Tien, a founding partner of DT Capital, a leading Chinese VC/PE firm, “Why invest in China at this time?” His response was balanced. He acknowledged the many challenges but suggested that most of the market is investing in the so-called ‘”Pre IPO” and that there are great opportunities in earlier stages and in less crowded markets in central and western China.
Finally, turning to Indonesian PE, here we had an interesting dialogue that included a well-recognized global PE firm, KKR, and two leading domestic players, Saratoga Capital and Ancora Capital Management. The main observations here were that Indonesia is emerging as an attractive country for PE investors, in light of a more stable political climate, its enormous growth potential fueled by a growing middle class, its young demographic, large size (over 17,000 islands and about 250,000,000 people) and abundant natural resources. Ridah Wirakusumah, Director and head of Indonesia for KKR, pointed out that PE firms can add value to Indonesian investees by improving what he calls “operational Apha”, namely improved efficiency through technologies and professionalizing management, innovation and improved transparency and governance.
All in all, there was an optimistic tone to the opportunities that lie ahead in this part of the world for VC/PE investors: Indeed, East Asia presents a sunny spot in an otherwise volatile and uncertain PE investment market.