In this edition of China Money Podcast, guest Bruno Raschle, chairman of global fund-of-funds manager Adveq, talks with our host, Nina Xiang. He discusses Adveq's investment activities and performance in China, how to pick fund managers to back, and his views on the future of the Chinese private equity's exit environment.
Listen to the audio podcast, or read an excerpt below.
Q: Advep has a number of Fund-of-Funds (FOF) dedicated to Asia. Can you tell us more details about your investment vehicles that can invest in China?
A: We started to commit into China in 1998. We invested primarily in venture funds out of our technology program. In 2006, we started formally an Asian investment fund. Initially, we covered all Asia Pacific, but today we are focusing on India and China primarily.
Currently, we have three U.S. dollar funds dedicated to Asia: a US$217 million fund established in 2006; an US$181 million fund set up in 2008; and a third fund we started raising last year with a target fund size of US$300 million.
China takes up probably two-thirds of our total Asian commitments. Since 1998, we have committed a total of approximately US$400 million in China.
Q: In 2009, Adveq planned to set up a joint RMB fund with Dalian United. How did it go?
A: That plan never got implemented. Over time, we learned that our philosophies were different (from Dalian United's). We amicably decided to not execute the plan.
Q: For your first Asian FoF, can you give us some examples of the funds you backed?
A: We initially invested in some of the brand names such as Hony Capital, CDH Investment and IDG Ventures. But we also committed to first-time funds. Around 40% of all the Chinese commitments went to first-time funds, including GSR Ventures or Bioveda Capital.
Q: Investing in first-time funds requires a lot of conviction. What would make you believe in a first-time fund manager in China?
A: Investing in first-time funds requires you to be very analytical and bottom-up oriented. Psychologically, you have to read the minds of the managers. You can never make enough due diligence calls. In the end, it is a gut feeling whether you believe a manager can make money for you or not.
Q: How has the mix of funds you invested in evolved over the years?
A: Initially, we committed mostly to local fund managers who were overseas returnees. We generally try to back local managers specializing in a certain industry or field.
We think private equity and venture capital investment in China is still a long-term proposition. That means we like to see managers investing in business models and concepts that are sustainable and can survive disruptions in the markets.
Q: Can you give us an example to demonstrate what you mean?
A: Sure. GSR Ventures invested in Boston Power, a battery company in the U.S. Once GSR had control of that almost-bankrupt company, they brought their manufacturing facilities to China. The company now produces batteries for various non-cyclical industries.
This is a typical example where the fund manager has created the deal, executed it, and made sure that this very challenging undertaking across the Pacific has become successful.
Q: To make one investment, roughly how many funds do you look at?
A: Out of 100 funds that we do preliminary screenings on, we may decide to do deep analyses for about 10 funds. Then we make commitment to one or two funds in the end.
I have been in this business for 30 years, and I'd say this was true in the early phases in the U.S. and Europe, and applies now also to Asia.
Q: What is the most challenging part in your investment decision-making process?
A: Today, it is ESG (Environmental, Social and Governance) compliance and headline risk primarily. You still run the risk where auditors of portfolio companies haven't done a good job, or a GP doesn't have tight financial controls over its portfolio companies.
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