Bird & Bird Partner Pádraig Walsh attended the 2013 AVCJ Private Equity & Venture Forum in Beijing last week. Below are some of his key insights from the forum.
- The normalisation of returns from China investments is, overall, positive for the developing maturity of PE and VC in China. It will benefit GP’s that combine the right strategy with the proper attention to deal selection. Is this a new reality? Or just a brave face? Probably a bit of both.
- The market is presently going through a process of write down to purge the inventory of poor investments that will never deliver a return. This will result in consolidation of funds, and some opportunities for special situations investments.
- Successful investments in China are less about the macro dynamics of the economy, and are more about the micro of the specific opportunity. The critical factor is the management team of the target - and particularly their competence and integrity.
- Internalisation of the diligence function is becoming more extensive. Some GP’s are now conducting diligence in collaboration with the target as a trust-building process. The use of external professional resources - financial and legal - is becoming limited to verification of specific issues.
In VC tech investment, some keys to successful investments include:
- avoidance of sensitive media sectors, such as social media and search. If Google can’t make it work ...
- empowerment of local management. Use the Yahoo! Japan model
- many entrepreneurs have gone into battle, lost, and entered the fray again. These smart, battle-hardened entrepreneurs are more likely to succeed.
- The planning for exits start at the point of, and even before, investment. Given the low chance of an IPO exit, China is on the cusp of real development of the secondary sale market. This may not deliver maximum return on investment, but it avoids excessive delay of returns to LP’s.
- The key to successfully managing an exit is to align the interests of the stakeholders as closely with the GP as possible. Adopting a triangular approach between legal rights, profit and return, and a relationship of trust, can assist in procuring this outcome.
- There are signs of convergence between deal selection for US$ and RMB funds. The deal teams are the same within GP’s that carry both; the deal choice follows the needs of the company. I remain to be convinced that this resolves conflict issues.
- From an LP perspective, the current environment assists LP’s to negotiate better terms on waterfall provisions, conflict of interest management, and timing of returns. It remains difficult to achieve flexibility on fees.
The tone was pragmatic, even cautiously optimistic. Lessons of the past noted. Eyes to the future. All in all, a good gathering of the thinking here and now in PE and VC.