European VCs Look East to Asia

European venture firms are well aware of the importance of a global footprint for their portfolio companies. Many firms are increasingly looking East with Asia being the sought-after location of the moment.

Private equity investment in China is on the way up with firms investing $22.8 billion in Chinese companies by the end of the third quarter of 2011, according to a joint study by Deutsche Börse and CMS Hasche Sigle presented as part of the German Equity Forum in Frankfurt on Nov. 22. That figure compares with $15.8 billion for all of 2010.

The study also highlights the best way for non-domestic venture capital and private equity players to be successful: Join forces with the best local partners in China.

German-based pan European venture firm Wellington Partners is one such firm adopting this approach. It recently appointed Beijing-based Jeanne-Marie Gescher as venture partner advisor to support the firm’s tech portfolio and look for partnering opportunities for its European and U.S. portfolio companies in the region.

Gescher, who founded one of the first private advisory firms in China in 1989, is the 15th venture partner of the firm’s tech team and the first in Asia.

Wellington General Partner Bart Markus says that in the cleantech sector, the firm’s portfolio companies have, for years, established their production in mainland China and collaborated with suppliers from the region. But, he adds, increasingly, it is becoming important for these companies to market their innovations in China, Thus, Wellington is spending more and more time in Beijing, Shanghai and Shenzhen.

Adding Jeanne-Marie as a venture partner advisor will greatly expand Wellington’s ability to help portfolio companies access these markets, he says.

About half of Wellington’s investments are in cleantech and half are in the Internet sector. Markus says that not being able to tap into the Chinese market would be a mistake for Wellington’s portfolio companies.

But, Markus says that Wellington is absolutely not attempting to invest in China itself.

“We believe that to successfully invest in China as a European/U.S. firm, it is very, very hard,” he says. “We are not engaging in that at all. We’d lose every deal to our Asian competitors.”

Wellington is following its strategy of setting up in the United States. The firm has similarly been building a U.S. presence over the past decade for its European portfolio companies to successfully tap into U.S. markets. Markus predicts it will take another decade to build up a similar network of venture partners and infrastructure in China.

He adds that the challenge is hiring the best local team possible. He begs the question: “How would I convince the best Chinese VCs to join Wellington China rather than setting up on their own? It’s just not going to happen. Even for the world’s best brand names it would be tough.”

Some firms are doing it, however, and seemingly well.

France-based firm Ventech has a seven-strong Chinese team and its own China fund, Ventech China Fund 1 and 2, with $150 million in total assets.

Partner Eric Huet, who is the only non-Chinese partner on the team, stresses the importance and the benefits local professionals bring to the table.

There are still plenty of good investment opportunities in China, but new investors may need to look outside of Beijing and Shanghai to second tier cities to access truly proprietary opportunities.

Guy Zarzavatdjian Managing Partner3i

“We bring a mix of deep knowledge of the market and high professional standards in investments,” he says. “We bring connections, business development and a global vision. We also have many friend funds in China, particularly top recognized investors.”

Ventech’s Chinese investments are focused on mobile phone services, Internet websites, ecommerce, education and cleantech. Huet considers the hottest sector at the moment to be ecommerce.

Another European player with a local Chinese team is global venture veteran 3i. The firm has had a long established presence in Asia since 1997 and has local teams in Singapore, Beijing, Mumbai and Delhi.

Across the region, 3i’s Asian team of 38 investment professionals manage total assets of almost $1 billion, representing 14.5% of the group’s portfolio value. Anil Ahuja heads the Southeast Asia and India teams and Paul Su was recruited in July as senior partner to head China. Anna Cheung and Albert Xu are key partners in the China team.

In Asia, 3i invests primarily for minority stakes in businesses with growth potential, often with a long-term view via growth capital investments. The firm also invests in mid-market buyouts from Singapore and up to $200 million per deal in infrastructure assets in India. The 3i Indian Infrastructure Fund is reportedly the largest national dedicated fund of its kind.

3i focuses on the following sectors in Asia: consumer, financial and business services, health care, TMT, industrials and energy.

Managing Partner Guy Zarzavatdjian says that China has recently become a competitive market and since 2010 the landscape has changed considerably with increasing competition from both foreign and local investors.

He says good opportunities are still available in certain sectors if investors look hard enough, are proactive in originating deals and have local experienced teams on the ground.

He says the consumer sector is currently showing the greatest potential for investment in Asia, as the middle class continues to accumulate wealth.

In a significant move, 3i has been selected to participate in a government pilot program in China and granted a local RMB fund allocation for investment in the country. It is the only European private equity firm to achieve this to date, which enables the firm to invest up to $100 million locally without the need for exchange controls.

The group has also started raising its second Indian infrastructure fund. Its first fund is now 70% committed.

“There are still plenty of good investment opportunities in China, but new investors may need to look outside of Beijing and Shanghai to second tier cities to access truly proprietary opportunities,” Zarzavatdjian says.

Deal flow has been steady in 2011 for European players with teams on the ground in Asia and the onus is very definitely on quality, rather than quantity.

The message in Asia for foreign funds is quite clearly that waiting for the right deal to come along is key rather than jumping in at the first opportunity you find.

Angela Sormani is based in London and can be reached at angela.somrani@thomsonreuters.com.