Two-dozen LPs frozen out of new IDG-Accel China fund

Demand was so strong for the second China offering from International Data Group (IDG) and Accel Partners that they had to turn away “a couple of dozen investors,” Accel General Partner Jim Breyer tells VCJ.

“This fund was raised from the same investors who are our Accel Partners investors, and in approximately five weeks we had over $1 billion in hard commitments,” Breyer says.

IDG and Accel decided from the start to cap IDG-Accel China Growth II at about $500 million (it came in at $510 million), so “almost everyone was scaled back from demand interest,” Breyer says. “In fact, there were a couple of dozen investors, including some Accel investors, who we were not able to accommodate.”

The strong demand came despite some relatively tough terms—the GPs are charging a 30% carry and 2.5% management fee, according to a knowledgeable source.

Breyer says there were no changes in the terms and conditions from the first fund, but he declined to go into details or mention the names of LPs.

The first China fund, a $310 million vehicle raised in 2005, is close to being fully invested, and IDG-Accel expects to start investing from the second fund this summer or fall. Breyer was in China in mid-July to “do an active portfolio and reserve analysis to help determine when to make the shift to the new fund.”

About two-thirds of the [IDG-Accel China] portfolio is cash-flow positive, and there are several firms that are contemplating first-half 2008 public offerings on Nasdaq.

Jim Breyer, General Partner, Accel Partners

Breyer is one of two members of IDG-Accel’s advisory board, along with Pat McGovern, IDG’s founder and chairman. IDG-Accel has a total of 12 partners in China, including seven GPs, among them Hugo Shong, who helped McGovern set up IDG’s first China venture fund in 1993.

The new fund is expected to invest in about 30 to 40 companies over three years. It will be “rigorous” in continuing the same strategy it had for its first fund, which is to invest in China-based Internet and mobile communications companies that serve Chinese consumers. “We are not doing any China investments focused on global or non-Chinese markets,” Breyer says.

That strategy has already paid off. Portfolio company Allyes Information Technology Co. Ltd., which operates China’s largest Internet advertising service, was acquired in March by Chinese media company Focus Media Holding Ltd. (Nasdaq: FMCN) for about $300 million ($70 million in cash, $155 million in Focus Media stock and up to $75 million more in stock if Allyes meets earnings targets). The sale will reportedly return four or five times IDG-Accel’s investment.

LPs may see more exits soon. Breyer says “many [companies in the portfolio] are receiving offers. About two-thirds of the portfolio is cash-flow positive, and there are several firms that are contemplating first-half 2008 public offerings on Nasdaq.”

As well as IDG-Accel is doing now, Breyer knows the fun can’t last forever. He says he expects some sort of economic downturn in China within the next two years because “the growth has been so strong and the investment dollars so extreme, it cannot keep moving up and to the right. There has to be, over time, downturns and corrections.”

That said, IDG-Accel has put together “a team of partners that can work through a downturn as well as a boom,” he says. “It’s very much like Silicon Valley. It will experience booms and busts over many years. The test of our investment strategy will be in a downturn.” —Lawrence Aragon