Take out Alibaba and Tencent, and China tech story is not that exciting: Dechert’s Dean Collins

Photo: Pramugdha Mamgain/Dealstreetasia

As Asia matures into a private investment market with emergence of sector-focused funds and heavyweight investor China acts as the flag bearer, specially in areas of technology investments, a senior lawyer and PE fund formation expert has a contrarian view: China tech story may not be “that exciting”  if the likes of Alibaba and Tencent are taken out.

“I don’t have exact data but if you look at the China tech story and you take out Alibaba and Tencent, it is not that exciting. Those two are so dominant in market cap, in terms of investments,” law firm Dechert’s Singapore based lawyer Dean Collins told DEALSTREETASIA in an interaction recently.

Tencent and Alibaba have made an entry into the 10 biggest companies in the world by market capitalisation with the founders featuring among the world’s richest. The rise of China tech investment story largely hinges on Baidu, Alibaba and Tencent, also known as BAT. Also leading the country’s reputation as a tech investor is e-commerce group JD.com.

Collins says China will be an interesting player in the tech segment but the US — many a times pitted against China in this space —  will continue to remain dominant.

“A lot of truly ground breaking stuff comes out of the US. Things that truly change the way we do thing,” he said. China, on the other hand, takes existing things and adapts it to the local market.

The law firm Dechert, which focuses on private equity, financial services and international dispute resolution throughout Asia, with a particular emphasis on South and Southeast Asia, opened its newest office in 2014 in Singapore. The firm advises investment funds, their managers and other industry participants across the entire investment management spectrum, particularly on the structuring and establishment of private equity investment funds and other private equity-related transactions.

In a detailed conversation, Collins pointed out an emergence of a trend in Private Equity and Venture Capital funds where the region is starting to witness more of sector-focused funds. “We have had these kind of sector focused funds in more developed markets for many many years but I think we are beginning to see that happening here (Asia),” he noted.

In recent years, Asia has witnessed a cohort of sector focused funds in areas such as technology, education, healthcare and media. Earlier this month, in the VC space, Vertex closed its $210 million technology fund while Wavemaker closed $89 million fund that will focus on B2B and deep tech.

Similarly in education, PE firm Kaizen is looking to close its $125 million education focused fund while ChangedEdu, the education investment arm of Brussels-based family office Verlinvest SA, is looking to close 3-4 deals as part of its plan to deploy about $300 million in the next three to four years.

Edited Excerpts:

As a law firm, have you seen any smart trends emerging out in fund formations in this region ?

Mostly I would say for the new funds that it is more or less the same where the existing managers have some existing funds and they are able to raise a new one on the back of that. The first thing that we are beginning to see in Asia is the number of sector focused funds. And I am not talking about the VC funds focused on technology which are many. There might be for example a PE fund focused on healthcare or on media or natural resources. You have had these kind of sector focused funds in more developed markets for many many years but I think we are beginning to see that is happening here.

For investors into fund who don’t have a very large Asian programme the concept of sort of making their first investment into a healthcare fund focused on SEA would be a very big leap because it does not give them the diversification they want but I think more and more in Asia a particular sector or region, there is sort of coming together on that. So, we are beginning to see some sector focused fund in this space.

One thing that we are also seeing which is very contradictory is that large amounts of money going into those mega funds which are being developed by global buyout firms like KKR and TPG. And now that vast majority of funds being raised and the subset of that are one of the large regional funds like Affinity or other local players. Those are very important because if you are an institutional investor who cannot write a cheque of below $200 million, you cannot go and stick that money into a $250 million India or China or SEA fund. So you have to got to be in to those big bold sort of brackets there.

In terms of deal-flow what is your expectation for this year which is coming to a close soon and next year ?

I may not be the best person to answer that because I am more on the fund formation side rather than the deal side. But people are raising money and I am assuming that they are spending it there.

That brings us to the dry powder which is also at an all time high and though there are funds being raised, there is a concern about when this capital is going to get deployed ?

I think it depends a lot on the manager. We have got clients raise a large fund and in two years they have spent 70 per cent and soon they are embarking on a new fund and I have another client who raised a fund a number of years ago they have asked for an extension because there are some deals they are looking at. I think different clients have different sourcing networks where they put standard. There is nothing to say that the guys that invested quickly are better than the guys who invested slowly because they guys who invested slowly had some some very good reasons. The question would be, does the dry powder get deployed or not. To this, it should not get deployed because they (fund managers)  make rash decisions to try and spend their fund but only because they remain disciplined and if they cannot spend, they say sorry guys we were not able to spend, do you mind an extension.

China is playing a major role when it comes to investments in the region– in PE, VC or other strategic investments. How do you think that changes the play in Asia or non-Asia PE investors. Does it make it more difficult when there is a Chinese interest or bidder?

Sort of. The issue you can have with Chinese investors is that they may not be able to get money offshore. It might to need to go through an approval and we have had a number of funds where we had to deal with that. There was this fund restructuring where some Chinese money was coming in and we had an extension of a closing day for it. WE had to keep on extending the days for the conditions precedent to be met. So, yeah money from China can be challenging for the border effect and Chinese reasons.

In terms of impact, I don’t see an issue with Chinese Capital per se but there can be an issue in terms of who the investors are. I started work recently where a very large SOE has indicated that he is going to write a big cheque to this fund and yesterday I introduced them and they said its fine because if it had been such and such, we would not have touched the fund.

The other issue is that if you are getting a lot of money from somebody in China they may, to a degree write the rule-books about where they would want to use the money. In fund formation that could be challenging.

In terms of secondaries. Off late we have seen quite a few secondaries when it comes to fund formations. Is that indicative of something , may be there are not enough exits ?

Secondaries exist for a whole lot of reasons. It is hardly a new phenomenon. But the question is that what are they doing. We are seeing two things happening–one is the institution has decided that secondary is not a dirty work as in the past. People are thinking that if we are getting a little rump of portfolio here and we could get that money, though later we could get more, and we could use that to deploy now. So we are seeing that 10 years back when raising money was quite easy before it became difficult. There were a bunch of under-performing funds and no real future for the manager. We are seeing some funds that are being restructured, capital coming in and may be little bit of money for the manager.

I think we are seeing some of those less performing funds go through the restructuring process.

In terms of fund raising, has it become more difficult to raise a fund because there may be way too many options for an investor to go to ?

I don’t think it has and I think you could look at different reasons and different answers. In Asia, it may be easier to raise money for Japan than in Southeast Asia for example recently.

Stepping back, the amount of capital available for investment into funds has not gone down but kind of grown. It is driven by denominators. Weather there are too many fund raisers in the market is a different question because if you have got a billion of appetite for funds and there is a guy who is raising a billion dollars, you have a match. If you still have billion dollars appetite but people are trying to raise two billion, its just half the money but that does not mean the demand for funds has gone down.It just means that there are more people trying to raise funds.

In terms of valuations in this region do you think that has been a concern with your clients. Also, has that been in some specific sectors or across the sectors ?

You have to just look at the world and the non-economic news that prediction is a fool’s game at this point in time.

A lot of these investments are happening in tech, be it capital from China or these large mega funds. Do you see a trend there and where does Asia stand in competition to US ?

I don’t have exact data but if you look at the China tech story and you take out Alibaba and Tencent, it is not that exciting. Those two are such so dominant in market cap in terms of investments and in that kind of stuff. China will be an interesting player, I think US will continue to be so. A lot of truly the ground breaking stuff comes out of the US. Things that truly change the way we do things. For China, it takes the existing things and adapting it to the local market and sometimes also missing out things in the own economy that has never been significant.

And where do you see Southeast Asia stand out in terms of these investments ?

We have a few in Indonesia — GoJek and Tokopedia. In Singapore also we saw Lazada and we have Sea (Garena). I think Southeast Asia has always been about region plays. If you look at Southeast Asia, you could draw a parallel with Europe which has different markets and different languages so a model from Europe could work well in Southeast Asia.

Do you see exits being a concern with your clients in this region ?

Presumably. Ultimately, you need to get an exit. I think the level of concern varies for each investor.

How have LP’s expectations for funds or rather GPs changes in this region ?

LP’s want returns and they want diversification. The challenge has often been in Asia could be that are we seeing the same level of challenge for the perceived risk. Now, the risk may not be much different from the US but it may not be seen that way. If you do not have people on the ground there it is hard.

LPs for a number of years have been building their programmes and they have opened offices in Asia and may be employing the smartest Chinese students who have studied in the US. But, I think the trend has always been there where people start with doing broader strategies and narrow it down. They might be investing in a fund of funds, then might do a pan-Asian fund, then you might do a number of large funds, then you might do some sector funds, then co-investments and this is entirely linear. You might go full circle.

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