Searching for the new frontier

If the dotcom bubble taught venture capitalists anything, it was the danger of hyping niches way beyond their potential to deliver a return on investment. VCs and their institutional investors (LPs) are wary of being caught by the same mistake twice, but are still as committed as ever to pursuing the path of outstanding returns. So will the stampede east deliver? Lisa Bushrod reports.

On one hand, taking a punt on a geography, namely Asia or Central & Eastern Europe, where most of the talk and some action is centred, does seem less risky than putting all one’s faith in sector or niche or sub-niche within that sector. In reality, the risks are probably more varied, but perhaps more containable-and if not containable at least largely identifiable.

In part, the returns in jurisdictions like Asia and Central & Eastern Europe will be simple arbitrage and first-mover advantage. You only need to look at the fact that some portfolio companies in these jurisdictions wouldn’t get past the investment committee in more established private equity centres like North America and continental Europe, where something as simple as an environmental issue enters the frame. (See page 46 this issue, to illustrate the point.)

In point of fact, Central & Eastern Europe has certainly been more talk than action. This might be attributed to the buzz surrounding the Accession of 10 more countries to Europe in May 2004, eight of which belonged to this part of Europe. Certainly harmonisation of these countries’ legal and regulatory regimes with those of the pre-existing 15 European nations of northern and southern Europe points to their future potential. But one act of Accession can’t undo 50-odd years of the imposition of a command and control economy and all the legacies that entails.

Unofficially, one European-based placement agent notes that there are in fact literally only a handful of funds with which it might wish to form a relationship in this part of Europe. While such comments are inevitably influenced by a perceived marrying of interests between both parties in terms of what one needs (more LPs) and the other is able to offer (LPs interested in the region) it’s a pretty damning assessment of a region, depending on how inclusive you are, that has combined population of around 200 million. That suggests, perhaps, that state sponsorship will make up the shortfall in interest.

That’s certainly what happened in the case of Euroventures Ukraine, which just raised its first institutional funding, having got a track record under its belt with some money raised from the European Bank of Reconstruction & Development and the Dutch government a few years back. (Perhaps ironically, Euroventures Ukraine, although investing in Ukraine and this time round opportunistically in Russia, is based out of Cyprus, one of the two non-Central & Eastern European countries to accede to the European Union last year.) Also in early September, the US-sponsored Overseas Private Investment Corporation (OPIC) issued a call for proposals to manage one or more private equity investment funds to be invested in Eurasian countries that were formerly members of the Soviet Union. OPIC will sub up to $100m of the fund but no more than 33% of any individual fund, and the managers must raise the rest of the capital themselves.

Asia, it would seem, is a different story, attracting a number of firms that are either hoping to invest money dedicated to the region (much as Advent International and Barings turned up in Central Europe over a decade ago) or are purporting to be looking, in the first instance at least, to be setting up house locally with the sole aim of assisting their existing portfolio companies’ activities in the region.

Just going on activities in the last month, there was a flurry of Asia interest. A Sequoia fund for China is rumoured which would be something of a departure from its California hunting ground. Another US firm is KKR, which is putting feet on the ground in Hong Kong and Tokyo, each of which represent the firm’s first foray into Asia, to be led by a previously New York-based employee.

US buyout investor Thomas H Lee Partners and H&Q Asia Pacific, a regional firm, have formed an alliance to enable Thomas H Lee Partners’ investee companies to exploit opportunities in the region. The plan is also to do some new deals together. They join 3i, AXA Private Equity, Blackstone, Carlyle and Permira thus far this year. And back to venture, BlueRun Ventures, as Sequoia is reputed to have done, also sees the attraction of China, having opened an office in Shanghai. (BlueRun Ventures was formerly known as Nokia Venture Partners.)

And in the last few weeks there have been reports of successful subsequent fund raisings by those already located in Asia. Names taking advantage of institutional investor eyes smiling eastwards include: Henderson Private Capital’s Asia Pacific Equity Partners II, on a target of $400m; Actis’ South Asia Fund 2, which has closed on $150m; and CCM Capital Asia’s Asia Opportunity Fund II, which closed on $1.575bn. CCM Capital Asia was formerly known as JPMorgan Partners Asia.

It’s interesting to see that much of this activity bears out the results of Coller Capital’s global private equity barometer undertaken among 104 LPs this spring. Among its findings were the types of private equity ranked by attractiveness for GP investment over the next 12 months. First came European buyouts, second Asia Pacific buyouts, third North American venture, fourth North American buyouts and fifth Asia Pacific venture. The positioning of Asia Pacific buyouts and venture appears to directly correlate to the actual GP activity in these private equity sub-sectors. Since LPs see what GPs are touting in the market considerably before it hits the public radar, this should not be surprising.

If Sequoia’s Mike Moritz was right when he said recently that even a chimpanzee could raise a $100m venture fund, then would-be fund raisers in Central & Eastern Europe and Asia should pack their bags, borrow a chimp, and head west for a while. What they do when they get back, however, will tell whether the current excitement in looking east is justified. Much as Moritz went on to point out that making good investments was harder than raising money; albeit a hard notion for anyone in fund raising mode to believe.

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