Asia’s Private Equity News Source avcj.com November 01 2016 Volume 29 Number 41

DEAL OF THE WEEKFUNDS

Behind the blocksGPs should look further than finance for blockchain opportunities Page 6

Blume goes biggerIndia VC firm upsizes to $60m for Fund II Page 10

Internet advocatesPE buys marketing platform for lawyers Page 10

Shoreline’s Xiaolin Zhang on distressed debt opportunities in China

Page 11

INDUSTRY Q&A

Australia’s Future Fund makes innovation an investment priority

Page 3

Actis, BlueRun, CDH, China Everbright, Crescent, Gopher, IDG, IFC, Ironbridge, Jungle, Mayfield, Mirae, Motilal Oswal, Multiples, NewQuest, Northstar, Platinum, STIC, Sequoia, Simmons, Walden, Warburg Pincus

Page 4

EDITOR’S VIEWPOINT

NEWS

GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY

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Number 41 | Volume 29 | November 01 2016 | avcj.com 3

EDITOR’S VIEWPOINTtim.burroughs@avcj.com

FUTURE FUND IS AUSTRALIA’S LARGEST institutional investor and Atlassian is the country’s biggest start-up success story. The former got exposure to the latter in 2010 – five years before the company went public – but not through an Australian venture capital firm. Future Fund’s portfolio GP was Accel Partners, which initially invested $60 million in Atlassian, made a partial exit before the IPO, and now holds a stake in the company worth more than $600 million.

The sovereign wealth fund’s other venture capital relationships have delivered early access to the likes of Uber, Didi Chuxing, Pinterest, Airbnb and Snapchat. These are the highlights of an early-stage portfolio worth more than A$2 billion through fund-of-funds, direct fund investments and co-investments, Future Fund CIO Raphael Arndt said earlier this year.

As of June, the group had total assets of A$122.8 billion, of which 10.4% was in private equity. And of that A$12.8 billion, just under half was deployed in venture capital and growth equity strategies. Thanks to this approach, it is almost certainly one of the most progressive sovereign wealth funds globally in terms of addressing innovation.

Writing in Future Fund’s annual report, Steve Byrom, head of private equity, said that the asset class (and VC and growth equity in particular) has never been more important because it offers access to an innovation cycle largely uncorrelated to the challenging global economic and market environment. “We believe we are in the midst of a multi-wave innovation cycle driven by empowering the consumer, cloud computing, big data, machine learning and mobile connectivity,” he added.

Venture capital in China and India are now on Future Fund’s agenda, as are growth equity strategies in both countries – especially where they offer access to areas that are seen as proxies to the emerging middle class. The group’s first foray into India has already been reported: it backed the most recent fund raised by India Value Fund Advisors (IVFA), a GP with a track record in consumer and media, infrastructure services and healthcare.

The challenge for Future Fund and any

sovereign fund that wants to follow the same path is check size. One solution is to target late-stage rounds for established start-ups that would probably be public by now were it not for the largesse of hedge funds, sovereign funds and mutual funds seeking some private markets alpha. This is what took Saudi Arabia’s Public Investment Fund into Uber and Singapore’s GIC Private into Flipkart and Xiaomi.

Investing through a fund-of-funds is another option, and it may be particularly attractive to emerging Asian LPs that want exposure to the world’s leading VC firms but don’t have the local knowledge or networks to secure it. Beyond that lies the separate account, which offers more customization and – depending on the arrangement – places a higher degree of discretion in the hands of the LP.

What Future Fund is said to have fashioned to channel its exposure to IVFA and other small to mid-cap managers in Asia might be termed a separate account-plus. It created a pool of capital, appointed a manager, and then proceeded to populate the pool. The manager offers ideas but Future Fund conducts its own assessments and signs off on any decisions. Flexibility is the key: a mid-market GP may sit alongside a Chinese VC firm set up by ex-employees of a leading domestic internet company, a single LP structure for early-stage deals in India, and a handful of co-investments.

There is no guarantee that more sovereign wealth funds will embrace venture capital wholeheartedly and enduringly – some won’t be able to handle the risks, particularly where emerging markets are concerned, and others will flee as soon as they begin to feel the effects of a down cycle. But for those that want exposure to new business models, capable of disruption that extends into other private equity strategies, customization will increasingly be the name of the game.

Tim BurroughsManaging EditorAsian Venture Capital Journal

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avcj.com | November 01 2016 | Volume 29 | Number 414

ASIA PACIFIC

IFC proposes backing Actis’ energy fundThe International Finance Corporation (IFC), the investment arm of the World Bank, has proposed a $100 million investment in Actis Capital’s latest emerging markets energy fund. The vehicle will invest in energy generation and distribution assets in emerging markets in Asia, Africa and Latin America. It has a target size of $2 billion.

AUSTRALASIA

Ironbridge-owned Bravura files for IPOAustralia-based financial services administrator Bravura Solutions is looking to raise A$148 million ($113 million) through a domestic IPO – three years after PE owner Ironbridge Capital privatized the business. The company will sell 78.9 million new shares and 23.2 million existing shares for A$1.45 apiece. Ironbridge will sell 16.1 million shares, reducing its stake to 47.2% from 86.7%.

Crescent sells stake in ClearView WealthCrescent Capital Partners has agreed to sell a 14.9% stake in Australian financial services provider ClearView Wealth to Sony Life Insurance for approximately A$145 million ($111 million). The private equity currently holds a 52.9% interest in ClearView, having headed a consortium that submitted a takeover offer for the business in July 2012.

GREATER CHINA

CDH realizes $806m through WH partial exitCDH Investments has made another partial exit from Chinese pork producer WH Group, selling an approximately 6.83% stake for HK$6.25 billion ($806 million). One billion shares were placed at a price of HK$6.25 apiece, reducing the private equity firm’s holding to 12.94% from 19.77%. This follows a HK$9.25 billion partial exit in August.

BlueRun closes $500m early-stage fundBlueRun Ventures has closed its latest China-focused fund - comprising US dollar and

renminbi-denominated tranches - with more than $500 million in aggregate commitments. The two vehicles, which were both oversubscribed, will make seed to Series A round investments in local start-ups. The firm has also promoted investment directors Wei Cao and Jiajie Wu to managing director level.

CEL to receive mandate from NSSFChina Everbright (CEL), the Hong Kong-listed multi-platform asset manager backed by state-owned China Everbright Group, is set to receive a separate account mandate from the National

Council for Social Security Fund (NSSF). The capital will be channeled into 10-13 funds on CEL platform.

Credit card management app raises $84mU51.com, a Chinese credit card management mobile app, has secured $84 million in an extended Series C round from Chinese asset manager Harvest Global Investments and department store operator Intime Retail Group. The extension brings U51’s overall Series C round to $394 million.

Sequoia to invest $52m in GopherSequoia Capital China has agreed to invest RMB348 million ($51.7 million) in Gopher Asset Management, the alternative asset management unit of China’s Noah Holdings. The commitment is expected to help Gopher extend its product capabilities domestically and internationally.

IDG, Walden lead round for AI start-upIDG Capital Partners and Walden International have led a $65 million Series B funding round for US and China-based artificial intelligence (AI) and robotics company Rokid. The capital will be used to develop the company’s home robotics offerings and improve customer experience in China and the US, where a product roll-out is planned for the first quarter of 2017.

JD Finance leads $30m round for MicroseerJD Finance, the financial subsidiary of Chinese online retailer JD.com, has led a $30 million Series B round for Microseer, a Shanghai-based human resources and IT outsourcing services start-up. Existing investors including IDG Capital Partners, China Growth Capital, Shanghai Jinye Equity Investment Partners and CICC Private Equity also took part in the round.

NORTH ASIA

STIC raises $530m for special sits fundSTIC Investments has raised $530 million for a special situations fund that will target restructuring opportunities involving South Korean conglomerates. The STIC Special Situation Fund launched in May 2015 and closed earlier in

ZTO Express raises $1.4b in US IPOPE-backed Chinese logistics operator ZTO Express has raised $1.4 billion in its New York Stock Exchange IPO after pricing its shares above the indicative range. The company sold 72.1 million American Depository Shares (ADS) at $19.50 apiece, above the indicative range of $16.50-18.50. A further 10.82 million shares could be added to the offering if underwriters fully exercise the overallotment option.

It is the largest US IPO by any company so far this year; the largest US float by a Chinese company since Alibaba Group in 2014; and the fourth-largest offering on record by a PE-backed Chinese company on a US exchange.

Following the IPO, Warburg Pincus’ 6.1% stake in ZTO was diluted to 1.5%, while Sequoia Capital went from 5.6% to 1.4%. Gopher China S.O. Project – which is ultimately controlled by Gopher Capital, with Sequoia providing advisory services – dropped from 1.6% to 0.4%.

Founded in Shanghai in 2002, the company covers 96% of China’s cities with a range of services targeting the e-commerce and printing industries. It claims the fastest growth rate among the five largest Chinese express delivery companies as of the end of 2015, with parcel volumes growing at a compound annual rate of 80.3% from 2011 to 2015.

NEWS

Number 41 | Volume 29 | November 01 2016 | avcj.com 5

October, with Korea’s National Pension Service (NPS) coming in as the anchor investor.

Lintec buys Mactac from Platinum EquityJapanese adhesives producer Lintec Corporation has agreed to buy US-headquartered labels manufacturer Mactac from Platinum Equity for $375 million. The PE firm acquired Mactac for $170 million in 2014 from listed packaging business Bemis. The company’s European operation was sold to Avery Dennison in August.

Acushnet lowers IPO price, gains on debutAcushnet Holdings, which owns the Titleist and FootJoy golf brands, saw its shares jump 5.9% in the first day of trading in New York following a smaller-than-expected $328.7 million IPO. The company sold 19.33 million shares at $17 apiece, below the indicative range of $21-24. PE investors include Mirae Asset Private Equity; Woori-Blackstone Korea Opportunity Private Equity Fund, and Neoplux Private Equity.

PFG commits $15m to Yello Mobile unitYello Digital Marketing (YDM), the digital marketing unit of South Korean mobile internet company Yello Mobile, has received $15 million in funding from Partners For Growth (PFG), the PE arm of SVB Financial Group. The capital will be used to purchase additional shares in the company’s 18 affiliates – which have more than 1,400 employees and over 5,000 clients – and consolidate control within the group

SOUTH ASIA

Multiples invests $110m in ArvindMultiples Alternative Asset Management has agreed to invest INR7.4 billion ($110 million) in Arvind Fashions, the branded apparel distribution arm of listed Indian textile manufacturer Arvind. It will take a 10% stake in Arvind Fashions, which will use the capital to support future growth initiatives.

Actis platform to buy solar assetOstro Energy, an Indian renewable energy platform backed by Actis Capital, has agreed to buy a solar project owned by Suzlon Energy. The

deal will see Ostro invest an initial INR490 million ($7.3 million) for a 49% stake in Prathamesh Solarfarms, a vehicle set up by Suzlon to develop a 50 megawatt project in Telangana.

Ather raises $31m for electric motorcyclesIndian motorcycle giant Hero MotoCorp will invest about INR2 billion ($31 million) in domestic VC-backed electric vehicle (EV) start-up Ather Energy. It follows a $12 million investment last year by Tiger Global Management. Hero will take a 26-30% stake in the company in an effort to enhance its existing EV development program.

NewQuest, Kotak invest in Paragon companiesNewQuest Capital Partners has joined a $21 million investment in construction firm Capacit’e Infraprojects and engineering components manufacturer Maini Precision Products, both of which are portfolio companies of India’s Paragon Partners. The GP is acquiring shares from existing investors. Its partner in the deal is Infina Finance Private, which is owned by Kotak Mahindra Bank and the Kotak family.

MOPE invests $15m in Ganesh GrainsMotilal Oswal Private Equity (MOPE) has invested INR1 billion ($15 million) in Indian packaged cereals producer Ganesh Grains. The company will use the capital to increase brand awareness, expand its distribution network and build out its production capacity.

Mayfield, IIFL invest $7.5m in Box8US early-stage investor Mayfield and IIFL Wealth Management have invested INR500 million ($7.5 million) of Series B funding in Indian quick service restaurant (QSR) chain and food delivery start-up Box8. The capital will go towards technology improvements and geographic expansion.

SOUTHEAST ASIA

Simmons invests in Malaysia’s Leap EnergySimmons Private Equity (SPE), an energy-focused investor based in the US, has acquired Malaysian oil company Leap Energy as part of a plan to establish a global upstream consulting group. The investment will support SPE’s broader portfolio with operational expertise in mature field production optimization and predictive analytics for conventional and unconventional reservoirs.

Jungle leads Series A for Thailand’s PomeloJungle Ventures has led an $11 million Series A round of funding for Thailand-based online fashion retailer Pomelo. Existing investors, including 500 Startups and Fenox Venture Capital, also participated in the round. The Series A follows a commitment earlier this year from Indian venture debt firm InnoVen Capital and a $1.6 million pre-Series A round in 2014 also led by Jungle.

Northstar offers $238m for InnovaluesNorthstar Group has offered to buy Singapore-listed Innovalues, a components manufacturer for the automotive and industrials sectors, in a deal that values the business at approximately S$331.4 million ($238 million).

The PE firm has launched a scheme of arrangement whereby shareholders in Innovalues will receive S$1.01 per share in cash or one share in the Precision Solutions Group - parent of the acquisition vehicle - plus S$0.61 per share in cash. Existing Innovalues shareholders can account for no more than 20% of Precision Solutions. The offer represents an 18.1% premium to Innovalues’ September 30 closing price.

Goh Leng Tse, chairman of Innovalues, and three other directors have agreed to vote their combined 39% shareholding in favor of the Northstar offer. Should shareholders support the transaction, Innovalues would be de-listed.

The company produces precision machine parts and components for vehicles, printers, mechanical devices, sub-assembly products, and water treatment systems. It has manufacturing facilities in China, Thailand and Malaysia. China is the company’s biggest geographical market, accounting for 59% of revenue, ahead of the US at 18%. Four fifths of total sales are to the automotive sector.

NEWS

avcj.com | November 01 2016 | Volume 29 | Number 416

COVER STORYjustin.niessner@avcj.com

TWO RECENT PE INVESTMENTS INDICATE that Asia’s blockchain space may be on the cusp of a new development phase driven by a migration of talent and ideas from West to East: a $5 million Series A round for Coins led by Quona Capital, and a $60 million commitment to Circle from a group of international investors including China Everbright.

The companies have different target markets – Coins is focused on the Philippines while Circle wants to boost its presence in China – but their fundamental attractiveness is rooted in their US credentials. Expertise in blockchain is hard to come by globally, and Asia is understood to be behind the curve in knowhow development. The funding for Coins and Circle suggests that the region’s increasingly crowded ecosystem of blockchain-supported financial services start-ups is ripe for diversification.

This influx of Western leadership is setting the stage for an expanded range of business models that fall under the Asian blockchain umbrella. In the US and Europe, blockchain start-up activity already stretches beyond financial services, but the technology’s initial boom in Asia has remained anchored in banking and payments. The rationale is that by building up a competitive environment of similar companies, some will eventually sprout branches into other sectors.

“A year ago, blockchain wasn’t something the young, hungry entrepreneurs were after in Asia, but now you’re starting to see the talent here,” says Scott Likens, PwC’s emerging technology lead in Hong Kong. “Because of the draw of financial centers like Singapore and Hong Kong, fintech is going to lead the way on investments, but the VCs see industries that are not financial services as quicker and less regulated with fewer companies at play. There are hundreds of blockchain start-ups around payments and currency, so it becomes a more difficult question of where to put your money.”

Bitcoin beginningThe ongoing emergence of blockchain technology is commonly promoted as representing an opportunity similar to that of the internet in the mid-1990s. As the internet allowed for the secure, free and instantaneous exchange of data, so does blockchain promise to

revolutionize the exchange of assets. Information has always been intangible, and

therefore well suited to this style of networked medium, but stores of measurable value – like bills of lading for cargo shipments or documents relating to property titles – have become digitized only relatively recently. The dawn of blockchain accordingly offers a means of re-writing rules on the distribution of wealth while simultaneously intersecting political, financial and industrial structures in ways yet to be clarified.

Any technology with this level of vaguely alluring disruption potential deserves a good creation myth, and blockchain certainly delivers. The system was first developed as a

ledger for bitcoin transactions, and as such, was mysteriously invented in 2008 by Sathoshi Nakamoto, the pseudonym for one or a number of programmers who remain unknown.

This esoteric backdrop fueled a culture of libertarian thinking and idealism among early adopters who were eager to avoid repeating the economic missteps that led to the global financial crisis. It also set up the proliferation of one of the more misunderstood technologies to attract institutional funding.

The core interest of blockchain is not so much its free-to-use, dis-intermediated computational resources as its emphasis on cryptography. The technology validates transfers by authenticating a chain of timestamped units of data that

increases in complexity with each transaction. “Often when people say they’re building a blockchain, they really just mean they’re building a secure database that makes use of many of the characteristics that bitcoin has proven to work,” explains Leonhard Weese, mentor at SuperCharger Fintech Accelerator and president of the Bitcoin Association of Hong Kong.

Since its inception, blockchain has only attracted about $1.5 billion of investment. At first, activity focused on digital currency mining, wallets and exchanges, with VC funding for bitcoin start-ups topping out at just over $200 million in early 2015, according to CB Insights. This surge of interest precipitated a dramatic drop-off to $25 million of investment by mid-2015, which has been interpreted as an inflection point in the industry’s natural hype curve.

“I think that we are on the slope of enlightenment,” says Jeremy Liew, a partner at Lightspeed Venture Partners, which has backed China’s largest bitcoin exchange, BTCC. “The initial peak of inflated expectations was driven by the expectation that the primary use-case for bitcoin was to reinvent payments in the developed world, and for trading, and that this would happen fast. This has largely proven out to be wrong.”

The second phase of investment has been characterized by a shift toward non-bitcoin financial applications of blockchain technology, which either tap into the original bitcoin system or exploit a separately programmed protocol. These investments have been led by corporates and financial institutions aiming to improve online and mobile transactions in fiat currencies.

The fastest growth area, however, has been the use of blockchain as a system for recording adjacent non-monetary transactions. Chainsmiths, an Ireland-based blockchain consultancy that already services half its client base outside of the financial sector, ties this evolution in part to the shortcomings of banks versus industrial players when it comes to commercializing prototypes.

“Most of what you read in the news about blockchain is just financial institutions playing around with the technology, but they don’t have any hope of bringing that to the market,” says Kevin Loaec, managing director at Chainsmiths.

Ethereal frontiersAs blockchain segments mature in Asia, private equity and venture capital investors will benefit from a range of new entry points. Pitfalls related to the technology’s obscure nature, however, will persist

“Most of what you read in the news about blockchain is just financial institutions playing around with the technology, but they don’t have any hope of bringing that to the market” – Kevin Loaec

Number 41 | Volume 29 | November 01 2016 | avcj.com 7

“It’s very hard to bring innovation to finance because there’s so much regulation. That has always been the case, and blockchain isn’t going to change that.”

Non-financial applicationsEarly signs from the West that the future of the technology is in non-financial industries also include the diversification of specialist VCs such as US-based Blockchain Capital, which backed BTCC alongside Lightspeed but now counts a third of its portfolio outside of banking services. For example, the firm has invested in Wave, an Israeli company that uses blockchain to allow cargo vessels to send highly sensitive inventory titles across a decentralized network.

“We see a lot of interesting start-up activity around reimagining the bitcoin blockchain as an immutable record,” says Bart Stephens, managing partner at Blockchain Capital. “Many people tend to think of the blockchain industry as part of fintech, but we really see it as an evolution in computer science that will impact and alter not just financial services but government services, healthcare, legal services, international trade, shipping and logistics. We see a lot of our future activity in those areas.”

Although Asia has not yet followed this lead, it is expected to catch up quickly on the back of a number of technocratic drivers. Digital transfers of any kind in Asia remain subject to foreign exchange and border-control complications that have already been resolved in the US and Europe. Countries in the region must also contend with a much broader range of technological competency in cross-border trading, adding appeal to the simplifying architecture of blockchain.

The primary driver of Asia’s potential, however, remains its massive and fast-growing consumer markets. As such, the scaling upside of blockchain business models related to payments

and remittances cannot be as easily dismissed by bureaucracy-wary investors.

“Blockchain has very diverse applications, but if we make another investment in the technology, it’s definitely going to have some connection with fintech,” says James Pan, a member of China Everbright’s management decision committee. “Blockchain is not the only technology for coming up with payment solutions – which is the clear trend – but based on our due diligence so far, it’s the most reliable.”

The performance standard of this type of database is difficult to overstate. The most robust blockchain is the original bitcoin system, which is said to have up to eight times more computing power than the world’s top 500 supercomputers

combined. In the context of Asia’s large population trends, this resource is increasingly seen as an indispensable settlement solution.

“Asia is a very exciting and robust market, and we’re bullish on the developing economies and their adoption of blockchain technology,” Blockchain Capital’s Stephens adds. “There are about three billion consumers with a smartphone in their pocket who can essentially leapfrog the paper, plastic and physical branch-based products you see in the West into bleeding-edge financial services that are ultra-secure and ultra-cheap.”

Finding valueAs investment targets in this space multiply, one of the key challenges for GPs is identifying viable use-cases. One rule of thumb is to focus on monopolies such as insurance or taxation on controlled goods. This is because businesses in these fields are dependent on a single point of failure and become more secure when a decentralized network diffuses the trust and risk.

Another point of consideration is to avoid business plans that are attempting to apply the technology as a solution for non-technical

problems. For example, Chainsmiths’ Loaec cites a common investment thesis related to using a blockchain to streamline electricity payments – a concept that does nothing to solve the underlying problem of customers illegally tampering with their meters.

“Blockchain can be applied to all industries but most of the use-cases don’t work,” he says. “Probably 95% of all the people that talk to us shouldn’t be on a blockchain because they don’t have the right approach to the technology. Most of the time, the problem is about physical elements in the real world and has nothing to do with blockchain.”

Due diligence should otherwise focus on confirming the expertise of the targeted technical team, especially in light of the supply-demand imbalance for top-notch blockchain talent. For China Everbright, the decisive factor in its decision to back Circle was the company’s status as the New York Department of Financial Supervision’s first “BitLicense” recipient and the only digital currency play to receive an e-money issuer license in the UK.

“The technology is new and unfamiliar, so investors don’t usually have much experience in the space. This makes it more difficult to assess a team’s credibility and whether their product has any real value,” says Josh Stark, head of operations at Canada-based blockchain consultancy Ledger Labs. “Investors need to have a clear thesis on where they believe the technology and market is heading. That’s true of any investment, but in this space, credible answers that get beyond the hype are much harder to come by.”

Both the financial and non-financial service angles in blockchain are relatively well understood by PE investors with experience developing enterprise software for clients. The value proposition at the cryptocurrency end of the spectrum, however, is less immediately recognizable. In this area, it is harder to plot the future evolutions of the market, how bitcoin will perform as a currency, what trends will redirect its exchange platforms and in which countries.

Investors may overcome this lack of visibility through exposure to wallets, which monitor digital currency transactions across different geographies in real time. Keeping company burn rates low is also essential to ensuring there will be enough dry powder available to react when the inevitable black swan event starts moving the market.

“Bitcoin companies are like surfers. You can’t make a wave – you have to wait for it to come,” says Lightspeed’s Liew. “But when it comes, you can make sure that you’re pointed in the right direction, well positioned, and you can paddle hard. And if you get it just right, you can catch a really great ride.”

COVER STORYjustin.niessner@avcj.com

Bitcoin and blockchain venture capital funding

Source: CB Insights

250

200

150

100

50

0

US$

mill

ion

Bitcoin start-ups Blockchain start-ups2013 2014 2015 2016

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avcj.com | November 01 2016 | Volume 29 | Number 4110

BLUME VENTURES’ VISION HAD GROWN beyond what its check sizes could deliver. The early-stage VC firm gained exposure to a wide range of Indian start-ups through its first fund and already achieved some successful exits, including the sale of Taxiforsure to Ola and the purchase of Zipdial by Twitter.

But spreading the INR1 billion ($22 million) corpus across several dozen companies meant it often had only a very small claim on the proceeds.

“We realized that we had very little control over our positions in those companies when we were sitting in the single digit space. And even though we had good exits, they hardly moved the needle in terms of absolute dollar returns,” says Karthik Reddy, managing partner at Blume.

Having recently closed its second fund, Blume Ventures Fund II, at $60 million, the GP now plans to build on the experience gained in the first vehicle. Rather than spreading itself thin to gain exposure to a wide variety of businesses in the tech space as it has before, Blume will focus on obtaining bigger stakes in portfolio companies

and narrowing its investment preferences.With almost three times as much capital

as the previous vehicle, Fund II is expected to give Blume considerably more financial muscle. Whereas in previous investments the GP committed up to $250,000 in pre-Series A rounds for stakes of 7-8%, now it can go as high as $500,000. Blume is also planning more follow-ons, with over 60% of the corpus earmarked for additional contributions to investees up to Series A round. It will continue its strategy of finding co-investors to come in alongside it on deals, including in follow-on rounds.

Technology remains the key focus. The new fund has already made more than 25 investments in companies such as retail technology developer SnapBizz and health and fitness app developer HealthifyMe. Most deals will concentrate on the consumer technology space, but the firm also expects its business-to-business portfolio to deliver considerable success.

“They’re not necessarily going to attack American markets, but they will at least go and build a significant presence in regional markets in and around Asia,” says Reddy. “And we’ve seen some success already. We think some of our biggest returns are going to come from that space.”

The new vehicle also gave Blume the chance to broaden its LP base. As much as $40 million of Fund II comes from overseas investors – about half of whom are based in the US – in contrast to Fund I, which was mostly raised from Indian LPs. The GP sees this as a welcome step toward building a stronger profile among both LPs and investees.

“We just needed larger support, and since this is the foundation for what we hope will become a series of institutional funding-led future funds, that meant that we had to look at building a considerable international base as opposed to relying entirely on domestic capital,” says Reddy.

JAPANESE ENTREPRENEUR HIROTO Nakayama saw his country had a problem: too many lawyers with nothing to do. Government reforms launched in 2001 had worked well enough, raising the number of private lawyers from 17,000 to 37,000 as of April 2016. But the population had mostly failed to take advantage of the abundance of attorneys, preferring to stick to traditional informal methods of conflict resolution.

With younger lawyers bearing the brunt of the job shortage, Nakayama spied an opportunity, founding the media platform Asiro as a place where independent law firms and attorneys could advertise their services. Staff writers create articles on legal issues, written for laypeople, to attract ordinary readers who can then connect with lawyers through the site.

“Generally speaking, lawyers are not salespeople. Obtaining customers may be their biggest goal, but they don’t have the capability,” says Gregory Hara, CEO and managing partner of J-Star, which recently bought Asiro.

J-Star saw the company as a play on one of its

traditional focus areas: transition planning. While Nakayama was still in his 40s and not looking to retire from the company, he also believed that he would not be able to build the business to the scale he envisioned without outside capital. Selling to another company was not attractive since it would require him to give up too much control to the buyer, and an IPO would likely not attract much attention because the company, while solid, could hardly be considered trendy.

Bringing in a backer like J-Star – described by Hara as a “solution capital provider” that typically invests JPY1-10 billion ($9.5-95 million) per transaction – seemed the best fit. Hara pitched the firm to Nakayama as a partner that wanted to enhance Asiro’s ability to succeed on its own, rather than an owner that would use the company as a means to its own ends.

“We’re a shareholder with a great understanding of the business, and we have

capital, but on the other hand, as a temporary shareholder, our goal is to train the company to make it strong. He liked this concept,” Hara says.

J-Star’s plans for Asiro include helping it to diversify its appeal. Currently the site’s content is focused on traffic law, though lawyers also offer

other services, such as divorce, inheritance, bankruptcy and criminal law. The GP wants the company to raise the profile of these options.

Hara is confident in Asiro’s future as a part of Japan’s legal scene, citing its appeal to younger customers who are comfortable with obtaining

professional services online and its ability to outmatch the competition in content. “Many newcomers need to pay Google to secure a space in the search engine,” he says, noting that Asiro has never had to do so. “It becomes an entry hurdle for the other players. So once Asiro captures good content in a certain area, then its position is relatively stable.”

FUNDS / DEAL OF THE WEEKholden.mann@avcj.com

Blume gets early-stage boost

J-Star helps Asiro bring law online

Attorneys: Internet connection

Early stage: Broader base

Number 41 | Volume 29 | November 01 2016 | avcj.com 11

Q: Shoreline’s third fund closed at $500 million in mid-2015 (and was followed by an overflow vehicle of $200 million). What does the speed and nature of deployment say about overall trends in the market?

A: We focus on three investment categories: structured finance, special situations and non-performing loans (NPLs). We have fully invested Fund III and the additional capital we raised, with approximately $700 million deployed over the last 12 months. Most of it went into NPL deals. We have accelerated our pace of deployment in response to the market opportunity. As China’s economic growth has slowed in the last few years, the volume of NPLs accumulating within the banking system has been huge. The publicly disclosed NPL ratios of China’s commercial banks doesn’t tell you exactly how serious the situation is, because many more NPLs will emerge next year. Typically, they will involve struggling industries, such as mining companies in northwest China. Banks are under pressure to offload these bad loans.

Q: How easy is it to get access to NPL portfolios?

A: Shoreline is the largest player in the NPL and distressed market in China apart from the big four asset management corporations (AMCs). In the previous cycle, we were the most active investor in the NPL space so we have cultivated close relationships with banks and AMCs. Some banks contact us directly and arrange transactions that are nominally routed through AMCs. We have more than 40 employees, most of whom came

from the AMCs, banks or law firms. In addition, we are growing our network of local third-party service providers from 50 to 100. This nationwide platform will help us source NPL transactions.

Q: What do you think of the government initiatives intended to help address the NPL problem, such as debt-for-equity swaps?

A: The debt-for-equity swap initiative shows the government is looking for solutions, and Shoreline can benefit in that it can extend our business lines. There are potentially high-quality companies in financial difficulty that we can restructure after swapping their loans for equity. However, a professional team with deep legal knowledge is necessary to properly evaluate and execute debt-for-equity swaps. We have plenty of experience handling such legal issues but we would still invite industry experts and external partners to work with us on deals.

Q: What complications are there for US dollar-denominated investors chasing NPL deals? Do you also have renminbi-denominated pools of capital?

A: It was hard for us to operate in this space when we invested our debut US dollar fund. But we have built a strong deal-sourcing and investment platform over the last 12 years, which has made things a lot easier. More recently, Issues such as repatriation of capital and renminbi depreciation have become concerns for US dollar investors, but we believe these are temporary and there are financial tools that can be used

to mitigate the impact. As for local currency transactions, we have participated in some.

Q: How much competition does Shoreline face?

A: We are still the leading player in China’s distressed debt space, but I have seen more newcomers on the US dollar side and the renminbi side in the last year. We can’t expect to be the only large player as the market matures. A number of international investors have expressed an interest in investing in this space. I don’t see them as competitors but rather as potential partners because Shoreline has a level of localization they cannot match. On the US dollar side, we have previously partnered with Oaktree Capital on some co-investments. On the renminbi side, several local service providers have tried to raise independent funds but they are

small. We will commit capital to their funds and jointly invest in deals.

Q: How do you manage these portfolios once they have been acquired?

A: Before we buy NPLs, we conduct thorough due diligence on the borrowers, guarantors and registered collateral in order to set a meaningful purchase price. If the collateral is factory facilities, for example, we have to evaluate how much we can generate if we liquidate those assets in the future. We have built a database that tracks land supply and turnover rates in different provinces and cities, which helps us to price the underlying assets. In terms of collecting debts, we negotiate terms with the borrowers or go through court processes to liquidate the collateral assets. Another option is to convert these debts into equity and run a company yourself. There are many ways to collect repayment; the key point is whether you can generate a profit by doing this.

Q: Shoreline has seen some team turnover, including the departure of co-founder Ben Fanger. How have you addressed these issues?

A: As a result of Ben’s departure, six other people have left Shoreline, and they are all bound by a two-year non-compete clause. The biggest loss was to our investor relations function – four people left from that team, while we have lost only two from the investment team. We are in the process of rebuilding our LP relationships and we are actively looking for an investor relations partner to lead that function.

XIAOLIN ZHANG | INDUSTRY Q&A winnie.liu@avcj.com

Dealing in debtXiaolin Zhang, co-founder and managing partner at China-focused distress specialist Shoreline Capital, discusses the NPL opportunity and what private equity firms must do to address it

“There are many ways to collect repayment; the key point is whether you can generate a profit by doing this”

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Sanjay KukrejaManaging DirectorCHRYSCAPITAL

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• ADV Partners• AlpInvest Partners• Altius Associates• Ark Capital Investments• Asia Alternatives• Asian Healthcare Fund• Assicurazioni Generali SpA• Axiom Asia Private Capital• Bain Capital• Baring Private Equity

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and Development Company

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Management• IL&FS Investment

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Investment Fund

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Company• SBM Capital

Management• SBM Securities• SEDCO Capital• Sen Family Office

• SME Invest Fund Green Capital

• Standard Chartered Private Equity

• State Government of Victoria, Australia, India office

• Strategic Assets Partners• Tata Capital Growth Fund• Tata Opportunities Fund• Temasek Holdings• Templeton Emerging

Markets Group• Tokio Marine Asset

Management• TZW Assets Holding• University of Rochester• Vaatsalya Healthcare• Wayzata Investment

Partners• Wilshire Associates• Wood Investment Partners• Zephyr Peacock India

List of confirmed attendees in 2015:

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