Date: 26 Jun 2013
From: Asian Venture Capital Journal
FountainVest Partners took six months to raise its second fund, for which it also won the US dollar fundraising award, and then participated in China’s largest-ever PE buyout. CEO Frank Tang looks back and forward
Q: The fundraising process went smoothly despite a difficult environment. What were the contributing factors?
A: We have three anchor LPs and then a number of investors in Fund I are highly reputable. The fact that they decided to re-up in Fund II was great in terms of supporting momentum. By the time we reached our first close we had already surpassed the size of Fund I and that helped quite a lot in terms of finishing it off. In addition, our increase in our fund size was seen as pretty moderate.
We were about $1 billion last time and this time it was hard capped at $1.35 billion. Investors didn’t see this as aggressive and they knew our strategy would be consistent.
Q: You have been involved in a couple of buyouts recently. Are you expecting to do more and what does this mean in terms of team size and skill sets?
A: It’s limited right now, but we are seeing certain buyout situations emerging and it is likely to become a trend. In anticipation of our next phase of funds, we have been expanding the team. Our Beijing office opened about two years ago and we have been adding people across the board since then, at various levels and functions.
Q: Including the operational side…
A: We have always been looking at various ways to add value to our portfolio companies. It starts with the experienced people we recruit for these companies, depending on specific needs. We also have senior advisors engaged by the fund, and then on each project we have outside consultants. In terms of an in-house team, we are gradually building it.
Q: Can the recent spate of take-privates of US-listed Chinese companies – two of which involveFountainVest (Focus Media and LJ International) – be sustained?
A: I think it’s a wave of opportunity – it became quite active last year and it will continue to be active this year. There will be a self-selection process: some entrepreneurs feel it doesn’t make a whole lot of sense to continue to be listed in the West; others think that, with TMT companies, NASDAQ is a natural location because investors understand them. For companies with variable interest entity (VIE) structures, the uncertainty surrounding these structures will discourage many from going private.
Q: To what extent are you going to the chairman/founder and pitching the idea of a take-private? Is it a difficult sell?
A: For the deals we’ve worked on, we have approached the founder. Becoming a public company is always more glamorous, so to de-list could be perceived as embarrassing. However, over the last two years this view has turned around, it’s not necessarily a shameful thing. The decision is driven more by practical considerations. Does the valuation of the shares reflect the business fundamentals? Does being public help the company raise money through the capital markets on an ongoing basis? Does the company have an active following among analysts?
Q: Focus Media is by some distance the largest PE-backed deal of this type. Will it be topped?
A: I haven’t come across any meaningfully larger companies than Focus Media that are looking to do the same thing. Most of the companies are small. Shanda was the largest to go private in the US and then there was Alibaba.com in Hong Kong. For the likes of Tencent and Baidu, they trade at fair valuations, their businesses are well understood and covered by analysts, and they have high liquidity. There is no need for them to consider going private.
Q: Investors cite two other potential sources of control deals – succession planning and carve-outs. How much activity are you seeing in these areas?
A: Succession planning has started to emerge – there are selective first generation entrepreneurs who are now thinking about succession. As for carve-outs, we haven’t seen any. There are potentially a lot of opportunities among state-owned companies but we don’t focus on that. In the future there might be carve-outs from private companies but at the moment they are growing and adding new business lines. They could reach a point where they decide to become more focused
Q: So for the time being it will remain primarily minority investments?
A: We want to enlarge our stake and influence in businesses so we are in a better position to add value, and that could include more buyouts. Generally speaking, entrepreneurs have two choices. First, they want more capital so they can become a clear leader in their sector, and that could mean their stake is diluted. Second, they can insist on holding 51% or more and basically put a stop in terms of how big they can grow.
Q: The IPO market has been difficult in the last year or so. What impact is this having on your exits?
A: The IPO market remains weak but exits are also becoming more diversified. We do see mergers, trade sales and cross-border acquisitions becoming more active. In our case of our first fund, there has been on trade sale exit to a domestic strategic buyer from the same industry. Consolidation is certainly taking place.