Private Equity Fundraising In Q2 2016 by Preqin
The Secret to Consistent Top Quartile Performance
by Dr. Finian Tan, Chairman, Vickers Venture Partners
Do you continue to see opportunities for venture capital firms (VCs) to deliver good performance given the risks associated with venture capital today?
There are three main things all VCs need to do to achieve good results. Firstly, they need good deal fl ow, secondly they need a good “filter” and thirdly, they need to be able to add value to facilitate and nurture their companies to grow.
To ascertain if there are still opportunities for VCs, I guess we need to ask and answer two questions:
1) Are there macro reasons why innovations will no longer deliver outsized returns?
2) Are too many VCs chasing after too few deals?
I think the answer is no to both, since innovators like Uber, Palantir, Xiaomi and our own portfolio company, Samumed, can still disrupt and become world-beaters with outsized returns for their investors. They are all decacorns (valued at more than $10bn) and are still growing at an extremely fast rate. This means that gems can still be found in many different industries all over the world. They are by no means easy finds, but this is where the deal fl ow, “filters”, contacts and prior knowledge come into play.
China is no longer as nascent in its growth phase as when I first invested in Baidu in 2000 and neither is mobile internet. Many of the low-hanging fruits are gone. But there are still many to be found in the more obscure places and perceived riskier sectors, and in very creative people in the less obscure places. For example, one of our companies called Bolome invented the video e-comerce market in China and grew seven times in value in seven months. Another one of our companies, Kuyun, dominates the interactive TV market in China and is now valued at 10 times our entry price. This is the beauty and attraction of venture capital. The home runs give such high returns that, even after compensating for the write-offs, the overall returns can still outperform all other asset classes.
What are the key drivers of consistently strong performance in VC?
We aim to achieve top-quartile performance for all our funds. Despite achieving the fifth best VC in the world, with three topquartile funds and one second-quartile fund, we are still as motivated as we were on day one, 11 years ago, to perform at these levels. Our formula is working, which reinforces our conviction with our current strategy. We, of course, will continue to tweak and improve on our methodology as we strive to remain ahead of the curve.
As mentioned above, a good VC must do all three things well: good deal fl ow, a good filter and the ability to add value.
If a firm is not good enough to sit back and receive great deals, they need to have a way to trawl for great deals. The filter comes from ability, experience and working together as a team. Having the ability and networks to help the companies grow will result in quicker exits, which will enhance their reputation and begin the virtuous cycle of good firms attracting the best deals.
At Vickers, we are not yet so well known that we can just sit back and get the first shot at all the good deals. We work hard to trawl for global deals in the perceived riskier regions such as China, Southeast Asia and India and perceived riskier sectors such as global life sciences with a focus on regenerative medicine. I say perceived because, although the risks may be higher as they are at the frontiers of their respective areas, the potential for outsized returns far outweighs the risks, resulting in greater risk-reward ratios. The filter must then be fine enough to ensure we catch the small fishes that will grow to monsters and yet not so fine that it catches all the junk as well. Our failure versus success rates are around 28% and 72% respectively, with a home run rate of 36%. This, together with an outsized return from Samumed, has mainly powered the performance of our Fund 4 (2012 vintage) to a net return of over 5x, and is the best performing fund of all vintages since 2008.
The IPO market has been tepid for the last year – as your primary exit strategy, does this make you look at other exit routes more?
VCs generally invest early, so the IPO market is actually not the primary exit route. Trade sales form the bulk of the exits to larger companies and to later stage investors. For example, Baidu bought one of our companies and invested in two others at higher valuations, and many other strategics and later stage investors have done the same. So when there is more money chasing returns, it is generally good for us because the first place that money goes to is the growth stage and not to the earlier stages. This provides us with avenues to exit investments at better valuations.
The majority of capital raised by Asia-focused VCs has been for country specific-funds. Do you think you have gained a diversity advantage by investing across different countries?
No strategy can last the test of time – it must evolve. Lowhanging fruits get plucked as more competitors come to the playpen. Anybody who focuses on a particular window of opportunity will struggle when that window closes. Our strategy is not to be bound by any specific ideology, but to be pragmatic and opportunistic across geographies and verticals, investing in companies with the biggest risk-adjusted returns. This approach allows us to take the risks associated with specific verticals and geographies into consideration when making investment decisions.
So even if China goes through a rough patch, we are well diversified to be able to ride the troughs that will set us up to take advantage of the peaks. We also try not to be too exposed to prices that swing wildly based on fundamentals, or market moods. For example, our cleantech investment was on vehicle electrification in China, which is getting so polluted that the government has no choice, regardless of oil prices. This company is called JJE (Jin Jin Electric) and is now worth 100 times what we paid at entry. We like platform plays. Betting on a geography or sector rather than trying to guess which company will succeed, is a safer bet. So in India, we invested in a platform e-payment company called MatchMove Pay, which is now worth 10 times our entry price and is just beginning its exponential growth trajectory. The key to investing in frontiers is to ensure you risk manage well.
Where do you see the best VC investment opportunities in Asia with regard to geography and sector?
China will remain a huge opportunity due to its size and stage of growth. At the moment, there is less of a rising tide effect due to the lower growth rate. Having said that, China is still growing at over 6%, with domestic growth at 10% or so. If you select the faster growing domestic industries, you could get over 20% growth. If you select the best companies within these industries, you could get