Vincent Chan chose a bad time to strike out on his own. In November 2007, before the credit collapse and ensuing financial crisis were to hit, he left Nomura-backed venture capital firm JAFCO Asia to launch Spring Capital.
He’d spent seven years at JAFCO Asia, where he was a managing director and helped establish its Seoul and Beijing offices. In the nine years prior, he worked for firms including Suez Asia, PrimePartners and HSBC Private Equity Asia. Before that, he spent three years in Standard Chartered Asia’s corporate finance division. After nearly 20 years in finance, he’d come to the conclusion that only an independent platform could attract and retain the best talent. But his timing for a spin-out and first-time fund couldn’t have been worse.
“Not a lot of people have the guts to do that, and he did it at a time when the market was difficult [for] fundraising. I actually give him a lot of credit,” says Johnny Chan, chairman of the Hong Kong Venture Capital and Private Equity Association. He has known Vincent Chan for more than 10 years and describes him as “cautious”, “careful” and “process-driven”.
Spring Capital’s Chan admits the fundraising was difficult. “It was painful for me, and for the team,” he says. It took two years for the Hong Kong-headquartered firm to hold a first close on $151 million in November 2009, and almost another year for a final close on $250 million in August 2010. More than 70 percent of its limited partners are family offices in Asia and Europe, while the remaining are funds of funds and high net worth individuals.
In early 2009, after a fundraising trip to Europe that had resulted in little traction, he came to the conclusion the only way forward in the short term was to reduce salaries within the firm. He cut staff pay by 10 percent to 15 percent and his own pay by 90 percent. “My salary was lower than many of my colleagues’ for one year.”
I didn’t build the firm for myself, and I have no intention to stay here forever
“It was embarrassing,” he recalls. “You just asked people to join you and in six months’ time you cut people’s salary. I would not have done it if I could, but no one knew at the time in 2009 when the market [would] come back.”
The fundraising difficulties it encountered also hindered the team’s ability to do deals and it was forced to use its own capital to start building up a track record.
“Not everyone has the money [to do a warehouse deal], but LPs would not care,” Chan says. “They would say, ‘you’d better do a deal or you have no chance to prove yourself’.”
So the team used its own money in October 2008 to make a $10 million investment for a substantial minority stake in energy-saving company Shanghai Insuring Polymer Materials. But it then went for more than a year before agreeing its second transaction, a $10 million investment in a wind and electricity tower manufacturer. In the past year it has increased its investment pace and is on course to close a total of six to seven deals in 2011. However, the firm’s fund is still in the early phase of investment period, having deployed less than 50 percent of its $250 million fund.
Beating the competition
Chan says GPs who want to strike out on their own must think carefully about what their selling point is. “It’s not a sellers’ market, it’s a buyers’ market,” he says. “What is your differentiation? Are there any deals in your pipeline? Is there anything new? Why do people have to spend time reading your fundraising proposals?”
Chan’s own argument to potential LPs was that with a bite size of $4 million to $25 million, Spring Capital would address a market segment that is ignored by most buyout groups and is characterised by first-generation entrepreneurs that may need operational expertise to expand.
Chan: finding the right people
In some respects this sets Spring Capital apart from some other domestic private equity players. But a traditional, process-driven private equity approach to the lower mid-market is still challenging “particularly when more VCs are moving towards later-stage growth capital type of investment”, says HKVCA’s Chan.
Vincent Chan, however, says today is “one of the best times” to invest in light of recent global markets turmoil. Bank facilities have tightened and companies’ need for capital that comes alongside true operational expertise is even greater. “If you understand portfolio management, your portfolio companies have to survive in a bull market as well as a bear market,” he says.
Spring Capital’s major competition in the lower mid-market comes from local RMB-denominated funds. While entrepreneurs may be reluctant to accept a USD investment because of the more cumbersome deal approval processes, Chan argues a USD investment from his firm allows investee companies more time to grow given RMB funds have shorter investment periods and push portfolio companies to achieve growth targets in shorter periods. “More mistakes will be made if you rush the entrepreneurs,” Chan says.
Not an empire
China does not lack for talent, but finding the right people with proper expectations can be a challenge, Chan says.
“The market has grown so fast, particularly the RMB fund market for the last three years,” Chan explains. “There have been so many so-called success stories [of] IPOs where people make loads of money and buy mansions somewhere in Hong Kong or Shanghai. That’s the expectation [many people] have about private equity – that’s why they want to do pre-IPOs so that they can make money very fast.”
That’s not to say that Chan does not want his team to profit from their efforts. A “very clear roadmap” has been set for his team to understand when they will earn a bonus, collect carry and even own a part of the GP (Chan owns “substantially less than half of the GP”, with the rest held by the team).
“I didn’t build the firm for myself, and I have no intention to stay here forever. I think people work for this firm not for me,” says Chan, who notes such a platform should continue to attract talent more so than a firm that is someone’s “empire”. He only hires individuals who have the potential to become partners, he says.
To keep Spring Capital team competitive, Chan believes that only those who perform well should stay, including himself. “I tell every team member, if I’m not performing … it’s a burden for you. I should step down and someone should take my place,” Chan says.
Also deeply ingrained into the way Chan wants the firm to run is an emphasis on team bonding and family. This year, which was the firm’s first profitable year, the team and their families took a company trip to Hainan Island.
“The families also have to know this is the team that their kin is going to stay in at least for the coming few years,” Chan says.
In addition, the firm has formed a care group to support and take care of each others’ families.
“We want to build sufficient support within the group. At least as a firm, I want to be more human. That’s what I have learned from many more successful investee companies and funds in China.”