Q&A: HarbourVest's Sebastiaan van den Berg

Q: As a long-term investor, how much of a concern are valuations in China right now?

A: Even in a growth-type environment, if you overpay for an asset it will hurt you in your returns. Many fund managers are feeling the heat in this space - it's very crowded, it's hard to find proprietary deal flow and so it's difficult to be disciplined on price. As a result, you see people going into more early-stage deals but also going later, doing more buyouts and state-owned enterprise (SOE) deals that are difficult to transact and where there are more natural barriers to entry. Valuations have come down somewhat: the public equity markets in China are difficult and that has filtered through into the private equity space, with entrepreneurs becoming more realistic about what they ask for.

Q: Do you feel under pressure to find the next big thing, such as local GPs that have access to those deals that are more difficult to transact?

A: It's about balance. As a fiduciary of other people's capital, there has to be a level of cautiousness but we are also in a risk-taking business. When we construct a portfolio, we are not investing purely on promise - we need to make sure we have visibility and can adequately analyze whether a particular team can be successful. A firm doesn't have to be in its third or fourth cycle, but there needs to be some evidence they can do what they want to do.

Q: What do you look for in a Chinese GP?

A: Team turnover has always been a point where Chinese fund managers score low. If performance has been poor, there is a risk people will leave; if performance has been great, there is also a risk people will try to spin out and get better economics for themselves. It happens globally but even more so in China. Another issue is GPs' ability to return cash on cash. They make investments, have huge mark-ups in their portfolios, but they forget to monetize. Even some of the most successful managers have residual holdings in funds one or two where the companies have listed and they are just holding on. They say, ‘It's a great company, it's growing at 30%, let's hold on to it.' Western GPs tend to say, ‘It's a 4x, let's sell. It could have been an 8x, but tough luck - it could also have been a 2x.'

Q: Are Chinese GPs raising too much money?

A: On the whole, yes. There is a sense that they want to grab what they can while the music lasts. We try to tell them we are long-term investors and will be there for the next fund, but the message doesn't always get across. They don't want to turn away capital. A lot of successful funds globally face this dilemma, but a good number stay extremely disciplined.

Q: There is a perception that HarbourVest has been conservative towards China. Now you have opened an office in Beijing, is this changing?

A: I don't think it's an entirely accurate perception but I don't mind it. There are two parts to our China experience. We invested in China in the early 1990s when it was a big part of what private equity did in Asia and it didn't work out so well for anyone. Then we had the Asian financial crisis and suddenly many countries opened up to foreign capital and control-type deals. These investments in South Korea, Japan and Australasia generated really strong returns while minority deals in China were less sophisticated than they are now - you just got 5-10% of a company and hoped for the best. The conservative approach to China comes from that.

Q: How did you respond to resurgence of China funds in 2003-2004?

A: We didn't feel like we were going to take another bet. We thought we'd see how it works out and if indeed it made sense to go back into the market. That continued into 2005-2006 when you had the big wave of interest in China and India and a lot of Asian fund-of-funds came into existence on the promise that they would get you exposure to these markets. Although we were quite conservative, we still built a pretty meaningful China portfolio. We are in our sixth Asian fund-of-funds, which is just over $1 billion and about 40% is allocated to China. And our historical performance has been strong: looking at realized returns alone, we have invested $400 million and it is now worth $1 billion, so that's 4.5x; including unrealized returns, it's more like 2.5x. This has come through China funds, regional funds that invest in China, and also through our US venture funds.

Q: In practical terms, what difference does a China office make?

A: We are going to be more accessible. We have 14 investment professionals in Hong Kong, 4-5 focus on China and someone is there almost every other week. Having a permanent presence provides better access to GPs and developments happen so quickly in China that being on the ground is critical.

Q: Does it also signal more of a focus on country funds than regional funds?

A: There is a place for both, but you need to look at these regional funds and their country teams and stack them up against the teams of country funds. There are other elements that make regional funds interesting - they can do certain types of deals, add value and deploy resources in a way that country funds cannot. They also have sector and industry knowhow on a global basis. That said, we are rebalancing more towards country funds in China.

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• Topics
• Greater China
• China
• HarbourVest Partners
• Hong Kong (China)