Jean Hoysradt, chief investment officer of Mousse Partners, the Chanel family office, was interviewed by Eugene Snyman, managing director of Cambridge Associates on day three of SuperReturn Asia 2010. Hoysradt is responsible for asset allocation and direct investment.

The office was established in the early 1990s and was responsible for all its investment activity by 1996. Hoysradt joined in 2001 and looks after what she describes as a complex multitude of portfolios, both off and onshore. The investment portfolio is long term and global in perspective but of note for this audience is the fact that Mousse has offices in New York and Beijing.

Hoysradt says: “We started to see the growth and dynamism of Asia because of our affiliation with Chanel” says Hoysradt. “We became more and more convinced that it would be a major market.”

As a family office, Hoysradt believes that there is little question that you make more money by owning an operating business than as an investor, but her investment aims are to keep ahead of inflation ‘by some meaningful amount.’ The portfolio is in cash, fixed income and absolute return strategies, including multi-strategy, arbitrage, relative value and distressed but the largest piece, up to 50 per cent is in corporate equity and within that part, lies the private equity holdings, and they are increasingly focussed on Asia.

In 2007, the firm made the decision to open an office in China, in no small part because of the enthusiasm of an internal candidate. “We decided that it would make sense to open an office and made a deliberate choice to go for mainland China, not Hong Kong, because we wanted a more engaged network” says Hoysradt. The office opened in 2008.

“By definition it means that you focus more on China but it is more convenient to cover Asia as well” says Hoysradt. “I visit a lot. It is important to see funds and teams in their own environment and also the companies in which they are invested.

Some of it is by design and some if it is by happenstance but we have a larger exposure in China at this moment.”

Hoysradt likes any kind of manager who aligns his interest with that of his investors by investing in his own fund. Potential currency dislocations make her anxious. “By and large, investing in an Asian private equity firm has a higher risk premium than a US firm. “Who knows what is going to happen with the RMB funds versus the dollar funds, for example” she says, “but it is always great to come to Asia from New York – there is so much more growth here.”

Speaking from the perspective of the Sovereign wealth community, in the opening session of day three of SuperReturn Asia 2010,  Jin Liqun, Chairman of the Supervisory Board of the China Investment Corporation focussed on the growing strength of China in the investment world. “The current financial crisis is on its way out” he said. “The post mortem on why the catastrophe occurred has been allowed to fester and has hurt the innocent developing world.”

Regulatory reform is all the rage, said Liqun. “Efforts are being made to fix the regulatory regime which was deeply flawed. We in China are very careful about moving forward without creating problems for our country.”

Liqun referred to China’s relentless growth. “The global economic core centre is moving from west to east and it is not a transitory phenomenon” he said. “China is the undisputed power house for global economies and most attractive for investment. In 2010 we expect to see all time highs in the flow of foreign investment.”

Private equity will play a more significant role, Liqun predicted. “China has witnessed the fastest growth in private equity of all the Asian emerging markets. “There will be more domestic fund raising in RMB and it will catch up with investment from outside of the country. China promises to be the most exciting market in the world.”

Popular sectors include biotech, health, medicine, machinery and internet services. “Chinese leaders have responded to concerns about the investment climate in China for investors” said Liqun. “We continue to open up. Overall you will find that the government has greatly relaxed its constraints and the financial sector is more open.”

Among other reforms, the Chinese government is encouraging m & a activity and private sector investors. In some sectors, the government has been encouraging the breakdown of the monopoly of the state which would, he said, greatly improve the efficiency in the economy. “Companies are allowed to issue stocks and bonds to raise capital for restructuring.”

A few years ago, Liqun commented, Sovereign wealth funds weren’t in the lay man’s vocabulary. “The China Investment Corporation is a long term investor seeking superior risk adjusted returns for our shareholders” he said. “We collaborate with world class institutions and we firmly believe that we can contribute to sustainable economic growth and financial stability.”

The private equity market in China is expanding domestically, he said. “If foreigners work closely with locals they will have a good time investing in China.”

Liqun ended with a note of warning for the west. “It’s important to improve saving rates in developed countries. We have been students learning hard from you, so now you should learn something from us.”

2005 saw a lot of exits out of private equity investments from China and a subsequent diminution of dollar based investments and the rise of Chinese LPs, with money coming from a largely institutional investor base, drawing on local government guidance funds and high net worth investors, largely drawn from the rising entrepreneur classes. “Local LPs makes it easier to raise money domestically but equally makes US dollar investment difficult” said Vincent Huang, of Pantheon Ventures.

Dual allocation of RMB and Dollar funds cause problems for international investors. “We are seeing conflicts in dual allocation, resource allocation, time and limits on funds and alignment of economic interest” he said. “We are seeing different solutions to address these problems and we are pushing for more transparency and co-operation.”

By 2009, RMB based funds surpassed dollars in Chinese private equity. “Are we doomed to a dual set of standards?” asked panel moderator Ed Greene, of Diamond Dragon Advisors. Andrew Ostrognai of Debevoise & Plimpton believes not and that convergence is coming but can’t say quite when. “At the moment, offshore funds are closed to RMB and onshore funds are closed to non-RMB investors” he said.

Shirley Chen of China International Capital Corporation pointed out that China’s private equity business is quite different from that which operates in US and Europe. “There is no leverage in China because the growth opportunity is huge and there are so many low hanging fruits” she said.

The conclusion from the panel seemed to be that many LPs would rather invest in a market that has imperfections but that can generate returns.

In her introduction to the panel on the outlook for the private equity industry in the region at SuperReturn Asia 2010, Melissa Ma of Asia Alternatives Management reported that since the difficult years up to 2009, fund raising has improved with a 100 per cent improvement in asset raising to now in 2010. This money has largely gone to growth markets, and China has easily dominated in that arena, with over half of the new capital raised to date flowing into China. However, year on year there is still some sign of caution, with about 20 per cent declines against the same time last year.

In terms of valuations, some emerging markets are back to their pre-crisis peaks with India the closest at 95 per cent of its 07 peak. In terms of exits, the total amount of aggregate returned stands at US$ 80bn.

Ma introduced a distinguished panel, including Andrew Yan of SAIF Partners, John Ehara of Unison Capital, Gulpreet Kohli of Chryscapital and Simon Pillar of Pacific Equity Partners. Four questions were put to the panel and to the audience, with the electronic polling revealing a snapshot of sentiment in the room. Return expectations for the next three to five years, relative to current returns, were revealed to be better by 0.25 per cent for 48.12 per cent of the voting audience.

In terms of threats, 44.37 per cent of the audience felt that the biggest threat to Asian  private equity was too much money coming in. In terms of when will the Asian private equity market overtake the US private equity market, 43 per cent of the audience in the room believed that this will happen within 10-20 years.

It was the same result, virtually, as last year, when the question of which country will generate the best returns in the coming three years? China came out on top with 51 per cent.

“The Moon causes high and low tides” said Paul Schulte of China Construction Bank International, speaking in the opening address at SuperReturn Asia 2010. “Credit does this too and there is a finite amount of credit.” There is an unprecedented shift in wealth from the US to China, he said, estimating some US$ 8 trillion is moving across the world.

However, the situation in the West is still very difficult. “Deleveraging is evil” said Schulte. “It really sucks. It causes a contraction in asset prices, incomes, credit cards and spending. It’s hard to grow in that kind of environment.”

“Credit growth in the West can’t cover interest so western collateral values are in jeopardy” said Schulte. He estimates that there is another 15 to 30 months in contracting credit in the West. Meanwhile, he said: “Banks are expanding in the emerging world. RBS and Deutsche are the radioactive centre of the crisis in banking and they are expanding in the emerging world.”

The figures speak for themselves, according to Schulte. The West is US$450bn short of capital and Asia is US$115bn long of capital. “It’s all debt in the developed world and all savings in the emerging world. Credit covered up a number of problems in the West but with a shrinking income, people are realising that they are below water.”

Jonathan Anderson, managing director and Senior Global Emerging Market Economist with UBS opened the SuperReturn Asia 2010 conference this morning with the comforting explanation of why things are going to be alright. He demonstrated that over the 1990s, growth between the emerging and developed world was not so different but by 2001/2 the emerging world was beginning to grow up to 6 per cent faster than the developed world.

“The last two years have seen the greatest financial and trade crisis and everybody came careening off together” Anderson said. “But the emerging world is growing 4 per cent faster since the middle of 2010, the second quarter of 2010 saw emerging world growth at 7.2 per cent. The emerging markets are going to win, whatever happens in the economy.” And Asia is particularly strong in the emerging world according to Anderson. “Asia is the region that can and is leveraging up in the face of the slowdown in the developed world and will continue to for five to seven years. There is a massive out-performance story going on here.” And for Anderson, the heart of this out-performance in China lies in property. “The myth of the Chinese consumer is that there is no consumption demand” he said. “But if you include property, Chinese consumers have started spending. The property story is massive, there is a big property boom with property 135 per cent up over the last decade.”

Sev Vettivetpillai, CEO, AUREOS presented a session entitled “Portfolio companies & the war for talent: How can you evaluate portfolio companies in Emerging Markets & how do they deal with specific challenges that these markets generate?”

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, Sev looks at the slow changing attitudes of the LP community to Emerging Markets outside China and India.

A report by Anil Gupta and Haiyan Wang.

With its recent acquisition of 128 machines from California’s Illumina, Shenzhen-based BGI has assembled almost as much as gene sequencing capacity as the entire United States.  Having already sequenced the genes of several species including a panda, BGI appears determined to become one of the world’s leaders in genomics research.

It is still one to two decades before China and India achieve broad-scope parity with the US and Europe in science, technology, and innovation. But the overall direction is clear. The center of gravity of the world’s innovation landscape is moving east.

According to data from the US government, the number of patents granted by the US Patent & Trademark Office to inventions originating from China and India is growing at a 15-30 percent annual rate, a radically faster pace than for inventions originating from any other country. Further, as a recent survey by the R&D Magazine reported, over two-thirds of the executives in western MNCs believe that, during the next five years, both China and India will become significantly stronger in R&D than they are today, a level of confidence greater than for any other country in the world.

What are the forces propelling the rise of China and India as the new innovation hubs? First, private and public sector organizations in both countries are increasing their investments in R&D at a faster rate than in any other large economy. This is a direct outcome of the fact that, as the world’s two fastest growing economies, both countries can afford to spend larger sums on R&D each year. Importantly, since 2005, both countries have also stepped up the ratio of R&D investment to GDP - from 1.2 percent to 1.5 percent in the case of China, and from 0.6 percent to 0.9 percent in the case of India. Second, as the world’s two most populous countries, both China and India graduate a larger pool of scientists and engineers than any other country in the world. Thus, they offer greater R&D scalability at a lower cost than any other country. Third, as a direct result of the fact that they are still among the world’s poorest countries in terms of per capita income, their large middle income markets offer compelling incentives for frugal innovation. It is not coincidental that a product like Tata Nano came out of India.

These developments have three major strategic implications for multinational corporations. First, they need to look at China and India not just as competitive threats but also as opportunities. Given the current economic reality in the developed economies, it is nearly impossible for western MNCs to increase their R&D budgets. What they can do, however, is to get a lot more bang for the buck - i.e. boost R&D productivity - by leveraging China and India as increasingly important innovation hubs. Second, MNCs need to become smarter at protecting their intellectual property. This is more than a matter of seeking good legal counsel. It also requires other de-risking mechanisms such as distributing key modules of a major R&D project across labs in different locations and even different countries, so that IP leakage from any one location would cause limited loss. Third, MNCs need to cultivate the art and science of frugal innovation. This means treating the middle income market in China and India as core to the company’s strategy and designing products, services, and business models that are aligned with the economic, cognitive, and behavioral reality of these middle-income customers. Frugal innovation goes well beyond merely de-featuring. It requires becoming extremely customer-centric and reinventing the business model from the ground up.

Given the magnitude and pace of structural change in the global economy, it is a certainty that the set of top ten companies that dominate any industry in 2020 will be quite different from the set that dominates today. In this ongoing battle for global dominance, the odds lie squarely in favor of those companies which commit to leveraging China and India not just as markets or as cost efficiency platforms but also as innovation hubs.

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About the authors

Anil K. Gupta ([email protected] ) is the INSEAD Chaired Professor of Strategy at INSEAD.  Haiyan Wang ([email protected]) is managing partner of the China India Institute and an Adjunct Professor of Strategy at INSEAD.  They are the coauthors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).

Dr Gupta will share new research on this topic at the SuperReturn Asia event on Wednesday 29th September at 11.25am.

An Article by Ben Simpfendorfer, Royal Bank of Scotland

China and the Middle East are two historic  powers. Yet, their modern economic relationship wasn’t resurrected until after 2001. The relationship has since grown rapidly and is illustrative of the rebalancing taking place in the global economy.

The number of Arab traders visiting China surged around this time. Yiwu, a small Chinese coastal town south of Shanghai, receives 200,000 Arab visitors annually. It is a virtual Arab market town. China’s entry to the WTO in 2001 was an important explanation for the rise in Arab visitors. Equally important was the surge in oil prices after 2004 and the relaxation of China’s visa policies even as the developed economies tightened their own.

The results are evident in trade flows. China overtook the United States as the world’s largest exporter to the Middle East in 2008. It was the first time the United States had lost its number one position since the 1960s. Certainly many of China’s exports to the region are consumer goods, often made by foreign subsidiaries, but they are also increasingly accounted for by capital goods, from automobiles to port cranes.

Yet, these exports may equally produce instability in the Middle East. They are resulting in factory closures and jobs losses, troubling for a region in which 60% of the population is under the age of 30. It is not all bad news, however. There are tentative signs that China is building factories in the Middle East, from Egypt to Saudi Arabia, hoping to profit from the region’s strong trade ties to Africa and Europe.

The relationship is not only about what China sells to the Middle East, but also what it buys. China imports half its oil from the Middle East. Its dependence will only grow in time as domestic oil production peaks. By 2030, the Middle East is expected to provide every two out of three barrels of oil that China consumes. The upshot is that China is starting to take a new interest in the Middle East’s security.

Islam is a more delicate topic. But it is also easily misunderstood. China’s Muslim population is targeting the Middle East as a potential market for Halal food and Muslim clothing. Prime Minister Wen Jiabao, while speaking at the Arab League Headquarters in Cairo last year, was also keen to emphasize that fact that China has 35,000 mosques and requires Halal food to be served in public offices.

These two historic powers also see a symbolism in their simultaneous rise. Centuries ago they rose together as trade flourished along the Silk Road. They also fell together, as Europe took their place as the world’s dominant economic power. The return of the Silk Road, even if only figuratively, has thus reinforced the impression that China and the Middle East may yet reclaim their former glories.

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Ben will discuss China’s strengthening relations with the Arab world.  He will examine the rapid growth in trade and investment links between the two historic powers, explore the importance of oil and Islam, and speak about China’s role as a growth model for the region.  His views are based on extensive research in such cities as Beijing, Shanghai, Cairo, Dubai and Riyadh.

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About Ben Simpfendorfer, Chief China Economist, Royal Bank of Scotland.

Ben Simpfendorfer is Chief China Economist for Royal Bank of Scotland, Hong Kong.  Prior to this, he worked at JP Morgan Chase, Hong Kong as Senior China economist.  Ben speaks Arabic and Chinese, and has lived in Beirut, Damascus, Beijing and Hong Kong.  His editorials have appeared in the Financial Times, Wall Street Journal Foreign Affairs and the Internal Herald Tribune.  He is the author of “The New Silk Road: How a rising Arab world is turning away from the West and rediscovering China”,  published by Palgrave Macmillan in 2009.

Derek Sulger, Managing Partner, LUNAR CAPITAL MANAGEMENT will be an expert panellist in a debate moderated by David Lee, Co-Founder & Managing Partner, CLARITY CHINA PARTNERS, entitled “Vulnerabilities & Pitfalls For Private Equity In China: Evaluating The Risks, Experiences And Opportunities”.  He will joined by Kathy Xu, Managing Partner, CAPITAL TODAY; Vincent Chan, CEO & Co-Founder, SPRING CAPITAL ASIA; Neil Shen, Managing Partner, SEQUOIA CAPITAL CHINA and Yichen Zhang, CEO, CITIC CAPITAL.

In an interview for the Spotlight Series, Derek explains why growth capital is seen as the largest PE segment in China and the challenge for LPs to become more operationally involved.