What technology opportunities are emerging in Asia Pacific?
As e-commerce starts taking off in Asia, a lot of the business models are things that have been done in the US and we can look at how they played out there and extrapolate how they might play out in Asian markets. We tend to play to each country’s strength in terms of investments. So in China and India, our investments tend to be more about market segment development and expanding the total available market for Intel’s products, whereas our investments in Japan, Taiwan and Korea– where you have a more mature technology market and more hard technology being developed– tend to be the nature of gap fillers where we’re investing in companies that sell technology that we need to help produce our products or fill in gaps in our technology ecosystem.
Given the number [of tech companies], China has to be at the top of the list [in Asia], probably followed by India. The question is to what extent there is going to be true technology innovation coming out of China in the short-term, but I certainly think there is the opportunity for explosive growth there in e-commerce, social media, mobile apps – just because of the huge user base.
How does the regulatory environment and the large number of venture capital firms operating in China impact Intel’s investment process?
The questions about VIEs (Variable Interest Entity structures), offshore-onshore structuring in China, the accounting issues that have come up with the Public Company Accounting Oversight Board (PCAOB) and the SEC and the big four [accounting] firms operating in China affect us like they affect everybody else. We have some advantages though. Intel has been doing business in China for a long time and has manufacturing in Chengdu and Dalian. Because we have an onshore presence, we are able to invest both domestically into a PRC company or offshore. So we use those options to structure our investments accordingly.
Increasingly, given the changes in the regulatory system in China over the last couple of years, there is a decision made at the beginning of each investment whether it is going to be structured as an onshore deal or an offshore deal and there are a lot of consequences that flow from that. At one point it looked like the Chinese government was driving everybody back onshore, but there are still a number of deals that are being structured as offshore deals. The structuring issue adds uncertainty, complexity and time and expense to PRC deals in terms of legal and accounting fees.
There is a lot of competition, but one thing we found now is there aren’t as many firms doing pure venture technology investing as there were at the start of the venture capital boom in China. A lot have moved to later stage deals and to sectors outside tech.
You also work with Intel’s corporate pension fund investing into alternative assets. From an LP perspective, how do you see the Asia Pacific private equity market developing?
Something interesting is that over the last couple of years we’ve seen a lot of the larger buyout and private equity firms have raised significant sums for pan-Asia funds–Bain Capital, Kohlberg Kravis Roberts, PAG, RRJ Capital–and that may also provide sources of exits for VC and growth stage investors. If you look at where LPs are putting their money [in Asia], the bulk of it seems to be going into China and East Asia.
It’s been tough to do true buyout deals because of the legal systems in place in countries like China and India. Those buyout funds, if you look at them closely, actually do a mix of buyout and growth deals on steroids. These funds have a long time horizon, ten years with a five-year investing period, so as an LP you’re trying to predict what the regulatory environment is going to look like five years hence. The assumption LPs are making [about Asia right now] is that things are going to continue to liberalise and that it will become easier over time for those larger buyout deals to get done. I don’t think it is going to look like the US anytime soon, [although] you will probably get a situation in places like China where entrepreneurs will be looking for a way to cash out. The successful private equity funds are going to be those that can come up with a model and approach that enables them to work with these [entrepreneur/owners] and give them an exit and some liquidity and also keep the person’s pride of ownership and ego intact.