Venture investing in Germany

Deutsche Bank recently commented on the new venture grants available in Germany. No doubt, Germany is way behind the s-curve when it comes to venture investing. But what do you expect from an economy and society that is known for its conservative approach to…everything?

To be clear, we are in favour of venture investing as a means of creating new companies that have the potential to be big, one day. We agree with the authors of the Deutsche Bank report that it is not necessarily a question of How Many but rather a question of Quality. Having said that we advocate that there also needs to be a critical mass of start-ups in general before the How Many questions makes a difference. An market equilibrium overall needs to be established that can also absorb failures without stigmatising failing teams.

The US venture market has dealt with that under a ‘contingent contract’ basis. That is, teams get together to work on an idea and only if they manage to attract investment they will fully form. If not the team members move on. It is not unusual to see different teams iterating on a number of ideas, de facto having failed with a prior idea, to see a new company and team emerging.

The US model allows for energetic entrepreneurs to test the market without being held absolutely accountable for ideas that failed to attract funding at that time in history. It often does not mean that the idea was not valid (agreed, sometimes that is the case!), but it may be that the idea was too early for the market and other variables had to come into focus first before an idea has enough substance and a network that enables a faster adaption rate (Think of creating Apps before the iPhone even existed).

It is that clustering of capabilities on the one hand and the network effect (+ structure/regulation) of the local market on the other that allows for ideas and people to come together. Regrettably the latter too often walk away too early and do not give it enough time and chances to see the fruition of their own ideas. But who can truly afford waiting? It is that ‘idle’ time that appears to bug investors. It appears that the question that is forming in investors/society’s mind is “What, you still have not secured funding?” therefore you must be a failure. Regrettably that is utter nonsense. In fact, Germany would do good to overcome that attitude to venture investing as the venture market is required to create exactly that, the next big thing. The benefits of only company making it and the impact it has on people in that region or country is difficult to price in terms of future market capitalization. But surely we can agree that the position momentum may inspire other aspiring entrepreneurs to try too?

We suggest that Venture Investing is the only way to capture the potential upside when good ideas take off. Not every company can be the next Google or Youtube. Even smaller start-ups value as part of the value chain may make a difference later on when other things may fall into their place.


Robertson’s Tiger Funds – From Asia to Pacific…and back?

Tiger Asia Newsletter Header

The Hedge Fund business is littered with interesting anecdotes, success stories and subsequent humble pie by some of the perceived greatest minds on the street. What makes Julian Robertson’s investment story fascinating is that he is, by most peoples and investor standards, one of the most prominent and successful (hedge fund) investors and incubator. What went wrong then?

The story starts with Bill Hwang who ran Tiger Asia successfully for many years. The story ends with a firm now called Tiger Pacific. You ask what is the difference between ‘Asia’ and ‘Pacific’? And the answer is, we do not know.

At this stage what is apparent, Tiger Asia closed since it was never able to end rumors, allegations and accusations by the Hong Kong SFC regarding some form of insider trading. The case has been going on for years. Earlier in 2012, Julian Robertson probably decided that the asset drain on the one hand and the potential reputational consequences on the other, may have a significant impact on his legacy. In fact, in the New York Times DealBook article, Mr Robertson is quoted by saying “I am saddened by the news but certainly understand Bill’s decision. …I have worked side-by-side with Bill for 20 years. I have enormous respect for him as an individual and an investor. He has always been a great partner, a great person and a great friend. I continue to hold him in the highest regards.” We do not doubt that these words are sincere, quite the opposite in fact. However, these words sound awkward once the launch of Tiger Pacific was announced. Why?

The new team at Tiger Pacific is, well, not new. It is essentially the old team of Tiger Asia bar Bill Hwang. We ask the following questions:

  • What can investors do, do prevent old teams posting as new? And, should they? Is it not time to move on or is legitimate to run a quasi successor fund with essentially the same variables?
  • How do investors rate ethics, sustainability, corporate governance with regards to a Funds life cycle? Should a Fund be declared defunct for good? Is the re-launch under a new name simply false advertising?
  • What reputational concerns are there? Why couldn’t Tiger Asia simply retire Mr Hwang and nominate a new management team as we would expect from any corporate? Hewlett Packard et al wont close down shop after some news a la Autonomy and later re-emerge as Hewlett-Whatever.

Although we do not possess all the answers to the above questions, we do suggest that the hedge fund industry still struggles in defining its own business model. It still appears that hedge funds life-and-die by the fact that the portfolio manager is the product. If that is true, there is no accrued goodwill in the brand per se. Is it not time to create hedge fund firms that can survive irrespective of its founders malaise? Or is this simply not possible given the Fund terms and offering memorandum structures that contain key man clauses and other restricting provisions.

At CITE, we suggest that a (hedge) fund Product is defined by more than just its portfolio manager and its performance history. From an asset allocators perspective, we suggest to focus entirely on total value creation. Value creation is not simply a function of total return but very often takes shape in form of other elements too, including

  • access to local market knowledge, insight and expertise
  • access to a diverse viewpoint from other smart investors
  • sharing and debating global newsflow, investor trends and sentiments
  • networking benefits: access to local firms, analysts, experts
  • investor communication: up-to-date news flow with added manager editorial and comment; reality is, some news may be missed and/or the media may clout the intricacies of the news/event

Our view concerns the ubiquity of available funds yet very few actually deliver value beyond capital return, if that. In our mind, sharing of information and thus acting in a transparent manner, creates equal value to the asset allocators. From the fund managers perspective, creating some form of investor intimacy may lead to a reduced risk of redemptions when times are tough with regards to performance.

The cost of switching one fund for another simply because short term performance results are out of sync with peer group funds, are already high. Once the investor adds the costs of losing access to the aforementioned variables of network, information flow, exchange of ideas etc, a redemption notice may potentially be delayed by a months, quarter or even a year. This should be enough time to prove that performance follows insight and also demonstrate to the investor that trading (hedge) funds is for amateurs.

China growth outlook – is anyone concerned?

The Federal Reserve Bank of San Francisco published a recent review (‘Is China Due for a Slowdown‘) of the Chinese economy and whether  we can finally expect a slowdown. The summary reads “While average income in China appears to be headed towards levels that have been associated with growth slowdowns in other countries, high income inequality between wealthier coastal provinces and the less-developed interior suggest that deceleration may not be severe”. So is this good or bad news? As to the consumer story, we look to the US and Asia’s regional consumers in a little more detail below.

Further we read the Goldman Sachs A-Share piece with great interest. In its recent update, Goldman Sachs suggests the following companies, among others, as a Buy-Rating:

– Baosteel – Steel company
– Beijing Capital – Real Estate Developer: Residential, Office, and Commercial in Beijing
– Better Life – Supermarkets
– BlueFocus – Public Relations
– Fiberhome – Telecommunications
– Hualu-Hengsheng – Chemical manufacturer
– Industrial Bank – Industrial Bank, Top 10 in the country
– Jiangsu Yuyue – Medical Equipment
– Jizhong Energy – Coal products
– Ping An (A) – Insurance
– SAIC – Automotive
– Yantai Wanhua – MDI manufacturer, largest in the region

Other stocks that offer a potential upside (on current share price) are Lushang Properties, Jiangsu Zhongnan Construction, China Merchants Bank (A), Shenzhen World Union Properties and Zhejiang Yankong Group.

While this list is interesting and gives a broad range of exposure to various sectors, it masks the wider implications that currently drive the regional and global economy. Access to the these companies is restricted to many investors. Therefore other proxies may serve as an indication of what is truly happening in the region. Below, we take a look at the state of the domestic Chinese banking sector, the regional and global consumer sentiment as gauge for current consumption trends.

Deloitte commented in a report on China’s Banking Industry in its 2012 outlook. The conclusion of the report starts by stating:

“The banking industry of China faces challenges on many fronts – to asset quality, non-performing loan levels and liquidity, to name a few. Emerging risk is perhaps the greatest challenge. With the expected
slowdown in domestic economic growth and weak external demand, new risks in the industry are growing. Industry risk is being controlled, in part, through greater regulatory scrutiny, monetary policy easing, and
local debt approval. The reform of rural financial institutions continues to move forward, further supporting growth in “Agriculture, Farmers and Villages”.”

We couldn’t agree more. The transition from an inward looking banking sector towards an industry that strives to be part of the globalization effort will take time but the forces are at work. Not only is the sector catching up fast, it will certainly lead in a number of segments not before long. The easing of the RMB exchange rate ‘gridlock’ is likely to enable a more balanced approach by its domestic banks in line with investor expectations both domestically and internationally. The domestic banking sector certainly must get its act together to avoid any of the fallacies of earlier decades. Nonetheless, while the housing sector is overheated for some and therefore poses a significant risk, the individual consumer is still striving and aspiring to developed market levels.

To balance our (global) view, we explored KPMG’s US Retail Industry Outlook Survey (2012) to look for evidence that spending on the domestic, eg consumer level, are intact and demonstrate signs of robustness despite the gloom in the global economy. After all, someone has to spend their income for (consumer) goods and thus make the trade to go round; if not the Americans who else we ask. The authors of the report conclude “…retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the US economy are evident, as many executives have pushed back their expectations for a substantial recovery until 2014/2015 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels.” This makes an OK reading and does not worry us too much as we would expect some level of re-balancing at the individual consumer level. But signs are certainly pointing sideways if not upwards over a medium term view.

PwC - 2012_Retail_Consumer_Products_Asia_Chart16

PwC: 2012 Asia Retail and Consumer Products, Chart 16

The Asian regional consumer behaviour is certainly becoming an ever more important factor as far as the decoupling from the developed world versus developing world is concerned. PwC put out a report entitled 2012 Outlook for the Retail and Consumer Products Sector in Asia and hits the nail on the head. Numbers in China are always big and staggering but these do not change the fact, there are what they are. China’s spending on Food, Beverages and Tobacco will double during period 2011-2015 potentially achieving US$1.4tr in sales. It is thus interesting to note that China has only 2.5 hypermarkets per million people. France, the US, and South Korea have 25, 12.3 and 7.6/ per million respectively. The conclusion is obvious.

In a nutshell, the consumer story in Asia appears to continue to gain traction. Although some believe it is slower than analysts had forecast, it is still a momentum that is gathering pace. And if the classical S-Curve is anything to go by, Asia will soon have a major impact on corporates that serve the regional consumers.

We look at the global conglomerates that can serve the market (Unilever, Kraft, Mars, Procter & Gamble, Johnson & Johnson, L’Oreal, Walmart, Carrefour, TESCO, Metro to name but a few), have the capabilities to develop regional if not local strategies, and the capital to have staying power when things get tougher than anticipated. A clear road map is certainly required to take on these markets. Entering them all at the same time, may just a little bit too challenging for most.

Energy Storage revisited

Source: BCG, Revisiting Energy Storage (Feb 2011)

Boston Consulting Group released a research update on energy storage.

In this report, the team suggests that Compressed-Air Energy Storage or CAES could be a strong intermediary technology for stationary energy storage. This based on the assumption that the current costs for batteries are still relatively high. CAES offers lower upfront CapEx. However, the technology is somewhat dependent on fossil fuel, provides low efficiency and its operational flexibility is questionable. For the time being, Utility providers can still absorb the relatively low variability of supply from wind power (which makes up only 2% of the US energy mix today) and thus CAES is a viable interim solution. Should the variable component of the energy mix raise to 20% or thereabout and energy supply from those sources renewable sources outstrip demand, grid operators will face significant risks. (see Rachel Johnson’s article ‘Energy Storage: enabling a shift away from baseload generation‘ on

Interestingly, the BCG team sees Hydrogen Storage Tech as the tech-app that will super seed CAES in the medium term (post 2020). The business case is simple. Today, 100 gigawatts of pumped energy storage exists globally. ‘More than 1GW of stored power relies on technologies such as CAES or batteries, and an additional 4GW of electricity storage projects have been announced.’

The global market demand for energy storage solutions is likely to scale as Renewable Energy becomes more widespread amongst the energy mix. The addressable market is estimated to be €1bn today, increasing to €2-3bn pa until 2015 after which this could steadily rise to €4-6bn annually to 2020. After 2020, BCG sees the global market at €10bn per annum and possibly more.

So how should we play it? Where is the investment opp? Firstly, VC and PE firms alike see significant value in the electricity segment which is probably no news. Yet, capitalizing on the opportunity appears harder than at first glance. In a nutshell, the investment case is simple from a utility perspective as ultimately the market will end-up as ‘coupon-clipping’/ bond like investment model. As we have pointed out on a number of previous posts, lithium-ion battery technology companies are worthwhile having a look at.  Obviously, the pure-play investment would be into the raw-material market, i.e. investment in commodities. The price volatility may not be for the faint hearted, however.

Source: ThompsonReuters, US CleanTech 2010

The electric vehicle market is probably closest to the consumer and is in itself another interesting and very contested market with significant fragmentation at this stage. This should enable the savvy investor to earn a substantial return if one is able to estimate which firm will end up grabbing a significant market share. ‘Independent’ electric vehicles producer have certainly grabbed headlines in the past few years but whether they have the business execution capabilities, global distribution, and marketing competence remains to be seen (we think of Tesla, Th!nk City et al). For our part, we monitor what the global middle-class car manufacturers including Mitsubishi, Peugeot, Renault and Volkswagen are up to. General Motors appears to have found a new footing by refocusing their efforts on the E-segment and is likely to have the distribution power that will be needed to pay for the CapEx and OpEx required to succeed in the race to E-Vehicle glory. On the marketing side, BMW has recently unveiled that it will call its E-fleet ‘BMW-i Born Electric‘ analog to Apple’s iPhone, iPad etc series. We will have to wait and see whether BMW can live up to consumer expectations.

BCG further suggests that manufacturers of components linked to energy technology could be an interesting play. Examples include, pumps, compressors, turbines, inverters, switchgear. We agree, yet at this stage clear segment leaders have yet to emerge whilst process design is still emerging and efficiency in all design steps are still being developed. Technology start-ups are sitting in the starting blocks to either receive Series A funding or indeed are waiting for re-ups after the trough periods 2009/2010. We continue to focus on energy storage as one of the most viable ways to make money in renewable energy for investors.

Bloomberg News: Lead-Battery Demand for cars to increase 2.6% on China, India

Source: Johnson Controls

It is great to see that battery demand is on the up. Yet the YoY growth rate, as reported by Bloomberg below, appears relatively modest. Lithium-ion battery supply is only modestly raising. We have yet to hear a statement from EV manufacturers how they deal with input prices. Passing those costs on to the consumer and/ or fleet operators may slow down the S-curve of pick-up demand.

For now, we continue to favour Johnson Controls as a play on the sector as the firms overall revenue stream is well diversified.

Bloomberg News
Lead-Battery Demand for Cars to Increase 2.6% on China, India

Feb. 25 (Bloomberg) — Global demand for lead-acid batteries may rise 2.6 percent this year amid increased car sales in China, India and Southeast Asia, said an executive at GS Yuasa Corp., the world’s third-biggest producer.

Demand for car batteries will rise to 390 million units from 380 million in 2010, Hiroharu Nakano, general manager at the Kyoto, Japan-based company, said in an interview yesterday. GS Yuasa forecast demand will climb to 400 million units in 2012.

Johnson Controls Inc. and Exide Technologies, both based in the U.S., are the biggest producers. GS Yuasa has a 7 percent share in the automotive battery market and has partnerships with Honda Motor Co. and Mitsubishi Motors Corp. to make lithium-ion power cells for electric and hybrid cars.

“Demand from China, India and Southeast Asian nations has been leading global growth and this will continue for the time being,” Nakano said in Tokyo. Battery demand for new vehicles has increased in those countries, while worldwide replacement demand has risen moderately, he said.

In 2010, actual demand was expected to exceed the company’s forecast of 380 million units by about 5 million units following higher-than-expected car sales in China and other emerging markets, he said.

China’s vehicle sales will grow 10 percent to 15 percent this year after jumping 32 percent to 18.06 million vehicles in 2010, the China Association of Automobile Manufacturers forecast.

China Demand

Demand in China will increase 9 percent to 49 million units in 2011 and then 54 million units in 2012, while consumption in India may climb to 14.5 million units in 2011 and then 16 million in 2012 from 13 million last year, Nakano said.

Lead for immediate delivery was unchanged at $2,500 a metric ton on the London Metal Exchange at 1 p.m. in Tokyo. The price has gained 16 percent in the past year, touching $2,712.75 on Jan. 6, the highest level since May 2008.

Demand for lithium-ion batteries will jump to 3.8 million cells in 2015 from 1 million cells in 2012, he said.

Nakano said the lead-acid battery market will not be affected by growing demand for lithium-ion cells. Battery demand for new idling-stop systems, which consume more lead, has also been increasing, he said.

GS Yuasa plans to produce 30 million units this year, up from 28 million units last year, and 32 million in 2012, Nakano said. The company produces about 70 percent of these overseas.

The company plans to increase its share in China to 11 percent or 6 million units in 2012 from 9 percent or 3.8 million units in 2009. It also expects to raise its share in Southeast Asia to 45 percent or 9.4 million units from 43 percent or 7.5 million units in 2009, and 10 percent or 1.6 million in India from 5 percent or 0.6 million.

To contact the reporters on this story: Jae Hur in Tokyo at jhur1 Ichiro Suzuki in Tokyo at isuzuki

To contact the editor responsible for this story: James Poole at jpoole4

Green opportunities for storage-battery production

China Daily reports an interesting story on Energy Storage, aka Batteries, today. (see: Green opportunities for storage-battery production)

According to the paper, China account for about 25% of global lead-acid storage batteries. These batteries are widely used in Electric Vehicles. The export growth has been a staggering 23% p.a. CEEIA estimates that annual growth is likely to continue with a rate of 15% p.a. for the next five years.

As we highlighted in our China’s 12th 5-year plan piece, the government is keen to promote green technologies and has earmarked the renewable sector as part of its Magic-7 industries.

VC land a coup & A123 loses its CFO

Black Coral Capital, Flybridge Capital Partners, Stata Venture Partners landed a coup when they announced that A123 CFO Michael Rubino was going to join their venture backed firm Digital Lumens.

A123 – The consequence
This move may be a blow to A123 but a great opportunity for Digital Lumens. We wrote about ‘The Past, the now and the future of A123‘ earlier this year. With Michael Rubino leaving we feel that A123 has a lot to answer for. A123’s share price is down some 40% since IPO and the future path is somewhat in limbo. Losing a senior executive certainly adds to the uncertainty. Thus it is not surprising that Wunderlich Securities downgraded the stock. The new target price stands at $6! Now, for a company that was never profitable $6 may be considered good (remember those valuations?) but it certainly does reflect that the growth trajectory and EV/PHEV adoption curve is likely to be slower than anticipated. Arguably, we could see the stock trade lighter than current levels. However, at some point we would think that some large automotive players East (SAIC) or West (VW, Daimler – Smart) may have an interest in looking at the company.

The hard facts are bleak: A123 posted a loss of some $44m, with revenues at $26m. A turnaround seems still some quarters away.  A $6 share price doesn’t sound too bad when compared to our friends who may have had similiar costs but nowhere near as interesting revenues.

How does A123 business success relate to the EV sector? One of the interesting electric vehicles we have looked at is Th!nk, the Norwegian EV producer. (A HBR case study can be found here; paid content.) In May 2010, Think  presented an update on its business. It essentially announced that another $40m of equity was provided by the existing shareholder base. Moreover, the company projects that it will be cash-flow positive by 2011. A123, Enerdel (promo video) and Zebra will provide batteries ranging from 18 Kwh to 28 Kwh.

Think and Deutsche Bank provide a chart (see above) that summarized EV model releases over the next few years. So is A123 depending on the speed up model ramp up or are EV manufacturere depending on battery capacity? The interdependence is obvious and securing battery supply has long been a key battle ground.

Digital Lumens – Opportunity in the LED & SSL space
Digital Lumens operates in the energy efficiency segment which we consider is more attractive in the near term than betting on technology backed companies alone. Rather, the opportunity to replace existing stock with better materials seems obvious and makes both commercial and ‘green’ sense. LED lighting in particular appears to be attractive for its energy savings potential. The Department of Energy (DoE) has set up the Solid-State Lightening initiative (SSL) that proposes that it can cut US energy lighting usage by 25%. In March 2010, the DoE published a Muli-Year Program Plan for SSL. The report states that ‘[t]he global lighting fixtures market is expected to reach $94 billion by 2010, and SSL is expected to play a substantial role in the market by that time. Sales of high-brightness LEDs (HB–LEDs), the technology associated with LEDs for lighting applications, were $5.3 billion in 2009.” Siemens‘ Osram’s Sylvania program notably focuses on SSL.

Khosla Venture and General Catalyst have both been active in the LED space: both funded LumenZ, a Boston based University start-up. Checking on Khosla’s website, we fail to find it in their Portfolio section. However, in a presentation delivered in 2009, it is still in the portfolio. Highland Capital Partners made an investment in QD Vision. QD’s pitch is interesting ‘QD Vision is developing quantum dot solutions for efficiently backlighting mobile phones and other mobile displays, as well as LCDs for desktop and notebook computers and LCD television screens. These initial applications alone represent an addressable market exceeding $2 billion by 2014 for quantum dot-based components’. According to some news sources, QD Vision has raised a total of US$33m to date.

Overall, as costs of LED is coming down the adoption curve is likely to increase significantly. For now, technology hurdles, costs, and general consumer/ commercial acceptance are issues that need to be addressed.