Hi everyone, welcome back to the Harbinger VC podcast. Today we have joining us Edmond Ng, who is a founding partner at Axiom Asia, one of the top performing private equity fund-of-funds (FoF) that invests across venture, growth equity, and buyouts in the greater Asia region. Axiom has had a stellar run since 2006, recently closing $1.8 bn for their Fund 6 (managing $7bn AUM overall), so they’re well capitalized to continue backing growth in the region. Edmond shares with us his formative experiences, including what it was like to join GIC at the height of the Asian Financial Crisis in 1997 and lessons learned. Edmond describes the founding of Axiom Asia, what it took to survive in the early days, and some of Axiom’s best investment decisions. At the same time, Edmond discusses challenges and tough decisions that FoFs must make with regards to their managers, as well as the differences in PE investing across stage and region. Finally, we cover some of the shifting market dynamics in China, from key technological and commercial trends to financial liberalization and the growing attractiveness of Chinese stock exchanges.
[Editor's note: this interview has been edited and condensed for clarity. The opinions expressed in this article are Edmond’s own and do not reflect the views of Axiom Asia Private Capital]
Foray into Finance with GIC
Hi Edmond, thanks so much for joining us today. Before we dive into the details of your storied career as an investor, as someone who experienced first-hand the Asia Financial Crisis in the 1990s, the early innings of Chinese economic growth in the 2000s, and through the internet and technology driven boom this past decade resulting in $100bn dollar companies from Xiaomi and Kuaishou in China to Shoppee in Southeast Asia… could you start by telling us about yourself, where you’re from, what are some of your formative experiences?
Edmond: Sure. I was born in Hong Kong when it was still a British colony. Both my parents moved to Hong Kong in the 1950s from Shanghai. My grandparents were from the Jiangsu province and Northern China. So, from a very young age, I learned to understand Mandarin, Shanghainese and Cantonese, although Cantonese was the only dialect that I could speak as a kid. I picked up Mandarin only after I met my wife in college.
In the 1970s and 1980s, the Hong Kong economy was one of the four Asian tigers flying at the time. My parents were business owners and really benefited from this trend. Since a young age, I got to travel to a lot of different places in Asia and also North America.
Recently a Taiwanese businessman asked me how best to describe Hong Kong. I think of Hong Kong as an entrepôt. It’s not just an entrepôt for goods, but also for people. Many of my parents' friends had the goal of moving to another country. Hong Kong people are always looking for better opportunities. It had a dynamism that you could not find anywhere else. People moved there from mainland China to look for better opportunities, and then they moved to the West for even better opportunities.
I first visited the US when I was about six years old and fell in love with it right away. It’s hard for a kid not to like all the space that you get in the US. Most people in Hong Kong, even the decently wealthy ones, still lived in apartments. But in the US, it seemed that everyone lived in big houses. I made it my goal to study in the US one day. Eventually, I’d move to the US as a 10th grader and attended a boarding school in in Claremont, California.
I’m more of a city guy, so for college I applied to schools in big cities like New York, Chicago, Los Angeles. I was fortunate to be accepted by Columbia in New York, which I believed to be one of the greatest cities in the world. And it was there that I decided to pursue a career in finance.
At first I thought I would study civil engineering, since I liked physics a lot. I liked the idea of building bridges and other infrastructure. I had to give up that idea though, since I have a pretty severe allergic reaction to dust and dirt. And further, while that Columbia, many of my friends were going into finance, being in New York and all. I think it was just natural for people to think about getting a job that can pay for the college tuition and also cover the cost of living. So, I ended up majoring in industrial engineering, which was the closest thing to finance that the engineering school at Columbia offered. I subsequently went to Stanford to get a master degree in Management Science and Engineering.
At Stanford I read a lot of books recommended by friends, such as “Reminiscences of a Stock Operator”, “Liar’s Poker”, etc. My favorite was “Barbarians at the Gate”. So I've always been a fan of war histories, and the image of a bunch of barbarians laying siege to cities really appealed to me. Private Equity quickly became the subsector in finance that I wanted to join the most.
Fortunately for me, the government of Singapore’s investment corporation (GIC) just happened to be recruiting at Stanford for its alternative investment division. GIC at the time already had a global investment program with offices in Singapore, Hong Kong, Tokyo, San Francisco, London, etc. I really wanted to see what Singapore was like, since there had always been this rivalry between Hong Kong and Singapore. I accepted that offer and went to Singapore in 1997.
1997 was an eventful year. Isn’t that when the financial crisis began in the region?
Edmond: Yes 1997 was truly an eventful year. That was the year when Hong Kong ceased to be a British colony. The handover ceremony was on July 1st 1997, which coincided with the day I started at GIC. And the next day, on July 2nd, that’s when the Thai government decided to abandon their currency peg to the US dollar, and the Asian Financial Crisis officially began. The crisis definitely hit the performance of GIC at the time. But GIC has such a large program, and at the time was still underinvested. The Asian financial crisis actually presented a great investment opportunity for us.
But it wasn’t easy to do deals either. Most of the quality assets in Southeast Asia were owned by the large families. They’re very tough negotiators. Looking back, I was probably too conservative in pricing some of these assets. Insisting on buying companies at historical average valuation multiples is probably not a good strategy, since the revenue and earnings of those businesses were way down. We need to be mindful of that. Also, I learned that debt could be a great friend when things are going well, but it could also really kill a business on the way down. I think to this day, I'm still averse to using too much debt in our investments.
Further, in many emerging markets, enforcing minority shareholder rights or debt holder rights could be very difficult. Some of the most successful businessmen in the region could turn out to be some of the most unscrupulous ones as well. I won’t mention names here, but there were a lot of people not honoring their contracts at the time. Even government contracts could be voided. To this day, I don't like companies that rely too much on government business.
What do you feel like has changed in Asia over the past decades?
Edmond: I can't really say how the system has changed since the crisis, but rather that the system hasn’t been tested again. When we talk about Global Financial Crisis in 2008, it didn’t actually hit Asia that hard. China has been on a steady rise since 1997 and, and I think much of the regional economy was more dependent on the growth of China. China did very well during the Global Financial Crisis.
So yes, the system hasn't truly been tested. I think China has become a lot more sophisticated. During my time at GIC is, we've always been able to exercise our minority shareholder rights. Maybe it took some time to do things. For example, on redemption rights… if your counterparty doesn't have money, they just don't have money. You just have to wait for them to find that money to redeem your investment. I think GIC’s operating experience in mainland China has been very good overall, and that carries over to Axiom Asia as well. We haven’t had any problems.
Got it. GIC is a highly reputable investor, and they're a very comprehensive investor with a lot of capital. Since you started with them back in 1997… might you be able to share how GIC has evolved over time
Edmond: I'm really glad that I started my career at GIC. Perhaps the pay wasn’t as good back then, so people were much nicer and helpful. GIC also has that global presence, so I got to work in Singapore, the San Francisco Bay area, Hong Kong, and also Beijing. I had excellent bosses and colleagues, and along the way also met many of the top private equity players as well, and got to learn from their successes and mistakes over the years.
Furthermore, GIC is one of the oldest and most established institutional investors in the private equity market globally. It started committing to private equity and VC funds in the early 1980s and was among the early investors in KKR and Sequoia. It also has a long history of doing co-investments, including in some of the most famous Silicon Valley companies. They determined that they could afford to take a very long term view, which is why they started investing in private equity funds and venture capital funds.
After I left, GIC got even bigger. I think that deployment pace of the GIC private equity program is probably 10x bigger than when I was an employee. Perhaps the biggest change at GIC since I left may have been its new stance on publicity. When I was still there, GIC greatly emphasized anonymity. The GIC name would not be mentioned in any media. We had this clause with fund managers saying that you could not tell people that GIC had invested in you, and this was the same with portfolio companies.
But now, you see GIC’s name all over the place. This is a big change, and I think important because it helps GIC do deals. As a former employee, I am proud to see the GIC name mentioned everywhere.
Launching Axiom Asia
GIC certainly has a sterling reputation. And it seems that they laid early groundwork for more co-investments and other ways to juice up returns to the LPs. And Singapore itself is just an incredible example of nation building in addition to long-term investing. Let’s talk a bit more about the fund you founded. Could you share Axiom Asia’s origin story? What was the thought process and initial investment strategy?
Edmond: So after seven years with GIC, I was getting a bit bored. I’ve also always wanted to have an entrepreneurial experience. So in July 2004 I tendered my resignation. GIC actually asked me to stay until they could find a replacement, which I did for another seven months. Pretty soon after I left GIC, two of my former bosses there approached me. They were still employees at GIC at the time, but they basically came up to me and said: “Hey Edmond, we’re thinking about setting up an Asia-focus PE fund of funds. Would you like to join us?”
Back in 1999 or 2000 I had been looking into the fund of funds space for my boss in North America, the likes of HarbourVest, Adams Street, Horsley Bridge, etc. and I thought it was just brilliant business idea. And so when these two gentlemen came to me, I figured we should do it. And of course, they were still at GIC. So I was really the only person who could do a lot of the grunt work. That's how I got involved in the founding of Axiom Asia.
Got it, so Axiom Asia was set up in 2006. How did you determine what stage of PE investment, what key markets to invest into?
Edmond: Well, I was the more junior members among the 3 founders, and a key reason they got me involved was because I had spent a lot of time in China . I knew China extremely well, and they knew that China was going to be an important market for the business. I don't want to claim any credit, it was really their idea that there would be demand for this Asia-focus FoF business at the time.
In hindsight, 2005 and 2006 was probably the best time to start an Asia FoF business. The US and Western European markets were very hot. Institutional investors were seeing record distributions from their fund investments. 2005 and 2006 were also record years in terms of fundraising for PE funds in the US and Europe. Valuations for deals in the West were hitting historical high. Investors were looking for another place to deploy capital.
Meanwhile, the Asia economies, after many years of lackluster performance, were finally emerging out of the AFC. The growth was led by red hot China, which joined WTO in 2001. Australia, Japan and South Korea all benefitted from this new growth engine. At the time, there were very few Asian PE funds. A number of them were outposts of American and European buyout fund managers that set up shop after the AFC looking to buy good assets owned by distressed Asian conglomerates. These funds were starting to see healthy returns and distributions from their investments. Interest from institutional investors in Asia PE was high. However, many of them realize the cultures in Asia could be quite different from that in the West. This coupled with the language barrier made investing in Asia on their own seem like a dangerous proposition. The Western institutions needed some “local” guides to help them build their program here.
Back then GIC was already very well well-known in the LP circle in the West. So for them, to bet on a group of investment professionals coming out from GIC seemed like a very safe bet for them. We managed to raise a $440 million initial fund. This was in 2006, with the final close in 2007.
By the way, we weren’t the only people who saw this opportunity. We did a study once, and found that from 2005 to 2007, there were more than 30 Asia focused PE fund of funds formed. So competition for us was pretty fierce and there was no guarantee that we could raise a second fund, let alone six funds. To make matters worse, the FoF business model was being challenged in the West by gatekeepers like Hamilton Lane and StepStone. These firms also played in the separate accounts business, where LPs pay a much lower fee. So I would say we were fighting for survival, and many of our old colleagues from GIC did not think we could survive.
For me, Axiom was definitely an entrepreneurial experience. Besides looking after our investments in China, I was also the COO and CFO of the firm. There was really no money for the founders in our first six years of operation.
I didn’t realize Axiom Asia struggled so much in the early days, with so many competitive funds. What did it take for you to survive, succeed and continue to raise large amounts of capital from your LPs?
Edmond: We were probably the only truly all Asian outfit. Most of our competitors at the time, they were outposts set up by FoF managers in the US and Europe. Perhaps we just understood the market a bit better than they did, so we got our strategy right. Also, all the key decision makers at Axiom Asia live here. We don't have an investment committee sitting in the US, the UK or Switzerland, so it makes it easier for us to react to changes in the market.
We never marketed ourselves as an emerging market fund of funds. We made it very clear to our investors that we were an Asia-focus fund of funds. So we will invest in both the emerging markets in Asia and also the mature markets in Asia. And we weren’t just going to do buyout funds. We’re going to invest in buyout funds, growth equity funds, and venture capital funds. I think depending on where the institution investors come from, they react very differently to this strategy. I think a lot of the Europeans didn’t want to touch venture, since VC funds in Europe didn’t produce quality returns at the time. That was bit of a mistake. Many of our peers started out putting a lot of money in buyout funds. The buyout returns from Asia just weren’t that great when compared to the returns of US and European buyout funds. The Global Financial Crisis didn’t help. Actually, the major buyout market in Asia at the time was Australia. Looking back, those Australian deals didn’t do poorly. But it took a long time for them to exit.
Since we did more venture and growth equity, which performed phenomenally during this period, we have better returns to show.
Key Success Factors for Fund Investing
Are you able to talk through some of the investments you've made during that period?
Edmond: I’ll share what I can, although some of these are sensitive. I’ll mention three names because they’re very well-known already. The first would be Capital Today, which is a growth equity fund based out of Shanghai started by Kathy Xu, who used to work at Baring Asia. She decided to set up Capital Today, partially because Baring was more focused on buyouts, and Kathy wanted to have the flexibility to do some venture investments as well. Capital Today was one of the first institutional backers of JD.com, which clearly became a very successful investment for them.
Another would be DCM Ventures. DCM has backed a string of quality Chinese internet and eCommerce companies. Their latest major exit was Kuaishou, but they’ve also backed companies like Vipshop prior. They’ve done extremely well.
And the third is Gaorong Capital, which was set up by three gentlemen that came out of IDG in China. They were key early investors in Pinduoduo.
These funds have all performed extremely well, and they are very reputable investors in China.
The outside world only sees the winners and the success. What are some of the harder decisions you’ve needed to make? To the extent possible, are you able to share some of those more difficult conversations internally, or perhaps what are some of the misses or things that you wish you had done differently?
Edmond: This one is hard. So private equity is a relationship business, right? You do in-depth due diligence on a fund manager or a company, and you become very close to the people that you invest in. So I think one of the most difficult things is to know when to cut off these relationships. It’s easier if the relationship were as just completely screwed up, if the GP just did something really poorly. It’s easy to break off those relationships. But the hardest thing to do is break things off with people who have made a lot of money for you in the past, but whose recent performance just isn’t that impressive anymore. So we continue to struggle with this, and we have to get better at that.
Does this vary by asset class, stage, or category? For example in venture, good investors are good investors… but there are different vintages and market trends that tend to vary over a period of time. Whereas for PE and later stage investing, it seems to come down to execution and is a bit more consistent. How might this dynamic affect what we described earlier, regarding the difficulty of cutting off certain relationships?
Edmond: This a good point. Of course when we say performance, we look at both absolute performance and relative performance. If it’s just a bad vintage, we could cut people some slack. The bigger problem is if you keep missing the best companies in each cycle. I mean every now and then there's a new concept and you need to make sure that you are in it, and have exposure to the best companies. That’s also how you generate more deal leads, since operators at the best companies tend to have the highest quality networks.
Further, another problem we think about is… We are a big believer that fund size is an enemy to return. It’s easier to manage a small fund. It becomes harder and harder as your fund size increases. So at what point does a fund become too big for the market? This is so hard because naturally for the best managers… people chase after them. So they’ll end up increasing their fund size due to that.
That’s fair. Looking at the broader market, there are few funds that are super disciplined and repeatedly raise at a similar size. Benchmark is a good example in the US, they have what… like 5-6 GPs, with similar fund size through multiple vintages. And then there are top tier funds like a16z that are getting bigger and bigger over the years, with media presence, ops teams, etc.
Approaching Growth Equity and Buyouts in Asia
Back to Axiom Asia. So it seems you invest in multiple stages across markets in Asia. Could you talk bit more about growth equity or PE?
Edmond: Well, for growth equity, usually it involves companies that are showing some profit, whereas venture capital can invest in companies that may not even be generating revenue. But now, even that distinction is blurring. Most of the growth equity deals that we see are in companies that are still losing a lot of money.
So that’s more of a late stage venture play vs. growth equity. The dynamic is very similar to that of venture. The main difference between the VC fund managers and the growth equity fund managers is that by the time when growth equity gets involved in a particular space, the first round of competition is already over. So growth equity is really just looking at a handful of companies, it’s about identifying which one is the best company and try to get into it. So it's very much about winning allocation. There is investment judgment as well, because at that time there will still be a few competitors in the space, but it’s a lot easier at that time to determine who will be the ultimate winner.
And by the way, there is a different dynamic from what you see in the US, where usually there aren’t as many people competing in the same space. But in China, once you have a good idea, it's not uncommon to see 30 competitors doing the same thing. And so growth equity fund managers and the VC fund managers in China need to keep a much bigger team than their peers in the US because it's about staying current. It's about getting in front of the entrepreneurs. It’s not surprising to hear stories about fund managers in China that’ll wait for entrepreneurs at their homes, in the elevator lobbies, etc. just to get 5-10 minutes of the entrepreneur’s time.
For buyouts… it’s a very different market. China is big on venture and growth. But for buyouts, we’re talking about the more mature economies in Asia. We’re talking about Australia. We’re talking about Japan, South Korea, etc. The competition level in these countries is not as intense as that in China. You won’t see as many new managers pop out every year. Yet there is a similar challenge… It doesn’t require a lot of competition to start a bidding war. Buyout fund managers are usually trained investment bankers or management consultants right, so they think in a pretty similar way.
So as long as the manager is established in the market with equal access to good financing, they’ll have a shot. But I think they are competing at the margins. Maybe one fund knows a space better than the other, which allows them to bid at a slightly higher price than the competition and they get the deal. And it comes down to the network they have in the local market.
There are two major categories when it comes to these buyout funds. There’s the pan-Asia buyout funds, these are bigger players doing big deals. At Axiom we stay away from that space. We are looking for the smaller fund managers that play in the lower mid-market. That’s where relationships really matter. I don't think you can find truly proprietary deals anymore, but the relationship still counts.
Got it. How do you think about the role of direct investing or co-investments?
Edmond: We invest in both emerging economies like China and India, as well as mature economies like Australia and Japan. Because of that, we invest in buyout funds, growth equity funds, and venture capital. But we still have this one problem. Buyout and growth provide high enough, more stable returns for investors, and venture is where we can get the outlier returns.
But even with this setup, we have one problem, which is the longer J curve that FoFs tend to have. By J curve I mean the period of time when the fund would be marked in the negative return territory. So co-investments and secondaries are very important in helping us mitigate that J curve.
Right from the start, we tell our managers that we would like to do co-investments with them. When it comes to a FoF doing co-investments, there are different philosophies. Some of our peers, they are so active investing direct that they almost look like they are competitors to the GPs.
We are very careful with this. We work with our GPs, we don't compete with them. So it's really just maintaining good relationships with them, and reaction time. In the beginning, GPs always worry that if they show their LP a deal, the LPs may not do it and then the GP can’t close the deal because the LPs didn’t commit or were too slow. So it takes time to build up the confidence level of the GPs. Our experience is that the LP needs to react quickly. If the GP shows you a deal, you need to give them a yes or no answer as soon as possible.
Right, so you can’t just have this drag on. Why does the GP offer allocation? Is it because after they exercise pro-rata, they might not have capital to fill the allocation? Or are they purposefully trying to create value for the LP and fighting for extra allocation?
Edmond: The former. Usually the deal might be too big for the GP. So in a buyout case, you may have a fund manager with a $500m fund, but is trying to do a $100m deal and needs some help. On the venture end, you’re right. If the GP doesn't have the money to take their pro-rata, then why not give it to the LPs.
Okay, good. We’ve essentially mapped out Axiom's approach to Asia investments, with more buyout in the mature markets. And then it seems that China has a steady dose of a venture and growth equity. And you’ve clearly expressed the importance of co-investments and secondaries.
Key Developments in China
For the last part of our conversation, let’s bring the focus back to China. So you have at once a detailed yet high level, broad perspective on what’s going on in the market. Could you share a bit more about what you're seeing? What are some of the developments that you're particularly excited about and talking to your GPs about?
Edmond: I don't think I can surprise you with any new insights here. Most of our fund managers continue to look at companies in the well-known high growth sectors, like B2C e-Commerce, B2B business services, social media, social commerce, healthcare services, biotech.
These are still the compelling areas. At the same time, we are in the midst of a technology war between the US and China, and so the space that is often talked about is semiconductor. China is very keen to build up its semiconductor industry. So I think there'll be a lot of government investment in this space. When we are talking to our fund managers, even the ones that traditionally had not looked into hardware, they are looking at semiconductor companies now.
It’s going to be difficult though. In a sense, semiconductors kind of behave like biotech, you don't really have proof until you put the product in the market. Some funds will pay significant tuition fees. It should still be an attractive sector, but we’ll have to be careful about who we back in this space.
Yes, these semiconductor companies have extremely high valuations, both in the private and public markets. Heck, some of them are going for 100x P/E on Chinese exchanges.
On that topic. I’d like to get your perspective on Chinese stock exchanges… it seems that there's been a lot more financial liberalization in China. Companies that once may have listed overseas or in Hong Kong may now consider listing domestically. How much do you think about that, and how might that impact some of your work at Axiom Asia?
Edmond: We welcome this development. For us, these are just additional exit venues for our investments. The more vibrant the domestic markets become, the better for us. Regarding Chinese exchanges… you get very high valuations, but there are also a lot of restrictions when it comes to selling your shares. So you can only sell at a very slow pace, especially if you are deemed to be an influential shareholder (some of our GPs would be considered as such).
So there’s this ongoing conversation weighing the costs and benefits of listing in China. Since the 2000s, we’ve seen this initial pop where companies trade at more than 100x earnings, and then three years later trade down to a more earthly multiple. And at that point, if you are not in a hot sector at the time, the valuation can get lower than what you see in Hong Kong.
So we need to be careful and not too attracted by high valuations at the moment. It’s tough… entrepreneurs are very attracted by these valuations. For us, we invest in USD funds. Many of their portfolio companies would prefer to take their company public overseas. In any case, the development is good for us.
This recent run is a great development for RMB fund managers since they invest in companies that prepare to go IPO on the domestic market. They probably made these investments when valuations were much lower because they didn’t face competition from the US dollar funds. And now there's this exit channel. So they’re doing very well.
Well it takes an experienced long term investor to navigate these developments, some structural and long term, some more likely driven by hype.
Last question Edmond. Getting back to Axiom Asia, you just raised another $1.8n and have been growing the team quite well. What are you looking ahead to, what are you excited about?
Edmond: I think we are still just at the beginning of the Asia private equity boom. I think the best has yet to come. For example, I think Asian investors will become a bigger driver of fundraising in the Asian PE market. Right now, unless you're talking about the RMB fund universe or South Korea… most of the PE capital comes from the West. We’re starting to see the emergence of Asian institutional investors. Although they’re currently still more interested in growing their exposure to the US and Europe. But I think Asia is still where the growth will come for years to come. So, if the returns here stay robust, I think a lot of this Asian institutional money will come back. And I think the market will be the better off for it.
We continue to be very excited about China. Trade and tech war aside, China will just continue to grow. At some point, I just hope that the world realizes that the strength of the Chinese economy does not come from its government. Rather, it comes from the desire of the Chinese people to improve their quality of living. It’s just poor people trying to get rich, and they work super hard at it.
I couldn’t agree anymore. It’s inspiring, and I look forward to a world where there's more exchange between people of all nations. If they could just spend time in another country, meet the locals, and take a walk in their shoes for a period…
Well Edmond, thanks again for your time today. Really fascinating perspective and hope to have you on again.