Can VCs break out of an old mould?

Privatisation has largely dried up in developed countries – partly because everything that could be privatised has been, and partly because the kinds of assets that remain would be hard to sell to the markets. Nevertheless, the UK government has dug deep and found a privatisation candidate in CDC, a little-known venture capital outfit. CDC started life as the Colonial Development Corporation in 1948 to invest in colonies that were considered a drain on the UK exchequer. Its remit has since spread to other areas of the world, but the aim of producing sustainable businesses in poor countries remains. The former colonies are no longer a drain on the UK’s finances – emerging markets are many investors’ favourite tipple and last year CDC increased its assets by 23 per cent and made a post-tax profit of £375m. Any flotation would probably value the firm at around £2bn.

CDC has primarily succeeded because it dared to tread where others did not. So while most VCs focused on Silicon Valley and other high-tech hotspots in the western world, CDC sought tiny start-ups in impoverished regions in South American, sub-Saharan Africa and south-east Asia. Its returns over the last 10 years have been astonishing despite the fact its government mandate insists that 70 per cent of its assets must be invested in areas with GDP per head of less than $1,750.

While, admittedly, CDC was compelled to operate in the poorest areas, it is surprising that other investors have not chosen to go down this route. Despite the inherent difficulties, the potential upside is just so much greater. Even now, with emerging markets in vogue, few VCs stray out of the remodelled mainstream. When a firm spreads it wings, it typically looks at the new European states, China, Hong Kong and Singapore. Yet, these markets are being harvested by so many players that the opportunity is already being squeezed.

The best investors understand that taking risk is about entering truly unchartered territory, rather than following the herd to “new places”. Jim Rogers, co-founder of the Quantum fund with George Soros, has made many fortunes by being the first (literally sometimes) investor in a geography or asset class. Mr Rogers was a pioneer of the emerging market game, buying shares in Africa in the 1980s and increasing his assets by a factor of hundreds 20 years later. While the strategy requires a lot of shoe leather, patience and courage, can it really be harder than scouting for the Next Big Thing in Silicon Valley or Cambridge? The competition is so fierce and the field so crowded that the risk of failing to unearth “alpha” is considerable. In unchartered territory, on the other hand, it is sometimes only necessary to find beta – if you get alpha too then you will become even wealthier than Mr Rogers.

This is no investment tipsheet and we are well aware that few readers will hop on a plane to Botswana with their cheque books. But if you do, don’t wait too long – Africa is the probably the last investment frontier and, endowed with abundant natural resources, it may not be very long before it becomes just another cog in the globalised economy.

The Week's Deals

Mobileye, the Netherlands-based provider of vision-based driver assistance technologies, has announced a minority stake investment from Goldman Sachs Capital Partners. The stake will be acquired by Goldman Sachs from Mobileye and its shareholders. Mobileye develops vision systems for accident reduction and driver assistance, designed to act as a "third eye" for the driver. These can support drivers in performing routine driving tasks such as distance keeping, and also provide the driver with warnings in dangerous situations. Founded in 1999, the company has been selected by BMW, GM and Volvo for their production vehicles starting from this year. Mobileye plans to use the funding to enhance opportunities in existing and new markets.

SiC Processing, the Germany-based clean technology company, has raised €53m from Zouk Ventures, Merrill Lynch Investment Managers, CC Private Equity Partners, Foursome Investments, Masdar Clean Tech Fund and other undisclosed investors. Established in 2000, SiC Processing provides management and recycling of used slurry from the solar and semiconductor wafer industries. It applies its patented technology to recover silicon carbide and polyethylene glycol required in the wafer cutting process, which it says generates substantial cost savings for its customers. The company owns and operates recycling plants in Germany, Norway, Italy, USA and China. The investment is to be used to fund further international expansion.

Ekinops, the France-based provider of next-generation optical transport products for service providers and private networks, has raised €20m from OTC Asset Management, Odyssee Venture, Auriga Partners, Equitis, Sigefi Private Equity (Le Groupe Siparex), Societe Generale Asset Management and Ventech. Ekinops says is currently experiencing very strong growth due to a number of new customer wins from telecommunications carriers in North America and in Europe and will use some of the investment to strengthen its sales and customer support presence in these areas.

20/10 Perfect Vision, the Germany-based developer of femtosecond laser technology for ophthalmology, has raised €13.5m from NBGI Ventures, Innoven Partenaires and The Entrepreneurs fund. The investment is to be used to accelerate the market penetration of the company's FEMTEC femtosecond laser workstation unit which has recently been introduced to the international markets.

The Week's Exits

Orexo, the Sweden-based pharmaceutical company, is to acquire Biolipox for about €94m. Sweden-based Biolipox is developing novel drugs for treating respiratory diseases and other inflammatory diseases, such as asthma, chronic obstructive pulmonary disease (COPD), hay fever, pain and arthritis. The acquisition is designed to create an innovative specialty pharma company with a broad product pipeline, global partnerships with major financial potential, and established sales channels. Torbjörn Bjerke, currently chief executive of Biolipox, will serve as president and chief executive of the new company.

Proveo, the Germany-based developer of real-time location software, has been acquired by Zebra Technologies for $16.3m (€11.5m) in cash. Zebra Technologies, which helps companies identify, locate and track assets, transactions and people, says the acquisition will extended its presence in the growing field of real-time location.

Nasdaq-listed MIND CTI has acquired UK-based Omni Consulting (Abacus Billing) for £3.6m (€5.2m). MIND CTI is a provider of convergent end-to-end billing and customer care products for tier two and tier three telecomms carriers worldwide. Omni, which provides billing and customer care software, will operate as a division within MIND CTI and continue to be run by the current management team led by chief executive Karl Wills.

People Moves

PACE, the Germany-based engineering software provider, has appointed Norbert Reimann as chief executive. Dr Reimann brings more than 20 years of sales, marketing and general management experience to PACE. PACE’s development strategy focuses on its flagship product Pacelab Suite, a software platform supporting the multidisciplinary design of highly engineered products. Dr Reimann intends to steer PACE’s continued expansion into vertical markets.

Finjan, the US and Israel-based provider of secure web gateway products, has appointed Eric Benhamou as chairman and John Vigouroux as president and chief executive. Outgoing president and chief executive, Asher Polani, will continue to serve on the board of directors.

Xtract, the Finland-based customer analytics company, has appointed Martti Mehtälä as chairman. Mr Mehtälä has more than 25 years experience as a senior manager in the IT industry, most recently as managing director of Microsoft Finland for 12 years. Xtract specialises in social network analytics and process optimisation with the aim of  helping mobile operators, media companies and consumer businesses deliver efficient marketing by predicting customer behaviour.

Most Accessed Companies

Santaris Pharma, the Denmark-based biopharmaceutical company, has attracted a lot of attention this week. The company's pipeline of drugs in development is focused on cancer and metabolic disorders. In June, The Financial Times reported sources close to the company that had suggested Santaris was in need of funds in order to efficiently pursue the possibilities provided by its proprietary LNA (locked nucleid acid) technology. A possible trade sale or IPO was also rumoured. The company recently appointed Bolette Wildt as vice president and general counsel.

MirriAd, the UK-based developer of embedded advertising technology, has also attracted a lot of attention recently. MirriAd’s technology offers marketers a promotional tool that digitally inserts brand images into video content after filming has been completed, with the aim of making them look like they were always there. The company says that product placement is set to see triple digit growth in the next few years in countries such as the UK, Italy and Spain as a result of a recent EU directive legalising product placement in Europe for the first time. MirriAd, which recently raised £2m (€2.9m) in funding, says it is already working with some of the leading studios, broadcasters and advertising agencies in both Europe and America.

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