New Israel-China fund closes $100m financing round

Catalyst CEL Fund will bankroll Israeli companies that can tackle China’s numerous economic challenges

(L. to R.) Shengyan Fan (head of strategic investment and development, China Everbright), Alain Dobkin (managing partner, Catalyst), Chen Shuang (CEO, China Everbright), Edouard Cukierman (managing partner, Catalyst-CEL) and John Chan (investment director, M&A department, China Everbright) at the signing ceremony (Photo credit: Courtesy)
(L. to R.) Shengyan Fan (head of strategic investment and development, China Everbright), Alain Dobkin (managing partner, Catalyst), Chen Shuang (CEO, China Everbright), Edouard Cukierman (managing partner, Catalyst-CEL) and John Chan (investment director, M&A department, China Everbright) at the signing ceremony (Photo credit: Courtesy)

China-Israel business relations got a huge boost last week, when Israel’s Catalyst Equity Management and Hong Kong-based China Everbright Limited investment fund announced the closing of a $100 million round of financing for their new Catalyst CEL Fund. The fund will invest in Israeli companies that have technologies, products, and services that China needs — and those needs are legion, said Shangyan Fan, Head of Strategic Investment and Development at China Everbright Ltd., and a Managing Director in Catalyst-CEL.

The deal was closed in a special ceremony at Catalyst’s Tel Aviv office, attended by top executives of Catalyst and Everbright. “China has a lot of needs, and we believe that Israeli companies are in unique position to bring in many of the solutions China needs,” Fan told The Times of Israel in an exclusive interview. “We are concentrating on bringing in companies that have established solutions in areas like technology, environmental and water technology, manufacturing, and even consumer needs.”

It’s the job of Everbright and Catalyst — which has been working in China for a decade — to assess the market needs in China and scout out Israeli companies that have the solutions to those needs, with the fund supplying cash to get their China operations up and running, she added. Fan expects that the fund will go through several more funding rounds, topping off at some $300 million.

But Catalyst CEL Fund — and the partnership between Catalyst and Everbright — isn’t just a way to make money. Even if the two firms don’t realize it, their partnership may help melt away the ongoing suspicions, misgivings, and skepticism many Israelis have about China, as well as pave the way for a much more enhanced Israeli presence not only in China, but in other countries Israeli and Western companies have had difficulties breaking into.

It’s been nearly four decades since the 1978 reforms in China, when Deng Xiaoping invited Western investment into the country. Since then, “getting into China” has been a godsend for manufacturers, retailers, food companies, and many more.

But not all who have tried have been successful. In fact, some of the America’s biggest names, like Mattel, Home Depot, and eBay have failed to make it in China, despite thriving in other markets around the world. Those that have succeeded have had to reinvent themselves to meet the needs of the Chinese market. “Kentucky Fried Chicken is huge in China, but Americans who walk into a Chinese KFC will not recognize a lot of the items on the menu,” said Fan.

To succeed in China, said Catalyst managing partner Alain Dobkin, you need to keep an open mind — to adjust to China’s (sometimes significantly) different business culture. “Forty years on, I think a lot of Western companies understand this, at least in concept. But for many it’s hard to change in practice.” That’s less of a problem for Israeli companies, Dobkin said. “To succeed, Israeli companies have no choice but to export, and that requires a worldly attitude to business culture, with businesses adjusting to the cultural needs of different markets.”

In that sense, Dobkin said, Israeli companies could often succeed in penetrating segments of the Chinese market where American or European companies couldn’t, a sentiment Fan agrees with. “For companies to succeed in China, they need to be patient and adopt local practices,” she said. “The people I have met here in Israel are open and direct, and very attentive to detail. They do not have a big presence in China but realize they need to be there, and are willing to do what it takes to succeed there. Our role will be to guide them to the right opportunities, as I believe they are well-equipped to succeed without our having to hold their hands too hard.”

Those cultural issues, as well as the historic reputation of China as a closed Communist society, plus the language barrier (and at least in some cases, Western racism) have contributed to building a “common wisdom” narrative — mostly negative — of what it means to do business in China. There is, for example, a long-standing impression that China will not “admit” a tech company unless it opens up a facility — a factory or R&D center — in China, in order to provide jobs at home, or (if you’re a conspiracy theorist) to “conquer” the Western company’s intellectual property.

But, said Dobkin, the businesses Catalyst-CEL will be investing in will not be required to set up shop in China — and in fact, “we are looking for companies that have the capacity to produce using their current infrastructure,” and that includes companies that are manufacturing products that China itself produces. “Like anywhere else, there is a tendency for businesses or government to look for solutions close to home, but the solutions the Israeli companies will be bringing are just not available in China,” said Dobkin.

Echoing that view, Fan said that the criteria for the fund’s investment will be solving some of the serious problems China has, like its environmental problems. “It’s no secret that China has complicated environmental problems,” she said. “We know that Israeli green tech firms have solutions to many of these problems, and for us, getting those solutions into play, and not acquiring IP, is what is important.”

Another “China myth” the partnership is dispelling is the one about China’s top-down government-directed economy. “The Catalyst-CEL fund is an unattached one with no criteria other than what we are setting,” said Dobkin. “This has nothing to do with the government. It is a fully independent private equity fund that is investing in companies that we believe will succeed and make money in China.”

That’s not to say that the government is not a factor, said Fan. “It’s true that much of the growth in China is propelled by the government, so we look at the various development plans, like the government five-year plans, in order to get an idea of where the best opportunities are. But that doesn’t mean they are telling us where to invest, and some of the companies we are investing in are not in the ‘government recommended’ industries.”

The fund, said Dobkin, will be investing in all kinds of companies, high-tech and low — with the main criteria their ability to deliver solutions. “Because of the scale of need and opportunity, and the need for solution providers to meet those needs quickly, we expect that most of the companies we invest in to be mature, medium sized or large companies that are already well established, and not in start-ups, although some tech start-ups may make the cut as well if they have innovative or disruptive technologies.”

And it goes beyond manufacturing and technology. Israel is a world center of advertising and marketing technology, both online and off, and the retail sector is likely to be a major growth area in China in the coming years — contrary to popular belief, for non-Chinese companies as well.

“All you have to do is take a walk in the streets of downtown Shanghai or Beijing, and you will see all the biggest Western brands well represented,” said Dobkin. Apple’s Shanghai store, for example, generates the highest sales and revenue of any Apple store anywhere, and Disney is set to open later this year in Shanghai its largest store in the world. Israeli technology designed to reach consumers will come in very handy for the next big wave of consumer brands — aimed at the middle class — reaches China, said Dobkin.

Catalyst Equity Management is a part of the Cukierman & Co. Investment House, which specializes in “marrying” Israeli companies with foreign markets. Among the major investment events in Israel, for example, is the Cukierman-sponsored Go4Europe event, which brings European (and Asian) and Israeli CEOs and investors together to make deals.

As news gets out about the Catalyst-CEL fund, said Dobkin, he has gotten calls from investors and fund managers in other emerging markets, like Russia and Brazil, looking to get in on the Israeli action. “For Israel, these emerging markets represent a great opportunity,” he said. “Doing business in Europe and North America, the preferred destinations for Israeli companies, is more difficult now, and there is a great deal of growth in emerging markets now.”

Edouard Cukierman, who heads the investment firm and is a managing partner of the Catalyst CEL Fund, agrees with Dobkin’s assessment. “With the fund’s first closing we are already focusing in on our first investments, which are highly attractive deals with significant opportunities in the emerging markets. The partnership with CEL provides us with the unique ability to have a significant near-term impact on our investee companies in Greater China and other emerging markets, driving the potential for outstanding returns,” he said.

And for Fan, opportunity to work with Israeli companies is very exciting, she said. “This is my fifth time in Israel, and every time I come it’s something special,” said Fan. “But this time is especially special. With this deal, we will be working with a great partner and a professional team. The companies they introduced us to were all great, and we are looking forward to seeing them in China soon.”

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