Adveq Chairman Bruno Raschle is bullish on China. For good reason.

"I'm expecting Shenzhen to become the No. 2 or No. 3 stock exchange or marketplace in terms of capitalization worldwide at some stage, probably much earlier than we anticipate," he told Red Herring in a recent interview.

That forecast comes as Adveq has long-established an investment presence in China -- it was there in 1998 -- before it became even remotely popular. Yet going into China presents a "learning curve" that any firms must go through, he said. Excerpts of that conversation follow.

Red Herring: Adveq has set up shop in three continents. Are you going to maintain or expand your global reach?
Bruno Raschle: Each service provider defines its own business model. Adveq's model is to endorse the globalization of private equity. We are accepting the globalization of asset management and would like to participate in the large opportunities it is creating. This is how we position and differentiate ourselves.

RH: Are you looking at China's recent plans for boosting some of its pension fund allocation into private equity?
BR: Everything in China is big, beyond belief. Plans are big, so are the assets. China has to go through its own experience curve, which will be different from the Western world's. The order of magnitude changes everything. The same applies to China's NSSF (National Social Security Fund), CIC, or other large state-owned asset managers. Chinese authorities are in the continuous process of formalizing and reviewing their policies, strategies, and investment plans. We shouldn't forget that the formulation of these policies must be in synchronization with the development of the regulatory framework, the economic development in general, and the priorities as laid out in the five-year plan.

RH: What can you bring to China that they don't already have?
BR: Foremost, the Chinese don't need Western capital. They have sufficient capital by themselves. In addition, with their cost structures, they have a huge advantage over Western nations. I would argue that trying to indoctrinate the Chinese to follow our system would be a mistake. I doubt that they would accept that a behavior that has worked for us in the Western world would automatically work for them as well. As in any country, there is always a home bias, such as the home bias of institutional investors for where they invest. There's also a home bias for whom you will give your money first. Anyone who wants to operate in China has to go through that curve and prove they are eligible. It's a trust issue.

RH: How long has Adveq been in China?
BR: We've made our first investment from Europe into China in 1998. We have learned a lot. We began to recruit Asian nationals in '02. Unlike in the US, where you have that mixed community of nationalities, such as Asians and Hispanics, in Europe we don't have that in the same dimensions. So we went through that learning curve and the culture of diversity. That led to the next question: Shall we go to Asia? Meaning: should we jump in the water or just continue to keep our feet wet? We thought about how to do it and where to do it. Ultimately, we concluded that we would go to Beijing right away rather than building expertise from hubs like Singapore and Hong Kong.

RH: Did this involve more partnerships to build local contacts there?
BR: The beauty of the private equity and venture capital community is that you have contacts around the globe. We certainly were watching the experience of firms like Dixon Doll's DCM. We looked at firms like IDG and also GSR with their relationship with Mayfield. Over time, we decided to enter the market. From the very beginning we had a philosophy to go with locals for various reasons, among them risk-management. We, including myself, were touring China every six weeks and meeting with over a hundred managers. Being myself Swiss and European I have had the additional experience of living and working in Africa and in the United States, in different multicultural environments, before jumping – maybe you can call this an advantage. I wouldn't say advantage, but I'd say maybe an openness to accept that there are other ways of how to do business and how to make money.

RH: Is the money going into Asia more than anywhere else?
BR: The numbers are very clear on that when you filter out the large and the mega buyouts: In the past two years, the same amounts were invested in private equity-backed companies in Asia as in Europe or in the United States. In '07 it was about $70 billion. Last year it was about $50 billion in each of the three continents. When you take that into consideration, and you add the government policies, the GDP, the large universe of buyers in the marketplaces, it just tells the story. There is more growth to come. However, at this point we have also to keep in mind that a large percentage of the growth in China, perhaps over 80 percent, is coming from investments out of their stimulus program. Very little is demand-driven. Yet even China over time must find ways to increase that demand-driven growth. It's not growth for growth's sake in China. They call it balanced growth, balanced across all industry sectors and geographies, for continuous economic development and transitioning.

RH: Are you working with the government of Pudong to help establish a fund of funds over there?
BR: This relationship is part of our effort in building a business in China, but also for having excellent relationships to the government and to regulatory authorities in China. Already two years ago, this is what we shared with the public, we entered into a memorandum of understanding with the Pudong government.

RH: Are you seeing more PE-backed IPOs, and is that a growing trend?
BR: We're observing that in China there is a fundamental trend to bring everything into the country. That means we will be seeing more R&D in China, and more local legal structures. They have a strong desire to realize sustainable developments within the country. The opening up of the new Shenzhen Stock Exchange is just a part of these efforts. I'm expecting Shenzhen to become the No. 2 or No. 3 stock exchange or marketplace in terms of capitalization worldwide at some stage, probably much earlier than we anticipate. The same will be happening on the corporate finance side, the M&A side. We will be seeing more M&A transactions in the future in China. They're going through that learning curve. The Chinese have also a history as traders and merchants, and that is part of their DNA. The business community of greater China, and of the whole Asian region, remain in their dynamics, independent of politics. These elements were not erased during the Cultural Revolution.

RH: How much of a learning curve is there for Adveq to understand China's business culture?
BR: Adveq will certainly go through its own learning curve. We have observed China acquiring small and medium-sized enterprises or technologies in the Western world for a decade. Somebody told me that in 2005 alone, China bought or took control of 248 companies in Germany that were small or of medium-size. We are experiencing today how they secure the supply of natural resources in a very professional manner, professional strategically and tactically. Lastly, in China there is an enormous universe of non-state-owned, often family-owned enterprises. For them, they don't have to learn the trade of M&A. They just have to go up the learning curve in making use of the financial services sector. The legal system in China is not one cohesive system. They adopted elements from Russia, Hungary, France, former Eastern Germany, Turkey, and from Egypt, and these elements are still all there next to each other. That's why when we go to China and do business there or when we ask how M&A may evolve, such aspects need to be taken into consideration. We can't just say in the Western world that in China there is no legal security. Though in many aspects things are far from being perfect in China – they just went through some developments during the past ten to twenty years that took the Western world one to two hundred – I think the statement is arrogant and completely wrong. There were several systems, and still are, that are being practiced at the same time next to each other. We have to respect and take the history of China into consideration.

RH: What are the biggest mistakes people make in entering China's business world?
BR: They lack the experience. Any good teacher must have had more children in school, and any good asset manager must have made more investments. They just have to go through that curve.

RH: What are the things you still have to do?
BR: I have begun to address the transition management, the generational change at Adveq five years ago. That has freed me up to address topics other than those of operational nature, strategic ones or private equity-related topics that are free to be pursued and that nobody is pursing, first for the better of the world, and second to make money for our investors.

RH: What are the top 10 performers of the past 20 years for you in the venture asset class and where are they located in the world?
BR: It was Silicon Valley, certainly the United States. On the venture side, the real returns came from those companies that returned 100 times the money for some investments, the home runs. Going forward, the same will apply to China, Europe, and the US.