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Voices From the Abyss: the Crooked Dealmakers Write Back, Offering to Work Together — and Why I’ll Always Say No

May 30th, 2009 Comments off
One of the earliest bonds issued in China     One of first bonds issued in China

 

My last two posts have elicited an unusual amount of feedback. The posts deal with the underhandedness, deceit, negligence and shameless greed of so many of the advisors, lawyers and investment bankers doing IPOs of Chinese companies outside China. 

It’s always nice to get mail. Well, mostly. A lot of the comments and emails were complimentary. But, probably half of the email traffic came from various ethically-challenged financial advisors, brokers, lawyers and fixers asking to work with me on their different China IPO schemes. All of them were, from what I could tell, the sort of transactions I railed against in my recent posts – particularly OTCBB listings, reverse mergers. In other words, the same people I would like to see neutered wrote to see if I wanted to go whoring around with them. 

I even got invited to a reverse merger conference in Las Vegas — hard to decide which part I’d least prefer, the conference or the setting.

In one sense, this is more than a little depressing. Either these guys hadn’t understood what I wrote, or figured I would be a useful shill for them somehow: “Look, we even convinced that guy Fuhrman who criticized OTCBB listings to get in on the game.” If so, they seriously miscalculated. 

There is another, more hopeful explanation for these wildly off-target emails. I know that times have gotten very tough for this whole crowd who made all the money wrecking what were often quite promising Chinese SME companies by convincing them to do bad IPO deals. The stock market, of course, is still limping, and most IPO activity (both the good and the debased) has all but dried up. 

Perhaps, then,  these emails to me are a last dying gasp, a tangible sign that the low practices that flourished over the last ten years are doomed. That would be great news, that bad advisors are contacting me as a last resort, because they’ve tried everything else and failed to revive a once-lucrative franchise fleecing good Chinese companies. 

You know what they say about things that sound too good to be true… We’ll see. 

For the record, as well as for those who may harbor any lingering hope I might be able to revive their business doing OTCBB listings or reverse mergers, I wanted to set out, clearly, what it is we do:

  • We only work with some of China’s best, fully-private SME
  • We only work with them on the basis of a long-term partnership, and we will only succeed financially, as a firm, if our SME clients do so. To assure this is the case, we take a significant part of our fees in shares that are likely to be illiquid for 3-5 years
  • We focus on raising our SME clients pre-IPO capital from any of the 50 or so Top Tier Private Equity firms active in China, and providing other financial advisory services over the longer-term, including subsequent capital-raisings, M&A work
  • In most cases, our clients will remain private for at least 2-3 years from the time we begin working with them
  • We are never involved in any kind of “rush to market” IPO, or any deal involving an OTCBB listing, reverse merger, SPAC, PIPEs

Now, I can imagine what a few of my recent email correspondents must be thinking, “What a dope. Why would anyone bother with this ‘high integrity’ stuff when you can make a fortune pushing Chinese companies through the IPO meat grinder?” 

That sort of approach, of grabbing fees while mutilating your client,  is so far removed from what I built China First Capital to do that it’s like asking a ballerina to enter a demolition derby. I’m lucky (or crazy, take your pick), but I didn’t start CFC with the primary motive of making money. I started it for three reasons:

(1) to have a chance, after achieving some career success elsewhere, to give something back to China, a country that’s been the deep and abiding love of mine since I was a little boy;  (2) to work alongside world-class founder/entrepreneurs, and help them get the financing they need to go farther and faster, and so become industry leaders in China over the next 10-20 years; and (3) to provide Chinese SMEs with at least one alternative to the sort of noxious advisory firms that have preyed on them for over 10 years. 

It’s demanding work. We refuse to cut corners, or get involved with a deal because there’s easy money to be made. We view our clients as our partners, not as a meal ticket.  In all these ways, I know I come from a different planet than the guys who arrange OTCBB deals, reverse mergers, or other quickie IPOs.

There’s another difference: I feel profoundly lucky every day to do what I get to do. I doubt they do. 

 

 

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Built to Fail – Case Studies on Chinese SME Companies Damaged By Greed, Deception and Crooked Investment Banking

May 26th, 2009 No comments

Qing Dynasty Lacquer in China First Capital blog post

My last post dealt with the often-unprincipled conduct of the advisors, bankers and lawyers who created many of the disaster stories among Chinese SME companies seeking a stock-market listing. It’s not a topic that will win me a lot of friends and admirers among the many advisors, lawyers, and investment banker-types still active, sadly, sponsoring OTCBB and reverse merger deals in China. In my experience, they tend to put the blame elsewhere, most often on Chinese bosses who (in their view) were blinded by the prospect of quick riches and so readily agreed to these often-horrible transactions. 

There’s some truth to this, of course. But, it’s a little like a burglar blaming his victim for leaving a second-story window unlocked. Culpability – legal and moral – rests with those who are profiting most from these bad IPO deals. That’s the advisers, bankers and lawyers.  They are the ones getting rich on these deals that, too often, leave the Chinese company broken beyond repair. 

The bad IPO deals are numerous, and depressingly similar. I don’t make any effort to keep tabs on this activity. I usually only learn specifics if I happen to meet a Chinese SME boss who has had his company crippled by doing an OTCBB listing or reverse merger, or an SME that is in the process of doing a deal like this. 

Here are a few “case studies” from among the companies I’ve met. They make for depressing reading. I’m omitting the names of the companies and their advisers.  The investment bankers on these deals deserve to be publicly shamed (if not flogged) for what they’ve done. But, the stories here are typical of  many more involving crooked investment bankers and advisers working with Chinese SME. The story lines are sadly, very familiar. 

COMPANY 1

A Guangdong electrical appliance company, with 1,500 employees, had 2008 revenues of $52mn, and net profit of $4mn, did a “reverse merger” in 2007 and then listed its shares on the OTCBB. Despite the company’s good performance (revenues and profits grew following the IPO), the share price fell by 90% from $4.75 to under 5 cents. At the IPO, the “investment advisors” sold their shares. The company also raised some cash, about $8mn in all.  But, quickly, the share price started to fall, and the market capitalization fell from high of $300mn to under $4mn. The company’s management didn’t have a clue how to manage a US publicly-traded company (none spoke English, for one thing), and so started making regulatory mistakes and had other problems with filing SEC documents. The company’s management, still with much of the $8mn raised in the IPO in its corporate bank account,  then started selling personal assets at wildly inflated prices to the company, and so used these related party transactions to take most of the remaining cash from the business into their pockets. No surprise, the company’s auditors discovered problems during its annual SEC audit, and then resigned.

The company’s share price is so low it triggered the “penny stock” rules in the US, which limit the number of investors who are allowed to buy the shares.

 

COMPANY 2

An agricultural products company with $73 million in 2008 revenues chose to do a “reverse merger” in the US, to complete a fast IPO early in 2009. The company got the idea for this reverse merge from an investment adviser in China who promised to raise $10 million of new capital as part of the reverse merger. The agricultural products company believed the promise, and spent over $1 million to buy the listed US shell company, including high fees to US lawyers, accountants and advisers.   

After buying the shell and spending the money, the company learned that the advisor had failed to raise any new capital. The company now has the worst possible situation: a listing on the OTCBB, with no new capital to expand its business, a steadily falling share price, and annual costs of being listed on the OTCBB of over $500,000 a year. At this point, no new investor is likely to invest in the company, because it already has a public listing, and a very low share price.

Because of this reverse merger, the company’s financial situation is now much worse than it was in 2008, and the company’s founder effectively now has no options to finance the expansion of his business which, up until the time of this reverse merger, was thriving.

 

 COMPANY 3

In 2008, an outstanding Guangdong SME manufacturing company signed an agreement with a Guangdong  “investment advisor” and a small US securities company that specializes in doing “Form 10 Listings” of Chinese SME on the OTCBB. They told the company’s boss they were a “Private Equity firm”. The investment advisor and the US securities company were working in concert to take as much money from this company as possible. Their contract with the company gave them payments of over $1.5 million in cash for raising $6mn for the company, a fee of 17%, and warrants equal to over 20% of the company’s shares. The $6mn would come from the securities company itself, so it could claw back a decent chunk of that in capital-raising fees, and also grab a huge slug of the equity through warrants. 

The securities company quickly scheduled a “Form 10” IPO for summer of 2008, and arranged it so the shares to be sold would be the warrants owned by this securities company and the Chinese investment advisor. So, according to this scheme, the Chinese SME would have received no money from the IPO, and all the money (approximately $10 million) would have gone direct to the securities company and the advisor.

The securities company deliberately misled the SME founder into thinking his shares would IPO on NASDAQ. Further, they gave the founder false information about the post-IPO performance of the other Chinese SME they had listed through “Form 10 Listings” on the OTCBB. Most had immediately tanked after IPO. 

In this case, the worst did not happen. I had met the boss a few months earlier, through a local bank in Shenzhen, and liked him immediately.  Before the IPO process got underway, I offered him my help to get out of this potentially terrible transaction. This was before I’d set up China First Capital, so the offer really was one of friendship, not to earn a buck. I promised him if he could get out of the IPO plan, I’d raise him money at a much higher valuation from one of the best PE firms in China. 

The boss was able to cancel the IPO plan, and I started China First Capital with the first goal of fulfilling my promise to this boss.  CFC quickly raised the company $10mn in private equity from one of the top PE companies , and the valuation was over twice the planned IPO valuation from the “investment advisor” and the securities company. This SME used the $10mn in pre-IPO capital to build a new factory to fill customer orders. 2009 profits will double from 2008. The company is on path to an IPO in 2011, and at that time, the valuation of the company will likely be over $300mn, +7X higher than at the time of PE investment.

 

 

 

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Ethics and Investment Banking – how disreputable advisors, bankers and lawyers damaged Chinese SMEs through OTCBB listings, reverse mergers

May 20th, 2009 1 comment

 

Qing Dynasty bowl from article by China First Capital

 

Back again in Shenzhen, with plenty of food for thought, as well as food for the belly. I go through the same “immersion program” whenever I arrive back here: it involves stopping for a plate of dumplings or bowl of noodles once every 30 paces. Or anyway, it certainly seems that way. 

The food for thought, as always, centers on ways to deliver enhanced value and service to clients and business partners. We have a set of core principles, that we build our business on, and that collectively represent our main differentiators. They are disarmingly simple – to work with integrity and honesty,  and always put the success of our clients’ first. We know that if we do this, our own success will follow. 

Simple, but not nearly as universal as they should be in our business. A lot of investment banking, IPO and advisory work in China has bordered on the criminal. Hundreds of SME companies were damaged, if not destroyed, by advisors, lawyers and others who neglected entirely to put their clients’ interests first. Instead, they pushed for companies to take various fast routes to IPO in the US, typically reverse mergers, OTCBB Listings, Form 10, SPAC deals. The reason: the advisors, lawyers, bankers all made a pile of money, quickly, through these kinds of deals. When things turned sour, as they often did, the advisers, bankers and lawyers were generally nowhere to be found, and the Chinese companies were left in dire straits.

Obviously, the bosses of the Chinese companies were complicit, since they agreed to these kinds of schemes to achieve a fast IPO. But, in my experience, the bosses main sin was that of ignorance. They simply didn’t understand all the workings of these kinds of deals, or even the fee-structure that would disproportionately reward the advisers, lawyers and bankers. In other words, the Chinese bosses didn’t do their DD, didn’t check the dismal track record of the many Chinese companies that already opted for OTCBB listings or reverse mergers.

I sometimes think the Chinese term for IPO, “上市” ( “shang shi”) has magical, intoxicating effect on some Chinese bosses. They hear it and suspend all their normal caution and suspicion. Soon, they end up agreeing to what are often truly disastrous transactions that don’t even deserve the name IPO.

There are, by some estimates, several hundred Chinese companies now listed on the OTCBB that are somewhere between “on life support” and “clinically dead”. Their share prices fell steeply immediately after listing (by which time the advisers, bankers and lawyers all pocketed their fees and lined up their next victims) and are below $1. There is little to no liquidity. They often trade at PE multiples of 1-2x. The costs of retaining the OTCBB listing are bleeding the companies of badly-needed money. They have no chance to raise additional capital, nor to do much of anything (except waste money on Investor Relations firms) to lift their share price.

I get angry just thinking about this. I’m offended that people in my field of work would be involved in such self-serving, greed-ridden transactions. Secondly, it’s also brought a lot of harm, and sometimes complete failure, to what were very good Chinese SME companies that once had bright futures, until they had the misfortune of putting their financial futures in the hands of these advisors.

Of course, the guiding principle behind all investment decisions must be “caveat emptor”. Chinese bosses clearly didn’t “caveat” enough. That’s regrettable. But, the gains made by the advisors, lawyers and bankers were so enormous, and so ill-gotten. That’s the heart of the matter: Chinese companies were ruined so that a bunch of ethically-challenged finance people could get rich.  For me, this is contemptible.  How these people sleep at night I don’t know.

I do know this: we try to do everything we can to make it less likely that a good Chinese SME goes the same route, and ends up in the same sad condition. One way is through information. We’re producing Chinese-language materials meant to explain the hazards of transactions like OTCBB listings and reverse mergers. Our plan is to distribute the materials as widely as possible, both online and off. It may not put the bad guys out of business, but at least it will make it easier for Chinese SME bosses to know which questions to ask, what kind of track record to look for or, more often,  run away from.

I’ll be sharing soon on this blog  the English version of some of this information.

 

 

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Asian Venture Capital Journal reports on China First Capital partnership with Horwath

May 14th, 2009 No comments

China First Capital article in Asia Venture Capital Journal

The Asian Venture Capital Journal’s latest issue includes a short article on China First Capital’s partnership with Horwath.

You can read it here: 

http://www.scribd.com/doc/15346001/Asian-Venture-Capital-Journal-Article-about-China-First-Capital-Horwath-Capital-China-Partnership

The reporter, Maya Ando,  contacted me originally by email, and ended up doing the “interview” by email as well. While the spontaneity and give-and-take of an in-person interview is lost, it’s a good journalist technique. It reduces the ever-present likelihood of errors and misquoting. Accuracy, not friendly banter,  should be the journalist’s goal, after all.  

I wish email interviews had been possible back in the Stone Age when I was a journalist for Forbes. Virtually no one had email. I remember spending days, even as a senior editor, trying to track down sources by phone or fax to check their facts. 

 

 

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“The Great Unwind” — Jim Zukin’s Masterly Analysis of Global Financial Crisis & Opportunities for Chinese Companies to Benefit Through M&A

May 11th, 2009 No comments

Ming Dynasty

Readers of this blog will know I’m a big fan of Jim Zukin, a founding partner of the investment bank Houlihan, Lokey, Howard and Zukin. We met again for lunch last week, in Los Angeles. 

I’ve had the pleasure of meeting, and befriending, quite a few smart, and highly successful businessmen and entrepreneurs. It’s probably been the most rewarding part of my career. But, even among such pretty stellar company, Jim Zukin stands out. I’m truly awestruck – which is not a quality I often exhibit — by his intellect, his charisma, his business savvy, his warmth and humor, his love for his family, his clear and incisive thinking on the largest issues of our time. 

Jim is also much, much better at investment banking than I will ever be. I tend to be somewhat stubborn and used to being in charge. But, Jim’s judgment as an investment banker is so much more thoroughgoing than my own, that he is one of the very few people I’ve known who, metaphorically,  I would follow unquestionably into battle. Like a good junior officer, I would,  “Salute, shut up, and do what I was told.” 

Jim shares with me a deep affection for China, and a great delight in doing business there. He spotted big potential opportunities for his firm in China several years ago, and personally traveled there frequently to get Houlihan Lokey’s office started and on a solid footing, which is where it is today. Jim is one of those people who seems to know more about more things than should be possible, let alone for a guy who’s also occupied with “minor” tasks like staying very close to his five kids and grandchild, while helping to run the thriving global investment bank he founded. 

Among the things Jim understands well (better than anyone I’ve run across) the remarkable moment in financial history we’re now living through – the US is struggling to rebuild its banking sector and recover from a serious credit crisis and recession, while China is awash in liquidity. Most experts look at this and see just one dimension – that China’s government will continue to use its massive foreign exchange reserves to buy US government debt, thereby providing some additional stability to US interest rates and the dollar. 

Jim Zukin sees beyond this – indeed well beyond the current horizon —  to another important aspect of the financial symbiosis between the US and China. Chinese companies, as Jim sees it,  now have the scale, the ambition, the growth potential and the financial resources, to acquire assets in the US. This could have transformational effects for the Chinese companies able to acquire businesses in the US, and no less of an impact on parts of the ailing US industrial base. China could, and should, become a buyer of quality Middle Market companies in the US. There are good reasons why: because these US assets will help the Chinese firm accelerate its growth,  improve distribution and customer base in the US, upgrade technology. One other reason: US Middle Market companies are comparatively cheap, at the current valuation multiples (often around 5x)  and dollar-renminbi exchange rate. 

Jim sees this opportunity earlier and more clearly than most of us. He does so, in part,  because he holds more substantive knowledge and insight about the US, China and the financial tsunami that has changed the world over the last year. He condensed some of this knowledge and insight into a Powerpoint called “The Great Unwind and Its Impact”. 

I recommend it as essential reading, for anyone who wants to understand better the current financial crisis and some longer-term impacts on China and the US.  There’s a large amount to chew on in Jim’s report, not just the section on China. It shows a breadth of understanding that help explain why Jim was able to build a perennially successful investment banking firm, as well as perhaps the only one that’s come through the current financial crisis stronger than ever. 

You can view it here:

http://www.scribd.com/doc/15194564/The-Great-Unwind-and-Its-Impact-By-Jim-Zukin

 

 

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Our Partnership to Serve China’s SMEs — China First Capital and Horwath Look to Change the Game in China

May 7th, 2009 No comments

China First Capital blog post -- Han mirror

China First Capital (CFC) this week announced that we’ve established a strategic partnership with Horwath Capital China (HCC), part of Crowe Horwath, one of the ten-largest international accounting firms. HCC is led by David Yu, a very impressive individual and fast becoming a good friend. David qualified both as a lawyer and a CPA, and has built HCC into a powerful financial services firm, based in Beijing, and focused largely on providing China’s SME businesses with accounting, legal and other strategic advisory services.

I wanted to spell out more of what lies behind this partnership – why we’re doing it, the strategic intent, the scale of the opportunity, and the ambitious goals we hope it will achieve. Through the partnership, our aim is to raise the level of financial services available to China’s best SMEs, to meet their specific needs. That’s a tall order, and we’re cognizant of the challenges. It’s now down to both companies to make this a reality.   

HCC are an optimal partner for China First Capital, and so we’re genuinely pleased and honored to be working with them. CFC and HCC both share that same focus on Chinese SMEs, and for the same good reason: both firms see that many of China’s best SMEs will emerge over the coming years as some of China’s most successful and dominant private companies. They won’t be “Small or Medium” for long.  

While China’s largest and most internationally-known companies tend to be partly state-owned (China Mobile, CNOOC, Sinopec), the private sector is where China’s economic future resides. By some estimates, over 70% of China’s GDP is generated by private companies. Twenty years ago, the percentage was less than 10%. That’s a remarkable transformation, unparalleled in modern economic history. Another key differentiator: China’s economy has privatized without privatization. In other words, this shift from state-owned to privately-owned economy happened not primarily because state firms were privatized. That’s the route taken in Europe, most famously in the UK, where during the 1980s, Margaret Thatcher sold to private investors previously nationalized companies like British Petroleum, British Telecom, British Gas.  

In China, privatization has played a very minor role in lowering the government’s share of GDP. Instead, China created legal and economic circumstances where private companies could form, compete and prosper.   And prosper they have. With few exceptions, the best and fastest-growing companies in China are now private ones, the SMEs that China First Capital and Horwath both work with. These SMEs are still smaller in scale than the state-owned giants. But, that will change.  

The strategic rationale behind our partnership with Horwath is to “change the game” in corporate finance and advisory services in China. The partnership’s explicit goal is to be the first in China to deliver to these strong SMEs the highest international standards of corporate financial advisory work. Together, we offer SMEs a complete platform including capital-raising, audit and M&A advisory, to assist in their continued growth, and eventual IPO listing on public stock markets.  

No other firm can offer this range of services to SMEs, at a uniformly high international level. The big investment banks and accounting firms charge too much, and generally won’t work with smaller firms. Domestic firms tend to be weak in areas such as private equity capital-raising and implementing international accounting standards that structure a Chinese company for a successful IPO.  

Just as important is what we won’t do. We won’t push a Chinese SME to go public before the right moment; we won’t put earning fees ahead of the best interests of the client. Sadly, in China, there are many, many precedents of unscrupulous or unprofessional “investment advisors” who have damaged or destroyed Chinese SMEs by pushing them to IPO too early, on the wrong market (example, the US Over-the-Counter Bulletin Board) or via an ill-structured “reverse merger”. The advisors make millions, and the SMEs never recover. 

Both David Yu and I share a similar purpose here: we think these great Chinese SMEs should have access to financial advisory services that are of a similarly high caliber to what larger companies now use.  We are not chasing fees. If so, we’d go after larger companies. We both see an opportunity to work with some outstanding SMEs that are on the verge of becoming industry leaders. If we do our part with this partnership between CFC and HCC, the SMEs reach that next level of success more quickly and efficiently than they would otherwise.

That’s the measure of success for us — not that CFC and HCC will increase their own fee income. If that happens, it should only be a result of the one thing that really matters to us: that our SME clients grow faster and stronger than their peers. 

 

 

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China’s State-Owned Banks’ Missed Opportunity Opens the Way for Some Global Banks to Prosper

May 4th, 2009 No comments

If ever there were a case of “a chart tells a thousand words”, it’s this one, courtesy of The Economist and Macquarie Research:

SME bank lending

At ground level here in China, it’s easy to see some of the more obvious signs of the financial distortion this chart portrays. In August last year, in the face of gathering worldwide economic slowdown, the Chinese government relaxed earlier controls on bank lending, basically instructing the state-owned banks to keep the economy and employment growing by expanding credit to businesses. Later in the year, the government lowered interest rates to further spur lending. 

My worry at the time was that most of this increase in bank lending would be channeled to the least deserving customers: the many clapped-out large state-owned enterprises, rather than the far more numerous thriving private sector companies short of cash. This would more or less defeat the purpose of the government pump-priming, since the lending would only allow some of the country’s least competitive most loss-making manufacturers to stay in business that much longer, at the expense of their better private-sector competitors. As a job-saving mechanism, it would likely be equally flawed, since most of the new lending would sustain for a little while longer bad jobs in bad businesses that should be allowed to wither. Failure is rewarded and success penalized. 

Well, the worries appear to have been very well-founded. The most deserving borrowers, China’s dynamic entrepreneurial Small & Medium Enterprises (SME), mainly came away empty-handed when all this new lending was being handed out. As the chart shows, overall bank lending to SMEs didn’t even crack 10% of total lending at four of the largest state-owned banks. With the exception of the more entrepreneur-friendly China Merchants Bank, which also happens to be the only bank on the list not owned by the central government, the large Chinese banks continued their past (bad) habits of stuffing bank loans into the tottering state-owned giants. 

The eventual outcome, of course, will be a lot more write-offs and non-performing loans inside these state-owned banks. For an abject lesson in bank lending policy, it’s hard to outdo this: the government-owned banks make loans to other government-owned bodies, which then default, causing losses at the government-owned banks that then need to be recapitalized by – you guessed it – more money from the government. 

There’s an even more malign effect: it’s actually getting harder – not easier – for China’s best-performing SMEs to obtain credit. These are the companies that are producing products consumers want, expanding employment, servicing their loans, making profits and paying taxes. The private sector now accounts for over two-thirds of China’s total economic output, and private SMEs represent the bulk of this. 

The Macquarie chart suggests the credit system of China state-owned banks is largely broken: borrowers least able to repay are those granted most of the lending. There are lots of losers in this, but no one is affected more adversely by this than the owners of China’s best SMEs. They are being locked out of the market for bank lending by Chinese banks. 

That leaves one possibility: SMEs finance their expansion through equity, rather than debt. This investment capital will come from outside the realm of China’s state-owned banks. Instead, it will largely be provided by the 100 or so private equity and venture capital firms now active in China. They have raised over $30 billion to invest in China, and the SMEs are a favorite target. 

Of course, not all SMEs will be able to raise equity. It’s generally an option only for the higher-performing SMEs with significant scale and significant presence in China’s domestic market. My company is an international investment bank working exclusively with Chinese SMEs, to help them raise equity finance from the best sources active in China, mainly the top private equity and venture capital firms.  The challenge for us, as for the private equity firms, is that too few of China’s best SME bosses know that they can access private equity investment and so escape from the perils of undercapitalization. 

For the SMEs that can raise money from international investors, this is not just the best option – but also often the only option – to finance growth. An injection of equity will deliver both the resources to grow more quickly and sizable competitive advantage against under-capitalized competitors. 

An additional advantage: by raising equity, an SME will strengthen its balance sheet and so be more likely to succeed in borrowing from one of the very good international banks with operations in China and a focused expertise on lending to Chinese SMEs: Citibank, Standard Chartered, ABN-AMRO foremost among these. I know the management in Shenzhen of all three banks. They are very well-run and very well-connected among SMEs across China. The three international banks bridge the huge gap created by Chinese state-owned banks failures to make adequate lending available to SME customers. 

For Citibank and ABN-AMRO, their current performance in China, founded on their strong presence in SME lending, is one of the only bright spots for two organizations that could do few things right elsewhere recently. Together, they lost over $30 billion last year, and Citibank is now a ward of the US government. 

Everything ABN-AMRO and Citibank did so spectacularly wrong in other countries, they do spectacularly right in China – they focus on the right clients, the right kind of products (loans to growth companies) and having steady bankers, not deal-makers, at the top.  If Citibank and ABN-AMRO are ever to recover their lost luster globally, they should learn from the example of their China operations. The banks represent two of the brightest hopes for the future financing of China’s SME entrepreneur class. 

In China today, there is no larger financial need – and no larger financial opportunity for investors – than to put additional finance into strong fast-growing private SMEs. This will allow them to grow most immediately into the leaders in China’s domestic market, and eventually, for some, into publicly-traded global businesses. 

China’s state-owned banks, meanwhile, will likely continue on their wayward path of lending to companies with more political clout than business ability. It’s a losing strategy for them. But, it’s one that creates ideal conditions for well-managed international banks in China, with the skills, market knowledge and focus to lend to SMEs (take another bow Citibank, Standard Chartered, and ABN-AMRO), to prosper alongside their SME clients.  

 

 

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