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China Merchants Steams in to Compete with SoftBank’s Vision Fund — Financial Times

July 10th, 2018 No comments

 

China Merchants Group has been adopting new technology to resist foreign competitors for nearly 150 years. Founded in the 19th century, the company brought steam shipping to China so it could compete with western traders.

Now an arm of the Chinese state, CMG has been enlisted once again to buy up technology at a time when global private equity is vying for a share of China’s burgeoning tech market.

The country’s largest and oldest state-owned enterprise, CMG said this month it would partner with a London-based firm to raise a Rmb100bn ($15bn) fund mainly focused on investing in Chinese start-ups.

The China New Era Technology Fund will be launched into direct competition with the likes of SoftBank’s $100bn Vision Fund, as well as other huge investment vehicles raised by top global private equity houses such as Sequoia Capital, Carlyle, KKR and Hillhouse Capital Management.

“They have been very important to China in the past, especially in reform,” said Li Wei, a professor of economics at Cheung Kong Graduate School of Business in Beijing. “But you haven’t heard much about them in technology . . . It’s not too surprising to see them moving into this area, upgrading themselves once again.”

CMG is already one of the world’s largest investors. Since the start of 2015 its investment arm China Merchants Capital, which will oversee the New Era fund, has launched 31 funds aiming to raise a combined total of at least $52bn, according to publicly disclosed information.

But experts say little is known about the returns of those funds, most of which have been launched in co-operation with other local governments or state companies.

Before New Era, China Merchants Capital’s largest fund was a Rmb60bn vehicle launched with China Construction Bank in 2016. While almost no information is available on its investment activity, the fund said it would focus on high-tech, manufacturing and medical tech.

CMG’s experience investing directly into Chinese tech groups is limited, although it has taken part in the fundraising of several high-profile companies. In 2015 China Merchants Bank joined Apple, Tencent and Ant Financial to invest a combined $2.5bn into ride-hailing service Didi Chuxing, a company that now touts an $80bn valuation. It also invested in ecommerce logistics provider SF Express in 2013.

Success in Chinese tech investing is set to become increasingly difficult as more capital pours into the sector.

“Fifteen billion dollars can seem like a droplet in China,” said Peter Fuhrman, chairman and chief executive of tech-focused investment banking group China First Capital, based in Shenzhen. “We’re all bobbing in an ocean of risk capital. Still, one can’t but wonder, given the quite so-so cash returns from China high-tech investing, if all this money will find investable opportunities, and if there weren’t more productive uses for at least some of all this bounty.”

CMG, however, has always set itself apart from the rest of the country’s state groups. It is unlike any other company under the control of the Chinese government as it was founded before the Chinese Communist party and is based in Hong Kong, outside mainland China. Recommended Banks China Merchants Bank accused of US discrimination

The business was launched in 1872 as China Merchants Steam Navigation Company, a logistics and shipping joint-stock company formed between Chinese merchants based in China’s bustling port cities and the Qing dynasty court.

Mirroring its New Era fund today, it was designed to compete for technology with foreign rivals. At that time it was focused on obtaining steam transport technology to “counter the inroads of western steam shipping in Chinese coastal trade”, according to research by University of Queensland professor Chi-Kong Lai.

Nearly a century later, after falling under the control of the Chinese government, CMG became the single most important company in the early development of the city of Shenzhen, China’s so-called “window to the world” as it opened to the west.

Then led by former intelligence officer and guerrilla soldier Yuan Geng, the company used its base in Hong Kong to attract some of the first investors from the British-controlled city into the small Chinese town of Shenzhen, which has since grown into one of the world’s largest manufacturing hubs.

Its work in opening China to global investment gained CMG and Yuan, who led the company until the early 1990s, status as leading figures in the country’s reform era.

Today the company is a sprawling state conglomerate with $1.1tn in assets and holdings in real estate, ports, shipping, banking, asset management, toll roads and even healthcare. The company has 46 ports in 18 countries, according to the state-run People’s Daily, with deals last year in the sector including the controversial takeover of the Hambantota terminal in Sri Lanka and the $924m acquisition of Brazilian operator TCP Participações.

CMG did not respond to requests for comment. But one person who has advised it on overseas investments said the Chinese government was using it in the same way the company opened up Shenzhen to the outside world, helping “unlock foreign markets”.

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In Today’s China, Paradoxes Still Abound. But So Do Opportunities — Site Selection Magazine

November 21st, 2017 No comments

 

In September, China First Capital Chairman and CEO Peter Fuhrman, familiar to attendees at the World Forum for FDI in Shanghai last year, delivered a talk from China to Harvard Business School alumni. Here, with Mr. Fuhrman’s permission, we present excerpts from his remarks.

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GDP growth has never and will never absolutely correlate with investment returns.

Any questions? No? Great. Thanks for your time.

Of course I’m joking. But that key reality of successful investing is all too often overlooked, and China has provided all of us over these last 30-some-odd years with a vivid reminder that IRR and GDP are by no means the same animal.

China is, was and will likely long remain a phenomenal economy. The growth that’s taken place here since I first set foot in China in 1981 has been something almost beyond human reckoning. Since I first came to China as a postgrad in 1981, per-capita GDP (PPP) has risen 43X, from $352 to $15,417. China achieved so much more than anyone dare hope, a billion people lifted out of poverty, freed to pursue their dreams, to make and spend a bundle.

China this year will add about $1 trillion of new GDP. Just to put that in context, $1 trillion is not a lot less than the entire GDP of Russia. So who is making all this newly minted money? And how can any of us hope to get a piece of it? Another question: Why, if China is such a great economy, has it proved such a disaster area for so many of the world’s largest, most sophisticated global institutional investors, private equity firms and Fortune 500s?

Turning Inward

Let’s start with the fact that China is a part of the World Trade Organization, but not entirely of it — not fully subscribed in any way to the notion that reciprocity, openness, free trade, level playing fields and equal treatment are positive ends unto themselves. As China has gotten richer it has seen even less and less need to attract foreign capital and foreign investment. That’s a tendency we see in other countries, including obviously some of the rhetoric we now hear in the U.S. — that more of the gains of the national economy should belong to its citizens. But China’s way is different.

The renminbi is a closed non-tradable currency, so getting US dollars into and out of China has always been difficult. China now has the world’s second-largest stock and bond markets, but those markets are largely closed to any investors other than Chinese domestic ones. But China also continues to provide companies going public with by far the highest multiples anywhere in the world.

When I first came to China 36 years ago China was a 100-percent state-owned economy. Twenty years ago the first rules were put in place to allow a private sector to function. Today, according to anyone’s best estimate, it’s about 70 percent private and 30 percent state, and most of the value creation is being provided by that private-sector economy. So in theory there should be very interesting M&A opportunities. But it’s been exceedingly difficult to get successful transactions done. One of the core reasons is that by and large all private-sector companies in China, large and small, are family-owned.

The other thing important to consider is a Mandarin term: guifan. It’s the Chinese way of explaining the extent to which a company in China is abiding by all the rules of the road — the taxes you should pay, the environmental and labor laws you should follow. It’s not at all uncommon that successful private-sector companies in China are successful by virtue of having negotiated to pay little or no corporate tax on profits.

For foreign-owned companies in China it’s an entirely different story. They are by and large 100-percent compliant with the written rules. This has an enormous impact on the operating performance of any company, so you can imagine how potentially skewed the competitive environment becomes. And keep in mind that corporate taxation in China in the aggregate is, if not the highest in the developed world, then among the highest, and the environmental and labor laws are every bit as difficult, rigorous, tough and expensive to implement as they are in the U.S.

China is a country where local government officials are scored on the measurable success of their time in office, and success is overwhelmingly attributed to GDP growth. So it should be no surprise if what they’re trying to do is optimize GDP growth, the percentage of a company’s income that goes back to the government in taxation can have an adverse effect on that. Instead the government will continue to urge its local companies to take the money and, rather than pay tax, continue to invest, expand and therefore build local GDP.

The Hum of Consumerism

The reasons to stay engaged and find a viable investment angle include GDP growth. China’s GDP is likely to continue to grow by at least 6 percent a year. Second, across my 25 years of involvement in China, every one of the predictions of imminent collapse — financial catastrophe, local government debt, bad bank loans, real estate bubbles — have proved to be false. It appears China has some resiliency, and it’s certainly the case that the government has the tools and financial resources to ride out most challenges.

Third has been how effortlessly it’s made the transition that still bedevils lots of Europe, from a smokestack economy to a consumer-spending paradise. At this moment every major consumer market in China is booming both online and offline. Alibaba, Baidu and Tencent are now operating as three of the most profitable companies in the world.

How does China have a robust, booming consumer economy and an enormous appetite for luxury brands, yet on average salary levels that are still one-fifth or one-sixth the levels in the US? The simple answer is that almost all the Chinese now living in urban China — about half the population, compared to about 15 percent when I first got here — owns at least a single apartment if not multiple, which is more and more common. The single best-performing asset in history has probably been Chinese urban real estate over the last 30 years. It’s fair to say the average appreciation over the last 10 years is at least 300 percent.

Though China has a population whose incomes on paper look like those of people flipping burgers at McDonald’s, they seem to have the spending power and love of luxury goods like the people summering in East Hampton. Even Apple itself has no idea how big its market is here in China. It’s likely that at least 100 million iPhone 8s will be sold to Chinese over the next year. The retail price here in China is at least 30 to 40 percent higher than in the US, with most phones bought for cash, without a carrier subsidy.

‘You’ll Be Older Too’

So where is it possible to make money in China? One message above all: Active investing beats passive investing every time. What you need to do is either be the owner-operator or be a close strategic partner with one, and stay actively engaged.

There are four major areas of opportunity: Tech, health-care services, leisure and education (see graphic below). The potential for building out a chronic care business in China is enormous. Looking ahead 25 to 30 years, sadly China will likely suffer a demographic disaster. This country will become a very old society very quickly. That’s the inevitable product of 30 years of a one-child-per-family policy. By 2040 or 2050, 25 percent of China will be over the age of 65.

The overall rate of GDP growth is unlikely to ever rival that of a few years ago at 10 to 12 percent a year, but overall what we have is higher-quality growth. People in China are living well. Things should continue to motor along very smoothly at least for one more generation — a generation whose members are better educated, more skilled, ambitious and globalized than their parents.

There’s no denying the reality of what a better, happier, freer, richer country China has become since I first set foot here. I marvel every day at the China that I now live in, even while I occasionally curse some of the unwanted byproducts like heavy pollution in most parts of the country, overcrowding at tourist attractions, bad traffic, and a pushy culture that’s lost touch with some of China’s ancient glories.

China will continue to amaze, inspire and stupefy the world. The Chinese have done very well and will do better. At the same time, those of us investing in China may do a little better in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.

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China Investing, The Pain and the Perks — Harvard Business School Global Alumni Lecture

October 10th, 2017 No comments

 

It was a delight and a privilege to give a talk on China investing to Harvard Business School’s global alumni organization. If you’d like to see the slide deck, please click here. The audio version of the lecture, done by worldwide webcast,  is also up on YouTube.

The topic was a big one — why have China investment returns so often failed to keep pace with the phenomenal growth in the country’s economy, and can investors do anything to improve the odds of success? Given an hour to discuss, I could only really scratch the surface.

A key takeaway: the past needn’t be prologue. Investing in China may prove less vexatious in the future. In part, that’s because of the growth of a mass affluent consumer market in China, a shift that plays to the strengths of many US, European and East Asian companies and institutional investors. Second, of course, everyone now can learn from past mistakes and misperceptions.

As I said in closing, “China will continue to amaze, inspire and stupefy the world. Chinese have done very well and will do better. At same time, those of us investing in China may do a little better here in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.”

 

 

 

Venture Fundraising in Yuan Soars as Investors Target Chinese Tech Firms — The New York Times

September 23rd, 2017 No comments

 

HONG KONG (Reuters) – China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.

Fund managers have raised 95.8 billion yuan ($14.54 billion) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7 billion yuan in all of 2016. That puts 2017 on pace to be the biggest year since 2012, when 145.8 billion yuan was raised, according to data provider Preqin.

There are currently 78 funds looking to raise as much as another 1.15 trillion yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.

 Those include the 350 billion yuan sought by the China Structural Reform Fund, 200 billion yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150 billion yuan for the state-owned Enterprise National Innovation Fund.

The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals. The China Structural Reform Fund, which was launched in 2016, has raised 20 percent of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.

“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital. “China has a lot of money in its government apparatus. It wants to seed innovation and entrepreneurship and this is how it’s doing it.”

The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years. It also compares with flat growth expected for U.S. venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA).

CATCHING ENTREPRENEURS

Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had U.S. dollar funds are launching their first funds in yuan. Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.

Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.

“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies. “That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50 percent of the deals. Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”

Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group (BABA.N), is looking to raise at least 10 billion yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd (0700.HK), Baidu Inc (BIDU.O) and JD.com Inc (JD.O), is targeting about 8 billion yuan for its fund, sources told Reuters.

The investment management arm of securities firm China Renaissance is also adding to its yuan reserves with a new fund worth about 6 billion yuan, according to a person familiar with the plans who couldn’t be named because details of the fundraising aren’t yet public. Ion Pacific is raising 1 billion yuan for its debut fund in the Chinese currency, while GGV Capital is about to close fundraising for its first yuan-denominated fund.

“Some sectors don’t allow foreign investors, so for example, in the culture and media industry you need to apply for certain licenses like video licenses and you need to be a local investor,” said Helen Wong, a partner at Qiming Venture Partners.

“Now the IPO window is open for the local stock market, so that encourages a lot of companies to go for a local listing,” she added, in reference to the increase in IPO approvals by regulators in 2017 that is prompting more companies to start preparations to go public. Previously, a slow approval process and long line of companies waiting for clearance dissuaded many from those plans.

The shift would give an added boost to the Shenzhen and Shanghai bourses. China has had 322 new listings this year, raising a combined $22.9 billion, Thomson Reuters data showed. This already surpasses the 252 for all of 2016, even after the country’s securities regulator slowed the number of weekly IPO approvals in May.

It could also reduce the influence of the Nasdaq and New York stock exchanges, where many Chinese technology companies previously flocked when they went public.

“For the RMB side, you see more companies in restricted sectors like healthcare and media and certain parts of cleantech that needs government support to get started,” said Hans Tung, managing partner at GGV Capital. “You also see companies in the fintech space and a lot of them need a license to operate a business in the financial services industry, so they tend to want to list in China.”

 

As published in The New York Times.

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Why Has China’s GDP So Outpaced IRR?

September 22nd, 2017 No comments

It’s the paradox at the core of China investing: why has such a phenomenal economy proved such a disappointing investment destination for so many global institutional investors, PE firms and Fortune 500s.

Financial theory provides a conceptual explanation. Investment returns are not absolutely correlated to GDP growth. China will likely go down in history as the best proof of this theorem. China as certainly delivered exceptional GDP growth. In per capita PPP terms, China is 43 times larger than in 1981, when I first set foot in China as a grad student. No other country has ever grown so fast, for so long and lifted so many people out of poverty and into the consumer middle class.

Commensurate investment returns, however, have been far harder to lock in. Harvard Business School’s global alumni organization invited me to give an hour-long talk on this topic this week. It required a quick gallop through some recent and not always happy history to arrive at the key question — does the future hold m0re promise for global institutional investors looking to deploy capital in China.

 For more detailed look at some reasons for the big disconnect between China’s national GPD growth and investment IRR, and some suggestions how to improve matters, please have a look by clicking here at the HBS talk slide deck.

Publicly-quoted shares in Chinese companies have failed by far and away to keep pace with the growth in overall national income. In the alternative investment arena, global PE and VC firms enjoyed some huge early success in late 1990s and first part of the 2000s. Since then, the situation has worsened, as measured in cash returns paid out to Limited Partners. One major reason — the explosion within China of Renminbi investment funds, now numbering at least 1,000. They’ve bid up valuations, gotten first access to better opportunities, and left the major global PE and VC firms often sitting on the sidelines. With tens of billions in dry powder, these global firms look more and more like deposed financial royalty — rich, nostalgic, melancholy and idle.

China this year will add approximately $1 trillion of new gdp this year – that’s not a lot less than the entire gdp of Russia. Indeed, China gdp growth in 2017 is larger than the entire gdp of all but 15 countries. Who is making all this money? Are all the spoils reserved for local investors and entrepreneurs? Can global investors find a way at last to get a bigger piece of all this new wealth?

Overall, I’m moderately sanguine that lessons have been learned, especially about the large risks of following the Renminbi fund herd into what are meant to be sure-thing “Pre-Ipo” minority deals. Active investment strategies have generally done better. With China’s economy well along in its high-speed transition away from smokestack industries and OEM exports to one powered by consumer spending, there are new, larger and ripe opportunities for global investors. In virtually all major, growing categories of consumer spending, Western brands are doing well, and will likely do better, as Chinese consumers preferences move upmarket to embrace high-quality, well-established global household brand names.

Harvard, its alumni and benefactors have a two hundred year history of investing and operating in China. So, there’s some deep institutional memory and fascination, not least with the risks and moral quandaries that come with the territory. The Cabot family, at one time among America’s richest, provided huge grants to Harvard funded in part by profits made opium running into China.

Harvard Management Company, the university’s $35 billion endowment, was an early and enthusiastic LP investor in China as well as large investor in Chinese quoted companies including Sinopec. Their enthusiasm seems to be waning. Harvard Management is apparently considering selling off many of its LP positions, including those in PE and VC funds investing in China.

This looks to be an acknowledgment that the GP/LP model of China investing has not regularly delivered the kind of risk-adjusted cash-on-cash returns sophisticated, diversified institutional investors demand. While China’s economy is doing great, it’s never been harder to achieve a successful private equity or venture capital investment exit. True, the number of Chinese IPOs has ratcheted up this year, but there are still thousands of unexited deals, especially inside upstart Renminbi funds.

While decent returns on committed capital have been scarce, the Chinese government continues to pour billions of Renminbi into establishing new funds in China. There’s hardly a government department, at local, provincial or national level that isn’t now in the fund creation business. Diversification isn’t a priority. Instead, two investment themes all but monopolize the Chinese government’s time and money — one is to stimulate startups and high-tech industry (with a special focus on voguish sectors like Big Data, robotics, artificial intelligence, biotech) the other is to support the country’s major geostrategic initiative, the One Belt One Road policy.

One would need to be visionary, reckless or brave to add one’s own money to this cash tsunami. Never before has so much government money poured into private equity and venture capital, mainly not in search of returns, but to further policy and employment aims. It’s a first in financial history. The distortions are profound. Valuations and deal activity are high, while returns in the aggregate from China investing will likely plummet, from already rather low levels.

Where should a disciplined investor seek opportunity in China? First, as always, one should follow the money — not all the government capital, but the even larger pools of cash being spent by Chinese consumers.

In China, every major consumer market is in play, and growing fast. This plays to the strengths of foreign capital and foreign operating companies. There are almost unlimited opportunities to bring new and better consumer products and services to China. Let the Chinese government focus on investing in China’s future. High-tech companies in China, ones with globally competitive technology, market share and margins are still extraordinarily rare, as are cash gains from investing here.

Meantime, as I reminded the HBS alumni, plenty of foreign companies and investors are doing well today in China’s consumer market. Not just the well-known ones like Apple and Starbucks. Smaller ventures helping Chinese spend money while traveling globally, or obtain better-quality health care and education options, are building defendable, high-margin niches in China. One company started by an HBS alumnus, a native New Yorker like me, is among the leading non-bank small lending companies in China. It provides small loans to small-scale entrepreneurs, mainly in the consumer market. Few in China know much about Zhongan Credit, and fewer still that it’s started and run by a Caucasian American HBS grad. But, it’s among the most impressive success stories of foreign investment in China.

Of course, such success investing in China is far from guaranteed. Consumer markets in China are tricky, fast-changing, and sometimes skewed to disadvantage foreign investors. For over two hundred years, most foreign investors have seen their fond dreams of a big China payday crash on the rocks of Chinese reality.

The rewards from China’s 35 years of remarkable economic growth has mainly — and rightly — gone to the hard-working people of China. But, there’s reason to believe that in the future, more of the new wealth created each year in China will be captured by smart, pragmatic investors from HBS and elsewhere.

 

As published by China Money Network

As published by SuperReturn

YouTube video of the full lecture to Harvard Business School alumni organization

 

 

 

China Steps Up Warnings Over Debt-Fueled Overseas Acquisitions — The New York Times

August 21st, 2017 No comments

BEIJING — China moved on Friday to curb investment overseas by its companies and conglomerates, issuing its strongest signal yet that it wants to rein in runaway debt that could pose a threat to the country’s slowing economy.

Beijing has stepped up its efforts in recent months to restrict some of its most acquisitive companies from buying overseas assets, worried that a series of purchases by China’s conglomerates around the world has been driven by excessive borrowing.

In the latest move, a statement published by China’s cabinet, the State Council, said the authorities would punish companies for violating foreign investment rules, and establish a blacklist of businesses that did so. The statement was attributed to the National Development and Reform Commission, the commerce ministry, the foreign ministry and the central bank.

The statement pointed to acquisitions in sectors ranging from entertainment and sports clubs to hotels, but it was unclear whether or how the government would block deals.

It reiterated a warning issued in December that restrictions on overseas investments were being imposed because of “irrational” investment trends.

That statement said that the kinds of investments overseas it described were “not in accordance with macro-control policies.” The government wants to “effectively guard against all sorts of risks,” it said. The State Council document said the government nevertheless supported overseas investments in sectors such as oil and gas and in China’s “One Belt, One Road” program, which aims to promote infrastructure projects along the historic Silk Road trading route.

“It’s the loudest yet of wake-up calls that the government holds the keys to the lockbox of the country’s wealth, public and private,” Peter Fuhrman, chairman of China First Capital, an investment bank, said in an emailed response to questions. “Bad M&A is all but criminalized.”

A surge in overseas acquisitions by Chinese investors in recent years has ignited fears that soaring corporate debt levels could destabilize the country’s economy, the world’s second largest, and further weaken its currency.

Companies like Anbang Insurance Group, Fosun International, the HNA Group and Dalian Wanda Group have capitalized on cheap loans provided by state banks to snap up trophy assets such as the Waldorf Astoria hotel in New York and AMC Theaters.

Beijing’s clampdown on overseas investments shows how the interests of private business can collide with those of the Communist Party government. Beijing has made financial stability a priority this year, with the party’s congress scheduled in the fall. Among the party’s top concerns: controlling debt, stemming the flow of capital leaving the country, and China’s opaque “shadow banking” system.

But while the latest statement from the State Council is likely to have an impact on mergers and deals, a lot of Chinese money is already offshore and thus not easily restricted by the government in Beijing, said Alexander Jarvis, chairman of Blackbridge Cross Borders, which has advised Chinese companies on several soccer acquisitions.

“Deals are still going to happen,” Mr. Jarvis said. “There is plenty of Chinese capital overseas in offshore tax havens, in the U.S., across Europe, Hong Kong. I’m not sure they can fully control that capital.”

In a sign of that deal making, a Chinese businessman, Gao Jisheng, struck a deal to buy an 80 percent stake in Southampton Football Club, a soccer team in the English Premier League, for about $271 million. Mr. Gao obtained the loan from a bank in Hong Kong, a special administrative region of China that is administered under separate laws, Bloomberg reported on Thursday.

Geoffrey Sant, a partner at New York-based law firm Dorsey and Whitney, said it is likely that the latest announcement from Beijing will result in a “temporary pause” in overseas acquisitions.

“I think they are thinking there’s a bit of irrational exuberance in the market right now and they just want to cool that off,” said Mr. Sant, who represents Chinese companies. “It doesn’t make sense to permanently ban some of these areas.”

The State Council statement comes amid increased scrutiny of China’s “gray rhinos” — threats that are large and obvious but often neglected even so.

In recent months, the government has said it would increase scrutiny of companies’ balance sheets, warning that some of the largest companies could pose a systemic risk to the economy.

Encouraged by the slew of acquisitions made by some of the country’s most powerful tycoons, many smaller Chinese companies started looking overseas, spurred by China’s slowing economic growth to look for new markets.

Many, however, had no experience running the businesses they were targeting. In one such example, Anhui Xinke New Materials, a copper processing company in central China, made a deal to buy Voltage Pictures, an American film financing and production firm, for $350 million. A month later, Anhui Xinke pulled out of the transaction.

In other cases, it was not clear whether many of the big trophy acquisitions were actually good deals.

In 2015, Legendary chalked up a net loss of $540 million, according to a regulatory filing that Wanda Film filed on the Shenzhen Stock Exchange. Fosun International, meanwhile, paid a premium to buy French resort operator Club Med, which was until then an unprofitable company, eventually agreeing to a $1.1 billion price tag in 2015 after a long takeover battle. The firm made a small profit last year, according to Fosun’s filings. And last year, AC Milan, the Italian soccer club that was acquired by a Chinese consortium for about $870 million, made a net loss of about $88 million.

“I agree with the Chinese government. A lot of these deals are bad,” said Mr. Jarvis.

Companies have already started feeling the pinch of Beijing’s clampdown on overseas investments, which started in earnest in December.

The number of newly announced outbound mergers and acquisitions by Chinese firms fell by 20 percent in the first six months of 2017 compared to the same period in 2016, though it picked up in May and June, according to Rhodium Group, a New York-based research firm.

In March, Dalian Wanda, the Chinese conglomerate that owns AMC Theaters and Legendary Entertainment, was forced to abandon its $1 billion deal to buy Dick Clark Productions, the firm behind the Golden Globes and Miss Universe telecast after Beijing tightened its controls on capital outflows. Months later, Wanda sold a majority stake in 13 theme parks to property firm Sunac China Holdings and handed 77 hotels to R&F Properties, another real estate company based in the southern city of Guangzhou, for $9.5 billion.

 

As published in The New York Times.

The New York Times Interview Transcript

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China’s New Plan for Silicon Valley Partnerships — Global Times

August 16th, 2017 No comments

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The once-sizzling romance between China and Silicon Valley has cooled rather dramatically. This has some potentially serious consequences for both sides, but especially for China, which desires to invest in and gain access to some of the hottest new ideas from this cradle of innovation. A new strategy is needed.

Until recently, Chinese investment funds and companies were investing hundreds of millions of dollars every year into promising Silicon Valley start-ups, as part of a strategy to forge closer ties between the US high-technology sector and the large Chinese market. But the flow of funds has largely dried up.

There are two main reasons. First, Chinese regulators imposed new restrictions on large overseas investments. Second, the US government began to take a less friendly attitude toward Chinese technology investment in the US, killing several proposed deals and holding up approval on many others.

There is every sign that things in the US are going to get more restrictive rather than less. As someone convinced of mutual benefits from Chinese investment in US technology, it all seems highly counterproductive. The world needs more deep and extensive ties between the Chinese and the US high-technology world, not just in start-up investing but also in university research and scientific conferences, shared research and development (R&D) labs, and partnerships among large companies working in hot fields like semiconductors, robotics, artificial intelligence and clean energy.

What can China do? Rather than sending money out, it can encourage more US high-technology start-ups to relocate to China. There is a huge amount to be gained, both for China’s continuing industrial upgrading and for innovative US technology companies looking to grow into giants.

China has in abundance the most vital ingredients for technology start-up success:  capital, a market and talented managers and engineers. In many industries, for example advanced manufacturing, robotics and new battery technologies, China often has more to offer technology companies than the US.

China already has lured a lot of Chinese-born scientists and technologists back from Silicon Valley to open start-ups. The next step is to lure some of the best early-stage US technology companies to China. This addresses a big weakness in the US high-technology scene: companies there tend to view the China market as an after-thought. In reality, it is often the market most worth prioritizing.

I’m seeing how well all this can work on the ground. We’re helping a promising US robotics company build its future in China. It is establishing a Chinese company as its main asset and moving some of its core team to China. It expects to add many more staff in China. The breakthrough product it’s now perfecting has a huge potential market in China’s manufacturing industry.

Originally, this company was aiming to find investors in China to help it grow in Ohio. We helped explain why bringing the company to China would make a lot more sense. The company is applying for R&D grants as well as venture capital in China. Within a 100-kilometer radius of its future base in Shenzhen, South China’s Guangdong Province is the largest concentration of potential customers and partners in the world.

We foresee big mutual gains if China can attract many more exciting early-stage technology companies. They  will create jobs, pay taxes and invest in local R&D. The benefits to China should be far larger than just buying some shares in a technology company based in Silicon Valley.

The objective isn’t to evade US rules but to bring start-ups early in their growth stage to the market where the demand is greatest. Technology companies do best when they sit close to the biggest concentration of customers.

The Chinese government has already said it wants to make the country more of a magnet for global technology talent. Shenzhen is a great city for US start-ups to grow big.

The steep drop in Chinese investment in Silicon Valley may actually prove a blessing in disguise. It’s smart to keep more of that capital at home to invest in great technology companies in China. Many US technology start-ups will achieve far more, and far more quickly, if they make China their future home.

The author is Chairman and CEO of China First Capital.

 

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http://www.globaltimes.cn/content/1061519.shtml

 

Goldman, Lazard China Dealmakers Decamp for Upstart Funds — Bloomberg

March 31st, 2017 No comments

 

 

 

 

(Bloomberg) — Veteran China dealmakers at Wall Street banks and Western buyout firms are heading for the exits, in search of the more lucrative deals and higher remuneration offered by smaller funds.

Three senior merger advisory bankers from Goldman Sachs Group Inc., Bank of America Corp. and Lazard Ltd. have resigned within the past month for senior roles at fledgling investment funds, according to people familiar with their departures, who asked not to be identified discussing private information. Carlyle Group LP Managing Director Alex Ying left the firm in January after two decades to set up Rivendell Partners, which focuses on mid-sized buyouts in Greater China and Vietnam, other people said.

The moves highlight the increasing challenges big banks face in retaining their top dealmakers in an environment of tighter regulations and shrinking fees. Revenue from investment banking in the Asia Pacific region fell 8 percent in 2016 to the lowest in at least five years, according to data from research firm Coalition. Merger advisory revenue dropped 4 percent, the figures show.

“Deal flow from China has come down considerably — those flows are severely curtailed relative to where they were,” said Henry Tillman, chairman of London-based advisory firm Grisons Peak LLP. “With investment banking revenue declining, people are going to look at their options.”

Imminent departures include Andrew Huang, a managing director advising on Greater China mergers and acquisitions at Goldman Sachs who has resigned to join Chinese private equity firm FountainVest Partners, according to the people. Peter Kuo, a China M&A banker at Lazard, is leaving to help run a technology fund backed by Chinese investors called Canyon Bridge Capital Partners, the investment firm confirmed in response to Bloomberg queries.

Higher Returns

Ellis Chu, head of China M&A at Bank of America, has also resigned and will be joining an Asia-focused fund, the people said.

Spokesmen for Bank of America, Goldman Sachs and Rivendell declined to comment on the departures. A representative for Carlyle confirmed Ying’s departure, declining to comment further. FountainVest Chief Executive Officer Frank Tang didn’t answer calls to his mobile phone seeking comment.

Running or working for a smaller, Asia-based fund can offer managers greater independence in decision-making on deals and give them a bigger share of fees and profits from exiting investments. Senior executives at global buyout funds in Asia typically have to share 40 percent to 60 percent of deal fees generated in the region with U.S. and European counterparts, people familiar with the practice said.

Smaller funds are also making more money. Private funds in Asia with assets of $500 million or less had a median internal rate of return of 16.1 percent over a three-year timeframe, compared with 11.5 percent at peers with more than $1 billion of assets, according to data compiled by research firm Preqin Ltd.

High Turnover

“A reason these guys are leaving likely also includes the fact those big firms have been having a challenging time of late in China, which leads to higher work pressure and unusually high turnover,” said Peter Fuhrman, chairman of Shenzhen-based China First Capital. “You can then try to set up on your own, make some deals, hope for success.”

The exits follow other recent moves to smaller outfits. KKR & Co.’s two most senior China executives left in December to form a China-focused investment firm. Richard Wong, an M&A veteran at Morgan Stanley, resigned this month after 16 years to help set up Nexus Point Partners, a China-focused buyout fund started by MBK Partners Ltd. co-founder Kuo-Chuan Kung.

The bankers and their new funds will face challenges when it comes to sourcing China deals. The government is clamping down on money outflows, which augurs poorly for outbound acquisitions. What’s more, competition is increasing from Chinese securities firms. Three Chinese banks ranked in the top 10 advisers on offshore acquisitions by mainland companies since the beginning of 2016, according to data compiled by Bloomberg.

Among the first buyout specialists to make the leap from big outfits were KY Tang, who left UBS AG’s private equity fund in 2004 to start Affinity Equity Partners, and Michael Kim, who set up MBK in 2005 with five other senior Asian executives from Carlyle. In 2010, TPG Capital lost Shan Weijian, who left to found PAG Asia Capital. The next year, Mary Ma departed to help start Boyu Capital.

 

https://www.bloombergquint.com/markets/2017/03/30/veteran-china-dealmakers-leave-wall-street-for-upstart-funds

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China’s Healthcare Sector a Big Draw for Private Equity Investors — South China Morning Post

January 19th, 2017 No comments

 

China’s healthcare sector a big draw for private equity investors

 
PUBLISHED : Wednesday, 18 January, 2017

Private equity firms and hedge funds are investing heavily into China’s healthcare industry in a bet on the sector’s upbeat growth potential, fund managers told a Hong Kong forum.

Private hospitals and drug makers are among the bright spots for investors focusing on China, where rising income and an ageing population are boosting the demand for quality medical services.

Private hospitals are set to attract large amounts of capital in the coming decade amid an underdeveloped private medical industry and a shortage of doctors, said investment professionals.

“Healthcare has been the single area that probably everyone can foresee globally an enormous amount of capital and investment,” Peter Fuhrman, chairman of China First Capital told the Asia Private Equity Forum in Hong Kong on Wednesday.

China’s population of individuals aged 60 or older is set to rise 90 per cent to 240 million by 2020, according to the World Health Organisation.

Meanwhile, one consequence of the nation’s one-child policy, introduced in 1979 and officially phased out in 2015, is that the burden of caring for ageing parents will put tremendous pressures on the young generations.

The healthcare sector in China will become a US$1 trillion a year business by 2020, according to a report by consulting firm McKinsey & Company.

Among healthcare institutions, private hospitals are set to become the best investment for this sector, said Li Bin, chief executive of Ally Bridge LB Healthcare Fund, a hedge fund that focuses on investing in China and Asia healthcare companies.

However, he said there are problems that will likely hinder the industry’s growth.

Among barriers, Li cited a shortage of quality doctors, the lack of an ecosystem to support the development of private hospitals, as well as the long time frame needed to build up a trusted reputation.

Although about half of the hospitals in the country are private, more than 80 per cent of medical professionals work in the public sector, which offer higher salaries and better career prospects, according to a recent report by Citi.

“Five years ago I said it would take 10 years for private hospitals to mature in China, now I think it would take another 10 years,” he said.

Alice Au Miu Hing from SpencerStuart, an executive search consultancy, said it remains extremely difficult to find experienced private hospital executives with China experience who can speak Putonghua.

“The common approach now is to bring someone from the industry from outside and see if the person can survive in the mainland market,” said Au.

Meanwhile, pharmaceutical and biotech start-ups will flourish with China’s emerging middle class seeking better healthcare services.

Judith Li, partner at the life science-focused Lilly Asia Ventures, told the forum that China spends about 6 per cent of its GDP on healthcare, versus an Organization for Economic Cooperation and Development average of 10 per cent.

“China has so many white spaces where there is nothing exists, and it’s very compelling,” she said.

“If you can bring it [a drug] from the US, you can then avoid the fundamental scientific risk of developing something that’s completely unavailable.”

http://www.scmp.com/business/article/2063273/chinas-healthcare-sector-big-draw-private-equity-investors

Turbulence and Paralysis: the Year Ahead in US-China Relations — Financial Times

December 13th, 2016 No comments

 

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A month before his official inauguration, Donald Trump is already tossing diplomatic grenades in China’s direction. It is a sign of things to come. 2017 is shaping up to be a highly eventful, taut and precarious year for China-US relations. This is partly due to a simple scheduling coincidence.

2017 will be the first time ever when both the US and the PRC in the same year will usher in new governments. The US will kick things off on January 20th by swearing in Donald Trump as President. China, meanwhile, will undertake its own large political upheaval, its five-yearly change in political leadership, culminating in the 19th Communist Party Congress sometime late in the year. Virtually the entire government hierarchy, from local mayors on up, will be changed in a monumental job-swapping exercise orchestrated by Xi Jinping, China’s president.

The US under Mr Trump, with a Republican Congress at his back, seems intent to challenge China more assertively in trade, investment and as a currency manipulator while intensifying the military rivalry. China’s leadership, meantime, will become deeply absorbed in its own highly secretive, inward-looking and internecine political maneuvering. While Mr Xi tries to further consolidate his power, Mr Trump will likely be asserting his, leading to a globally ambitious US and an introspective China. This would represent something of a role reversal from recent precedent.

With the chess pieces all in motion, businesses should be plotting their moves in China with caution. The proposed Trans Pacific Partnership (TPP) trade deal is dead, leaving China’s still-evolving “One Belt,One Road” initiative as the main impetus for new trade flows in Asia. Donald Trump says he will push for what he claims to be more “more fair” bilateral trade deals. China, with its $365bn trade surplus with the US and high barriers to much inward investment, is clearly in his sights.

How will China react? The only certainty is that as the year progresses, China’s government apparatus will slow, and with it decision-making at policy-making bodies and many State-owned enterprises (SoEs). All will wait to hear what new tunes to march to, once the new ruling Politburo is revealed to the public in the fourth quarter.

Chinese officials at all levels are already jockeying for promotion. That means falling into line with Mr Xi’s anti-corruption campaign. The Party Secretary in Jiangsu province, one of China’s wealthiest, got an early head start. He instituted his own form of localized prohibition, ordering that government officials could no longer drink alcohol at any time, in any kind of setting, anywhere in Jiangsu.

The booze embargo did include one loophole. If senior foreign guests are present, alcohol can flow as before, like an undammed torrent.

As the Party Congress approaches, it will be even harder to get a deal with a Chinese SoE lined up and closed within any kind of reasonable time frame. Even after the Party Congress ends, it will likely take more months for any real deal momentum to return. Investment banking bonuses along with billings at global law, accounting and consulting firms are all likely to take a hit.

One other certainty: the renminbi will come under increasing pressure as the US ratchets up its moves to apply tariffs to Chinese exports and China’s own economy remains, relatively speaking, in the doldrums. How much pressure, though, is another question.

Anyone making predictions about the speed and degree of the renminbi’s decline is playing with a loaded weapon. A year ago some of the world’s biggest and loudest hedge fund bosses, including Kyle Bass, David Tepper and Bill Ackman, were proclaiming the imminent collapse of the renminbi. The renminbi, despite slipping by about 6 per cent during 2016, has yet to behave as the money guys predicted.

The Chinese government uses non-market mechanisms to slow the renminbi’s decline. A recent example: its abrupt move in November to tightly control outbound investment and M&A. But shoring up the currency will undercut one of China’s larger economic imperatives, the need to upgrade the country’s industrial and technological base. That will require a prodigious volume of dollars to acquire US and European technology companies such as recent Chinese deals to acquire German robot-maker Kuka and US semiconductor company Omnivision.

Chinese investors and acquirers not only face tighter controls on the outflow of US dollars. The US is also becoming more antagonistic toward Chinese acquisitions in the US and globally. Deals of any significant size need to pass a national security review overseen by a shadowy interagency body known as the Committee on Foreign Investment in the United States, or CFIUS.

CFIUS works in secret. In recent months, it has blocked Chinese investment in everything from a San Diego hotel, to Dutch LED light bulbs as well as US and European companies more explicitly involved in high-tech industry including semiconductor design and manufacturing. The strong likelihood is CFIUS will become even more restrictive once Mr Trump takes over.

Unlike most areas of bilateral tension between the US and China, this is one area where the Chinese have no room to retaliate in kind. China already has a blanket prohibition on investment by US, indeed all foreign companies, into multiple sectors of the Chinese economy, from tech industries like the internet and e-commerce all the way to innocuous ones like movies, cigarettes and steel smelting. So, for now, China quietly seethes as the US intensifies moves to prevent China investment deals from being concluded.

China will probably need to regroup and start playing the long game. That means investing more in earlier stage tech companies, especially in the Silicon Valley, and hoping some then strike it big. These venture capital investments generally fall outside the tightening CFIUS net. China wants to spend big and spend fast, but will find it often impossible to do so.

Even as political and military tensions rise between the US and China in 2017, one ironic certainty will be that a record number of Chinese are likely to go to the US as tourists, home buyers or students and spend ever more there. China’s ardour for all things American – its clean air, high-tech, good universities, relatively cheap housing, and retail therapy – is all but unbounded.

If informal online surveys are to be believed, ordinary Chinese seem to like and admire Mr Trump, especially for his business acumen. Mr Xi, understandably, may view the new US President in a harsher light. Xi faces cascading complexities as well as factional opposition within China. He could most use a US leader cast in the previous mold, committed to constructive cooperation with China. Instead, he’s likely to contend with an unpredictable, disapproving and distrustful adversary.

 

https://www.ft.com/content/b1801637-4219-3222-9f45-658740aa1187

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Bill Gross, America’s “Mr. Unicorn”, Plots A Future in Asia

November 15th, 2016 No comments

 

bill-gross

Few technology entrepreneurs start one unicorn, a tech company with a market valuation of over $1 billion. Elon Musk has started three. Xiaomi’s Lei Jun two. Bill Gross has started and exited from seven, and has another two in his active porfolio.

Gross is the founder and chairman of Idealab, one of America’s oldest and probably still most successful technology incubators. Idealab was established in 1996. Gross was 38 years old then. He had already started and sold two software companies. He decided to take some of that money, as well as some from investors he knew, and start his own incubator.

From the beginning, Idealab has pursued a unique path among technology investors in California. Unlike most other incubators and VC funds, Gross himself comes up with most of the ideas for the new Idealab companies. Idealab then provides the first round of capital for each new company, hires a CEO and Gross takes on the role as non-executive chairman. Idealab has a full-time team to manage the back office work like HR and accounting for new companies during their early stages.  Idealab headquarters is in an old brick warehouse in the California city of Pasadena, near Los Angeles, and close to Caltech, where Gross went to school.

In the last 20 years, Gross has started 150 businesses. Of these, 45 have had successful exits, either through IPOs or M&A. A similar number are still in the Idealab portfolio.

The unicorns Gross created include some of the most successful early successes in e-commerce and online advertising. The companies are: eToys, Overture, Tickets.com, Netzero, Centra, Shopping.com and  Citysearch. Two other Idealab companies have recently merged with other tech startups. These merged companies, Twilio and Taboola, also now have valuations above $1 billion. Over the years, Gross also started and sold companies to Google, eBay, AOL, AirBNB. Along with internet companies, Gross has also started companies in solar and renewable energy, robotics, online education, wireless networking, 3D printing machinery, home medical care.

Gross long ago stopped raising money from outside investors. Idealab is a corporation, not a fund. Gross has the kind of freedom most tech entrepreneurs can only dream of – the imagination and drive to start new technology companies, a few new ones every year, and the capital to help them grow. Idealab’s capital contribution into each new company is about $250,000. If a company begins to grow according to plan, Idealab then raises outside money from VC firms, mainly the large ones based in Silicon Valley. Idealab’s return on invested capital up to now: 13.5 times.

Gross was born in Japan, but moved to California as a boy and got his start as an entrepreneur while in middle school. For 20 years, he has seen technology business opportunities earlier than most people. Anyone interested in where technology is headed, the important problems it may solve, how to incubate successful startups, and how China and East Asia may become more deeply integrated into California’s innovation ecosystem should listen to what Gross has to say.

 

Venture capital investing and incubators have grown very large in the last few years, both in the US and also elsewhere including China. There’s still a lot of capital looking for good ideas. Let’s dissect please how you look at the world. What are the key “metatrends” you see that will impact the shape and size of the global economy over the next 35 years?

Let me take you through those quickly. Start with population growth. The projections are there will be 9.7 billion people on the planet by 2050, up from 7.4 billion today. Larger population means lots of possibly negative impacts and so areas where technology needs to come up with new solutions. What are the major challenges in the future? I think mostly about six. I’m an engineer, so let me give you a list:

  1. climate change;
  2. how to the meet the need to provide better, more affordable healthcare and prevention against global epidemics
  3. food security, having enough safe food available across the world
  4. the growing technological divide between people living with the benefits of modern technologies and those who are left behind
  5. the workforce of the future, how to make sure people have the right skills to find productive jobs
  6. the future of the internet, how to provide security and privacy to everyone using it.

 

The people working to solve these problems probably hope to win Nobel Prizes, not become technology entrepreneurs.  So, where do you see the concrete business opportunities, where there’s both a future market and a potential for some kind of new technology breakthrough?

Of course, you wouldn’t expect me to hand over the keys to my kingdom, to give you the exact business areas we are now working on. But, I can share the industries where I think there’s lots of opportunity worldwide and where we’re actively coming up with new business ideas and looking to start new companies. Again, if you don’t mind, let me give it to you as a list.

  1. Autonomous cars and drones
  2. Clean water and clean energy
  3. New education models, including MOOCs
  4. Agriculture technology, including urban farming, growing food closer to population centers
  5. Advanced machine-meaning and deep neural networks to provide better, smarter data and decision-making
  6. 3D Printing, using metal, new materials
  7. IoT consumer and business
  8. Home automation
  9. Virtual reality and human-computer interaction
  10. New forms of transportation, including hyperloop and perhaps even flying cars
  11. Space, inexpensive launches, to space mining and microsatellites
  12. Software and information security systems to manage each of these

While it’s still possible to start successful companies with limited capital and get to market quickly as we’ve been doing for the last 20 years, some of the newer business opportunities I like will need much larger amounts of money and a longer incubation period. But, the rewards for success will be larger than anything we’ve seen up to now.

 

Up to now, you’ve focused only on building breakthrough tech companies in California to serve to US market. There are other places in the world with money and markets for good technology.

Yes, I definitely see a fusion of powerful and positive forces taking place in Asia that could allow Greater China to emerge as an important constituent in globally-important innovation, both as a market and as a base of ideas and manufacturing. This will be good for China, good for Asia, good for the US, good for the world.

I’m an inventor, and so have always looked to China. I have huge respect for the ingenuity, diligence and entrepreneurship of the Chinese people. Look at the example of China’s greatest inventor, Lu Ban, who lived almost 2,500 years before America’s Thomas Edison. He came up with ideas for flying machines and all kinds of advanced wooden implements .

 

So what role can you envision China playing as one of the world’s centers of technology innovation?

China, like the US, is a place where a large domestic market, manufacturing strength, capital and entrepreneurial culture all come together.

A few years ago, I gave myself a challenge, to come up with one new business idea every day.  I’ve mainly been able to keep up that pace. We could start even more companies, but there’s often one big constraint. We can’t find enough great people to run each new company. Greater China is blessed with having a large number of talented managers and engineers. That’s a huge and valuable resource. On the downside, intellectual property protection in China isn’t nearly as robust as it needs to be.

 

All of Idealab’s billion dollar exits happened during the early years of the internet, with IPOs for companies including eToys, Citysearch, Tickets.com and the sale of online-advertising business Overture to Yahoo. Have big exits become harder?

IPOs have certainly slowed down. The total number of annual IPOs in the US has been falling since we got started 20 years ago. It used to be over 300 companies on average IPOd every year in the US. It’s now below 100. This year is looking like one of the slowest for US IPOs. A big reason is the cost and regulatory burden of being a public company in the US. Our exits now come from M&A.  We continue to do pretty well.

Let me quickly go over our three of our most recent M&A exits. The three are all in different industries — mobile phone security, solar energy and robotics. We started Authy to provide simple but more effective mobile phone data and transaction security. We merged it last year with Twilio, which IPOd this summer on the New York Stock Exchange and now has a market cap of over $4 billion.

RayTracker is a company we started to improve the performance and energy production from solar panels by getting them to track the movement of the sun across the sky. This has been a passion of mine since high-school, to make solar energy more affordable and efficient. We sold RayTracker to First Solar, a Nasdaq-listed company. Today ground mounted trackers like RayTracker invented account for more than 90% of all solar installations in the US and First Solar is a leader the field.

The other recent exit is a little bittersweet, because we may have come to market a little too early with a product consumers originally didn’t really understand. They do now. Being too early with an idea can lead to failure just as quickly as being too late.  Our company was Evolution Robotics, which was probably the first company to design hardware and software for a home robot to clean floors. We had to come up with substantial new technology in vision recognition and spatial mapping, including our own proprietary indoor GPS system using infrared. We sold our company to a competitor, iRobot, which is now by far the largest company in this industry.

 

Can we have a peek inside the current Idealab portfolio? Talk to us about companies you think have the potential to grow into billion dollar businesses within the next few years?

I mentioned already my lifelong passion for clean energy and making solar energy cheaper and more efficient. We have two companies now, Edisun and Cool Energy, that have unique solutions that are finding a lot of market acceptance. Edisun both generates and stores solar energy, so it can be delivered to the grid when it’s needed. Cool Energy uses a Stirling Engine to capture low temperature waste heat, like from machines in a large factory, and turn it into clean electricity.  It can also make electricity from waste cold, like the huge refrigeration vessels used for LNG storage.

Mark Andreesen, the guy who invented the first commercial web browser and is now a successful venture capital investor, has said that “software is eating the world”. He means that just about every product and service is going to need more and better software in the future. I agree. The problem is, where are all those new software engineers going to come from? We’ve started two companies to teach kids how to write software, CodeSpark and Ucode. We’re noticing CodeSpark has more and more kids in China using it to learn to write software. We need to come up with a Chinese version, as well as Japanese, Korean.

One other area where we see huge potential is capturing and analyzing more and better mobile data, then using it for more efficient advertising. This could be as big a future market as “Pay-per-click” online advertising that earns so much money for Google and Baidu. I have a longer history in this area than most people. Overture, a company I started and sold to Yahoo for $1.6 billion in 2003, was an early successful pioneer of online advertising.

 

In the last 20 years, you’ve started 150 businesses, and had ideas for hundreds of others. Few people anywhere at any time have done that much business creation. What you have you learned about the reasons why start-ups succeed and fail?

I believe that the startup organization is one of the greatest forms to make the world a better place. If you take a group of people with the right equity incentives and organize them in a startup, you can unlock human potential in a way never before possible. You get them to achieve unbelievable things.  But if the startup organization is so great, why do so many fail?

This matters to me as an investor and entrepreneur. I’ve started more failed companies than probably just about anyone else. They all looked promising at the beginning, had money and people in place, but ended up dying. Each time a company fails it’s heartbreaking for the entrepreneur. So, trying to get some usable analysis on this process may end up reducing the failure rate for me and I hope many others too.

I tried to look across what factors accounted the most for company success and failure. So I looked at the five key factors — the idea, the team, the execution, the business model and the timing. It accounted for 42 percent of the difference between success and failure. Team and execution came in second, and the idea, the differentiability of the idea, the uniqueness of the idea, actually came in third.

 

After 20 years at Idealab, and twenty years before that starting and running your own start-ups, aren’t you getting tired of this, the pressure, the risk, the uncertainty of starting new companies? There’s got to be an easier way to earn a living.

I think we are in a very exciting time where technology and innovation permeates everything we do, and every company.  If the previous 20 years of my life were devoted to fostering entrepreneurship, I would love my next 20 to be about pushing new technological boundaries to make the world a better place. To happen, it’s going to need Asia and California to push together.

 

Version as published by Nikkei Asian Review

Chinese version as published by Caijing Magazine (财经杂志中文版)

Bill Gross’s TED Talk on why startups succeed

 

 

The Big Sort — The Economist

November 11th, 2016 No comments

 

Economist

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“THE vultures all start circling, they’re whispering, ‘You’re out of time’…but I still rise!” Those lyrics, from a song by Katy Perry, an American pop star, sounded often at Hillary Clinton’s campaign rallies but will shortly ring out over a less serious event: a late-night party in Shenzhen to kick off “Singles’ Day”, an online shopping extravaganza that takes place in China on November 11th every year.

The event was not dreamt up by Alibaba, but the e-commerce giant dominates it. Shoppers spent $14.3bn through its portals during last year’s event. That figure, a rise of 60% on a year earlier, was over double the sales racked up on America’s two main retail dates, Black Friday and Cyber Monday, put together. Chinese consumers are still confident, so sales on this Singles’ Day should again break records.

It points to an intriguing question: how will all of those purchases get to consumers? Around 540m delivery orders were generated during the 24-hour spree last year. That is nearly ten times the average daily volume, but even a slow shopping day in China generates an enormous number. By the reckoning of the State Post Bureau, 21bn parcels were delivered during the first three quarters of this year.

The country’s express-delivery sector, accordingly, is doing well. In spite of a cooling economy, revenues rose by 43% year on year in the first eight months of 2016, to 234bn yuan ($36bn). And although the state’s grip on China’s economy is tightening, the private sector’s share of this market is actually growing. The state-run postal carrier once had a monopoly on all post and parcels. Now far more parcels are delivered than letters, and the share of the market that is commanded by the country’s private express-delivery firms far exceeds that of Express Mail Service, the state-owned courier.

China’s very biggest couriers have been rushing to go public on the back of the strong growth. Most of them started life as scrappy startups, and are privately held. But because of regulatory delays, which mean a big backlog of initial public offerings, many companies have resorted to other means. Last month, two of them, YTO Express and STO Express, used “reverse mergers”, in which a private company goes public by combining with a listed shell company, to list on local exchanges. In what looks to be the largest public flotation in America so far this year, another, ZTO Express, raised $1.4bn in New York on October 27th. Yet another, SF Express, China’s biggest courier, recently won approval to use a reverse merger too.

But investors could be in for a rocky ride. Shares in ZTO, for example, have plunged sharply since its flotation. That is because the breakneck growth of courier companies masks structural problems. For now, the industry is highly fragmented, with some 8,000 domestic competitors, and it is inefficient.

One reason is that regulation, inspired by a sort of regional protectionism, obliges delivery firms to maintain multiple local licences and offices. Cargoes are unpacked and repacked numerous times as they cross the country to satisfy local regulations. Firms therefore find it hard to build up national networks with scale and pricing power. All the competition has led to prices falling by over a third since 2011. The average freight rate for two-day ground delivery between distant cities in America is roughly $15 per kg, whereas in China it is a measly 60 cents, according to research by Peter Fuhrman of China First Capital, an advisory firm.

A handful of the biggest companies now aim to modernise the industry. Some are spending on advanced technology: SF Express’s new package-handling hub in Shanghai is thought to have greatly increased efficiency by replacing labour with expensive European sorting equipment. A semi-automated warehouse in nearby Suzhou run by Alog, a smaller courier in which Alibaba has a stake, seems behind by comparison but in fact Alog is a partner in Alibaba’s logistics coalition, which is known as Cainiao. The e-commerce firm has helped member companies to co-ordinate routes and to improve efficiency through big data.

Other investments are also under way. Yu Weijiao, the chairman of YTO, recalls visiting FedEx, a giant American courier, in Memphis at its so-called “aerotropolis” (an urban centre around an airport) in 2007. He was awed by the firm’s embrace of advanced technology. He returned to China and sought advice from IBM on how his company could follow suit. YTO is using the proceeds of its recent reverse merger to expand its fleet of aircraft, buy automatic parcel-sorting kit and introduce heavy-logistics capabilities for packages over 50kg.

There is as yet little sign that China’s regions will begin allowing packages to move freely, so regulation will remain a brake on the industry. More ominously, labour costs are rising. There are fewer migrant labourers today who are willing to work for a pittance delivering parcels. This week China Daily, a state-owned newspaper, reported that ahead of Singles’ Day, courier firms were offering salaries on the level of university graduates.

http://www.economist.com/news/business/21710004-chinas-express-delivery-sector-needs-consolidation-and-modernisation-big-sort

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China Inc.’s Investment Bank Dives Into Troubled Retail Market — Bloomberg

November 8th, 2016 No comments

 

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China International Capital Corp., the investment bank ex-Premier Zhu Rongji set up two decades ago to help restructure the Chinese economy, is again taking on a role that fits with the government’s agenda.

CICC’s $2.5 billion acquisition of China Investment Securities Corp. will plunge the firm into the retail investor market, a segment it had long shunned because of thin margins and a traditional focus on institutional clients. The deal is part of Chief Executive Officer Bi Mingjian’s push to lessen dependence on volatile investment banking fees.

Yet the transaction also ties in with a key objective of the government, which will become CICC’s largest shareholder as a result of the purchase. Having used CICC to take some of the largest state companies public since the late 1990s, China is now looking for assistance in its quest to reform a retail-driven equities market that’s prone to speculative booms and busts.

In the wake of the latest such episode, a stock market meltdown last year, the government launched an unprecedented crackdown on the securities industry and arrested several high-ranking executives.

“CICC will once again play this civilizing and globalizing role, only with the more far-reaching aim of helping to professionalize the often-shambolic Chinese stock market,” said Peter Fuhrman, chairman of China First Capital, a Shenzhen-based advisory firm. “Its reputation is still unsullied in China, unlike other banks whose leaders have been marched out in handcuffs and whose market practices are widely blamed for the rampant speculative fever that often afflicts China’s domestic capital markets.”

Reforming Role

In announcing the takeover on Friday, CICC hinted at a reforming role by saying the two firms will “work together to improve the quality and efficiency of mass market services” through training and by upgrading technology systems at China Investment Securities’ 192 branches across the country that serve retail clients.

CICC is buying China Investment Securities from state-owned Central Huijin Investment Ltd. It will issue shares to Central Huijin, more than doubling the entity’s stake in CICC to 58.7 percent. CICC had to get a waiver from the Hong Kong Stock Exchange for the transaction, so that Central Huijin’s controlling stake wouldn’t be classified as a reverse takeover.

An additional rationale for the deal is Huijin’s push to consolidate the securities industry by combining institutional and retail brokerage businesses, said Zhang Chunxin, an analyst at CMB International Capital Holdings Corp. She cautioned that “the reform process will be long and gradual.”

China Investment Securities ranked 17th among Chinese securities firms by revenue last year, while CICC was 23rd, according to official data. Bi’s overhaul has the support of the firm’s foreign shareholders, who had already been pushing CICC to diversify into areas such as asset and wealth management, a person with knowledge of the matter said.

Sherry Tan, spokeswoman at CICC, declined to comment.

Shareholder Backing

The combined stakes of CICC’s main foreign backers — private equity firms TPG Capital and KKR & Co., and Singapore sovereign wealth fund GIC Pte — will drop to 15.3 percent as a result of the takeover. However, the foreign firms may buy additional stakes from Central Huijin in future, people familiar with the matter said.

When former premier Zhu Rongji created CICC in 1995, China was launching a shakeup of its state-run industrial sector, leading to the closure of some 60,000 firms and loss of 40 million jobs. Since then, CICC has worked on some of the biggest listings of state enterprises, such as China Construction Bank Corp. and China Mobile Ltd. It was the top adviser on mergers involving Chinese companies in 2014, 2015 and so far this year.

Buying China Investment Securities is a departure from former CEO Levin Zhu’s strategy. The son of the former premier, who ran the firm until two years ago, had long resisted expanding into retail broking, fearing it would erode margins and its differentiation from other Chinese securities firms, according to people familiar with the matter.

Last year’s leverage-fueled equities rally and the subsequent implosion brought worldwide attention to the shortcomings of China’s markets. The government responded with an effort that included enlisting securities firms in supporting the stock market as well as jailing senior brokerage executives for alleged wrongdoing. CICC wasn’t among the firms that took part in the stock-market rescue, but China Investment Securities was.

Market Manias

China’s 114 million individual investors account for the bulk of equities trading. That makes them a hard-to-ignore segment, but also one that tends to be susceptible to market manias. Critics contend that the government’s efforts to restore market calm last year only served to hurt investor confidence further.

The Shanghai Composite Index remains 39 percent below its June 2015 peak. Xiao Gang, who was removed from his post as chairman of China’s securities regulator this year, in January acknowledged loopholes and ineptitude within the regulatory system.

Some analysts aren’t convinced the deal is in CICC’s best interest. The stock fell 2.1 percent on Monday after a trading halt was lifted.

The transaction makes the firm “more like a state-owned company, which could compromise CICC’s corporate governance, operational autonomy” and its ability to retain top talent, said Fred Hu, Goldman Sachs Group Inc.’s former Greater China chairman.

http://www.bloomberg.com/news/articles/2016-11-07/china-inc-s-investment-bank-dives-into-troubled-retail-market

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Has Yum Worked Out How Fast-Food Firms Can Crack China? — Bloomberg

November 3rd, 2016 No comments

 

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Global consumer companies trying to find a business model for China’s burgeoning domestic market will be watching closely as one of the oldest Western brands in the country starts a new strategy.

Yum! Brands Inc., which opened its first KFC restaurant in China in 1987 and also operates Pizza Hut outlets, has been losing market share thanks to a food-safety scare, changing tastes, increasing local competition and a host of other challenges that foreign companies face in China. It carved out its China operations into a separate company, Yum China Holdings Inc., which begins trading today in New York.

Ring-fencing the business, the largest independent restaurant company in China with 7,000 outlets and more than $900 million cash on hand, offers Yum a number of advantages in dealing with a fast-changing market. Yum’s example could provide a road map for other global consumer brands in the world’s most populous nation.

Yum China has issued 386 million shares at $24.36, which puts its valuation at around $9 billion, according to New Jersey-based research firm Edge Consulting Group LLC. The stock rose about 2 percent to $24.85 as of 9:59 a.m. in New York, while Yum Brands gained 0.7 percent to $62.49.

“When their China operations get so big and are clearly catering just to the China market, splitting off could unlock a lot of value for shareholders,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “If I were an activist hedge fund investor, I would be looking at carving out brands within large conglomerates that are China plays.”

Doing so allows Yum’s management of the China business to tailor its operations and products more swiftly to changing local conditions, such as the menu preferences of diners in different parts of the country, mobile-based payments systems, hiring and other factors.

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It also helps tap Chinese investors willing to pay high premiums for a stake of an international brand’s China operations. Yum sold a combined $460 million stake in its Chinese business to Primavera Capital Group and an Alibaba Group Holding Ltd. affiliate, Ant Financial Services Group, in September.

 

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein.

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” Rein said. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”

Localization of offerings at KFC and Pizza Hut outlets in China will be an important component of the firm’s strategy for the country, Yum China Chief Executive Officer Micky Pant said at a briefing Tuesday in Shanghai. The company plans to increase investment in new outlets across its brands and does not plan to raise more capital, he said.

An activist hedge fund investor upset with the company’s handling of its China business is how Yum China came into being.

After a food-safety scandal in 2014 and cheaper local competition torpedoed Yum’s sales and profit in China, Corvex Management founder Keith Meister in mid-2015 urged the company to split off its Chinese operations — which contribute about half the group sales — saying that the move could generate an additional $16 a share in value for the Louisville, Kentucky-based company.

Yum’s total share of China’s market for fast-food chains dropped to 30 percent last year, from 40 percent in 2012, according to data from Euromonitor International. While sales have been growing again in China in the mid-single digits since late last year, the company has suffered from consumers shifting to healthier options and domestic chains sprouting up with more variety.


Volatility Reduction

Unlike Yum’s U.S. operations, where most of its restaurants are run by franchisees, Yum China directly operates over 90 percent of its outlets and plans to triple the number to more than 20,000 in the long term.

Yum’s spinoff would reduce volatility for its remaining business, while “giving investors with a higher risk tolerance access to a more pure-play China growth story,” said Jonathan Morgan, an analyst for Edge Consulting. “China’s economic slowdown could induce other U.S.-listed restaurant stocks to spin off their China businesses, to protect their core businesses.”

So far, companies with China consumer arms have often chosen instead to sell the division to a local competitor and take a stake in that business instead.

Wal-Mart Stores Inc. in June sold its e-commerce platform Yihaodian to China’s second-largest e-commerce company, JD.com Inc., for a 5 percent stake in JD. In August, Uber Technologies Inc. surrendered after a year-and-a-half battle with Didi Chuxing and agreed to sell its business in China. It departed the country in exchange for $1 billion in cash and a 17.7 percent stake in Didi.

McDonald’s Corp., meanwhile, is seeking to sell its 20-year mass franchise rights for China and Hong Kong for a reported $2 billion.

Starbucks Corp. is the only other major U.S.-listed food and beverage chain in China beside Yum, which owns and operates its outlets, numbering 2,400 stores across 110 cities.

China, Starbucks’ largest international market, represents the most significant opportunity for the company, said a company representative. The company has no intention to change its operation model in the market, according to the spokesperson.

 

Jackpot Valuations

“What we’ve seen across various industries is that foreign players eventually pull out or find a local partner,” said Hong Kong-based S&P Global Ratings’ restaurant and retail analyst Shalynn Teo. “It’s the local market knowledge and local relationships that determine which foreign businesses survive in China, and local players will always have an edge.”

With Chinese investors paying a premium for market share, such deals can prove attractive, said Peter Fuhrman, CEO of Shenzhen-based investment bank and advisory firm China First Capital. “As long as Chinese investors are offering jackpot valuations,

Those that don’t face the need to tailor their businesses to China’s widely diverse and morphing consumer market. Only from March this year did KFCs in China began accepting WeChat Pay; they started accepting Alipay mobile payments in July last year. Yet the country leads the world in the use of such transactions, with four out of 10 Chinese consumers using mobile payments at physical stores, research firm EMarketer estimated.

Starbucks stores in China still do not accept Alipay or WeChat, only Apple Pay, a decision which costs them 5 to 10 percent of sales, estimates China Market Research Group’s Rein.

Starbucks launched its own mobile payment system in China in July, allowing customers to pay with preloaded Starbucks Gift Cards via their mobile devices, according to the company.

As China’s consumer market continues to grow, more overseas companies may consider following Yum down the path of segregation.

“Four out of 10 spinoffs do not generate a return in the first year of separation,” said Edge Consulting’s Morgan. “How Yum China performs will help U.S.-listed companies evaluate their strategic options in China.”

 

http://www.bloomberg.com/news/articles/2016-10-31/yum-s-spinoff-offers-roadmap-for-western-brands-in-china-market

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PAG Said to Pay About $250 Million for Chinese School Operator — Bloomberg

October 31st, 2016 No comments

 

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By Cathy Chan

(Bloomberg) — PAG Asia Capital has paid about $250 million for Golden Apple Education Group, a Chinese company that’s been embroiled in legal action brought by creditors of its former owner, according to people familiar with the matter.

The Hong Kong-based private equity firm acquired Golden Apple from Sichuan Harmony Group, a Chengdu-based property developer, the people said, requesting anonymity because the details of the transaction are private. Golden Apple became involved in legal cases brought since 2014 by Sichuan Harmony’s creditors because it guaranteed some of the property developer’s loans, the people added.

The sale of Golden Apple helped resolve legal claims from about 60 individuals and money lenders, some of which had foreclosed on Sichuan Harmony assets, according to an official at Sichuan Financial Assets Exchange, the state-backed entity which was appointed to lead the Sichuan Harmony debt restructuring together with PAG.

“It’s highly unusual for a foreign private equity firm to buy a Chinese company undergoing court-supervised administration,” said Peter Fuhrman, the chairman of China First Capital, a Shenzhen-based investment banking and advisory firm.

The unwillingness of many Chinese creditors to write off part of their loans, a concession needed to restructure debt and give a company a new start, makes such deals “worlds away both in complexity and investment appeal” from other private equity transactions, Fuhrman said.

 One-Child Policy

A spokesman for PAG declined to comment. A spokeswoman for Golden Apple referred to an Aug. 25 media interview posted on the company’s website which said it is partnering with PAG and plans to invest 2 billion yuan ($295 million) in its facilities over the next two to three years. She declined to comment further on the PAG acquisition or on the company’s legal issues.

PAG, co-founded by former TPG Capital veteran Shan Weijian, is buying Golden Apple partly because China’s move to repeal its decades-old one-child policy has bolstered the prospects of the education industry, according to the people. The Chinese government has estimated that the change is likely to add three million newborns each year. Investors have taken note, with venture capital companies conducting 10 fundraising rounds in the first half for startups in the maternity and pediatric market, according to VC Beat Research, which tracks internet health-related investment and fundraising.

   Kindergartens

Golden Apple operates 33 kindergartens and two primary schools, mostly based in Chengdu, with more than 12,000 students, the people said. PAG plans to expand the number of primary schools and develop secondary schooling after acquiring the business, according to the people.

Sichuan Harmony has reduced its outstanding loans from state-backed lenders from 2.5 billion yuan to 1.9 billion yuan, according to the Sichuan Financial Exchange official, who asked not to be identified by name. The company has 4.5 billion yuan of assets and will focus on its medical and community nursing- home businesses, the official added.

The market for online education services in China has also attracted overseas interest. KKR & Co. last year agreed to invest $70 million in Tarena International Inc., which offers in-person and online classes in information technology, marketing and accounting. GIC Pte and Goldman Sachs Group Inc.

were among investors putting $200 million into TutorGroup, a Chinese online education platform, in its third round of financing in November. CVC Capital Partners in May sold its stake in Education International Corp., China’s biggest overseas educational counselling service provider, to a consortium led by Chinese private equity fund NLD Investment LLP.

 

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