Lei CAI Talks about Private PE
How much is PE’s development space in future? Whether the market will become a bubble after the investment boom cools off?
Financial crisis containment on global investment giants, the push-off of Shenzhen GEM, the reopening of IPO and the unconstrained liquidity are all beneficial to the development of Chinese private PEs, which is said to be the best opportunities.
Jiuding Capital Co., Ltd. (Jiuding Capital), founded in 2007, has invested in Gold Cup, Billions Chemicals and Linoya in recent two years and helped some of them achieve IPO. The company has been called Black Horse in Chinese private PE sector.
Jiuding Capital has acquired 2 billion yuan of funds in two years. A statistics shows that there are thousands of PE companies with 500 million yuan of funds. Different with them, Jiuding Capital is striving to become an official operator.
As one of China’s earliest LP PE firms, Jiuding Capital is managing Renminbi funds in accordance with international laws.
However, private PEs, as the new rising force, cannot be compared with global PEs and large-scale Chinese PEs with overseas backgrounds. How much is PE’s development space in future? Whether the market will become a bubble after the investment boom cools off?
Only invest in traditional industries
There are two elements should be focused while making investments: growth potential and moderate price, both of which can be found in traditional industries.
Like many emerging industries, Chinese VC industry was just established a few days ago. Many VC investors are in possession of capitals but are inexperienced, some of which always follow others to invest in some fields.
In contrast, Jiuding Capital has been managing six stages of funds according to international standards, eyeing on industries able to stimulate domestic demands while combining with the features of Chinese markets.
“What we interest in are traditional terminal consumption-based industries like food, clothing, catering, medicine and pesticide,” said Lei CAI.
It sounds a bit conservative. Is it looking for a new way to earn money from traditional industries with lower returns?
“Return on Investment (ROI) bases on two aspects and one is enterprise’s growth potential. Compared with traditional industries such as energy, environmental protection and new energy, there are huge development spaces and vast periodic fluctuation. If large capital is invested, price will be increased irrationally. Therefore, excessive concern about it will cause an industrial deficit.”
Obviously, it’s the natural selection of private PE companies. Lei CAI believed that, “There are two elements should be focused while making investments: growth potential and moderate price, which can be found in traditional industries.”
After the financial crisis, lots of PE companies have changed their investment ideas from IT and internet industries with higher risks and returns to those sectors with lower risks but stable returns.
Besides traditional industries, PE companies should do things such as being familiar with national conditions and environments, applying international standards and practicing strong judging ability so as to get strong.
Invest in those to-be-listed enterprises
After investment, Jiuding Capital will strive to help those enterprises which have the potential to be listed on the market.
PE’s lock-up period is usually 7-10 years. The first half period is investment period and last half withdrawal period. After the investment period, the uncommitted investment will be returned to investors.
“Our lock-up period is 3-5 years. We have to buy back if the project we invested cannot be listed on the market within 2 or 3 years according to international practices,” said Lei CAI. Hence, whether it is able to go on the market is an essential requirement when Jiuding Capital selects projects. Therefore, the company only invests in mature enterprises.
“Mature enterprises” refer to those companies with high profitability and huge growth potentials. He said, “Many enterprises seem to be profitable, but actually they earn profits based on financial leverage. It’s impracticable. What we focus on is capital return.” Jiuding Capital prefers to invest in those asset-light enterprises with their own brands, channels and markets.
After investment, Jiuding Capital will strive to help the investee be listed on the market.
Although most of Chinese private PE investors are private entrepreneurs that require higher ROI, they can provide platforms for the investees who need funds and management resources.
Jiuding Capital helps its investees optimize financial structures and management team by integrating institutional resources like consulting companies, hunting companies and management companies.
Nowadays, Jiuding Capital’s investees are lining up for the review by China Securities Regulatory Commission. “SME board is our capital withdrawal channel. Excellent enterprises in Chinese market will be listed on the market easily.”
Chinese PE is to be popular
With the advent of merger in the process of marketization, professional equity groups are required to complete such transformation.
Foreign PE firms have dominated Chinese PE markets before 2005. With the fast growth of Chinese PE companies, they have the ability to compete with foreign PE companies. Chinese PE companies with overseas background like CDH and HONY Capital are advantageous in combining Chinese enterprises to merger abroad.
Is there any market for small-sized private PE firms like Jiuding Capital between the attack of foreign and Chinese PE giants? Lei CAI answered yes and thought there was a huge development space for private PE companies.
“Chinese enterprises have relatively limited capital, but equity investors can provide financial support. Therefore, there is a huge financial space for PE firms while small enterprises get stronger. It can be angel fund, VC and PE.”
Lei CAI thought that marketization has become an irreversible trend. A large sum of state-owned and public-owned capital will gradually become private ones. In the process of privatization, merger will happen, which requires professional equity investors to help realize transformation. In addition to that, private capital needs equity investment, too. It’s very common to take over businesses by Rich Second Generation, most of which won’t manage their companies with old methods. They prefer to cooperate with investment corporations that can hire professional managers for them to upgrade their businesses.
However, there are lots of problems to be solved. The most important task is to acquire political support.
“At present, my primary concern is tax,” said Lei CAI. Whether an organizational form can become the mainstream is determined by markets, among which, tax is one of the most important factors.
Some experts thought many private PE investors would face final tests in 2013, which will be the important watershed for Chinese PE industry, because Chinese private PE investment became popular in 2008 and lots of PE investors were poorly regulated with a lock-up period of about 5 years.
- Jiuding Group
- JT Asset Management
- JX AMC