Banking & Finance

The new masters of the universe

China wants its own piece of the private equity pie

The new masters of the universe

Fang Fenglei: a pioneer in the local private equity industry

There has been a funereal tone to stories about the US private equity industry in recent weeks. Many private equity firms will go to the wall, the Economist magazine predicts. And a lot of survivors will exist only as “zombie funds”, keeping their existing investments just about alive but unable to make new ones.

Not the most cheerful stuff.

So how does the situation in China compare? On the face of it, China is growing while most other economies are not – so the country should be a cheerier place for private equity money.

Zero2IPO, a Beijing-based research firm, estimates that 13 investments were completed in the second quarter. They totalled $5.3 billion, nearly double the amount for the same period last year.

But the view is still somewhat skewed by Bank of America’s sale of its 17% stake in China Construction Bank to a consortium led by Hopu Investment Holdings, a private equity firm founded by the man who headed Goldman Sachs China operation, Fang Fenglei (for more about whom, see below).

The other positive for the Chinese private equity market: there is a viable exit strategy. The Chinese IPO window has reopened and its stock markets are rising again – even if there are those who have doubts about how long the good times will last.

Thirteen exits were also made in the period, according to Zero2IPO. Five Chinese firms – funded with private equity money – also managed to raise capital on the Hong Kong or New York stock exchanges. This group, which included Zhongwang and Lumena, raised $1.77 billion.

So, if they can see a clearer path to gain, more private equity firms should be ready to enter the fray. The launch of a new GEM board in Shenzhen should add further encouragement. The new exchange is targeted at small-and-medium sized enterprises with annual revenues below $100 million and is expected to open before the end of the year.

But will it be foreign private equity firms who capitalise? The scuppering last year of the Carlyle Group’s bid to invest in construction machinery manufacturer Xugong Group is one sign that the going may not be easy. Opponents of the deal roused public anger that foreign firms were getting in on the cheap. Carlyle withdrew.

Beijing would like to see domestic private equity firms chasing more of the action. But major Chinese players are only just beginning to emerge. This week it was announced that China’s sovereign wealth fund, CIC would spend $258 million for a 40% stake in CITIC Capital, a local private equity fund. Caijing magazine reported that this would see its capital base rise from HK$3 billion to HK$5 billion.

Meanwhile Fang Fenglei’s Hopu Fund is already being touted as a local heavyweight. Hopu rose in profile earlier in the year for putting together a consortium (that included Chinese state firms and Singapore’s Temasek Holdings) to buy into China Construction Bank, as well as Bank of China – when foreign strategic investors sold their stakes in both to raise capital.

Hopu is run by one of China’s leading dealmakers and is, by design, a challenger to big international firms like Carlyle, KKR and TPG. (Although it should be noted that a big chunk of its initial funding still came from overseas via Goldman Sachs and Temasek.)

It was active again at the start of July, teaming up with state food firm COFCO to invest a total of around $780 million for a 20% stake in milk producer China Mengniu Dairy.

The Mengniu deal was also interesting in that it seems to have originated in relationships forged in the China Entrepreneurs Club, a network set up by a leading posse of Chinese tycoons and business leaders. The 21CN Business Herald reports that a host of senior business figures including Liu Chuanzhi (Lenovo), Zhang Ruimin (Haier Group), Wang Shi (Vanke, see Who’s Hu below), Li Shufu (Geely), Jack Ma (Alibaba) and Li Dongsheng (TCL) have been meeting up to share ideas and socialise.

Ning Gaoning, the chairman of COFCO, and Niu Gensheng, the chairman of Mengniu, are members too, and their relationship through the club seems to have facilitated the deal.

Fang moves in the same orbit as these tycoons. And that gives his fund a key advantage: unlike foreign private equity firm, Fang is privy to the thoughts and ideas of the Entrepreneur’s Club. And in an industry where having the inside track on information is vital, he will likely hear about dealflow first.

Plus, as China’s first ‘god of private equity’, he has a patriotic edge too. COFCO’s Ning Gaoning admitted that one of the reasons for doing the Mengniu deal was to “drive off foreigners,” says the Herald.

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