Private equity firms usually prefer to operate behind the scenes. So it was a surprise when Blackstone Group, one of the sector’s most influential players, put itself in the spotlight by going public in May 2007.
The $4 billion initial public offering also had an unexpected component: the Chinese government. Its newly established sovereign wealth fund China Investment Corp (CIC) splashed $3 billion for a roughly 10% stake in Stephen Schwarzman’s investment house.
The deal was lauded as a defining moment in China’s efforts to diversify its foreign exchange reserves beyond US government bonds. But the Blackstone offering turned out to be troublesome: at one point CIC’s maiden investment lost nearly 80% of its value, as the 2008 global credit crisis saw markets plunge.
Critics fumed at the decision to buy a non-voting stake in the Wall Street operator at a toppish price. “The lesson must be learned,” the Xinhua-run Shanghai Securities News lamented in early 2008. “CIC’s first investment was the shares of a private equity firm, whose value is more or less a proxy of the bullishness of the stock market. In a way CIC is betting on a financial market derivative, and that is completely against the prudent investment strategy that it should adhere to.”
CIC finally exited its Blackstone position in March this year with a profit that over the holding period amounted to about a 7% annual return. That proved marginally better than parking the cash in Alibaba’s money market fund Yu’eBao – but there were other benefits from the investment given Blackstone became a key M&A dealmaker for China Inc (see WiC369).
But is history now repeating itself almost a decade after the Blackstone IPO? That is a question being asked as a renowned local rainmaker looks to take his private equity holdings public via a Hong Kong IPO. The concern: the smart money is selling at the top, ahead of another more turbulent period for financial markets. Adding to the worries: other savvy private equity firms are driving to market a host of other large Chinese IPOs as they likewise seek an exit.
Step up China Renaissance…
China Renaissance, one of the most active private equity investors in China’s tech industry, filed a listing application in Hong Kong last week. The company positions itself as an investment bank-cum-fund and is said to be looking to raise up to $800 million.
China Renaissance has certainly got the perfect name: on an almost daily basis the state media trumpets “the renaissance of the nation”. It is the creation of Bao Fan, now 47, who founded it in 2005.
This Chinese Schwarzman studied English literature at Fudan University before obtaining a master’s degree at the BI Norwegian Business School in 1995. Prior to founding his own investment firm, Bao had worked as an associate at a couple of American investment banks and he also held the position of chief strategy officer at Asiainfo Holdings, one of the earliest Chinese IT counters to go public in New York.
(Bao made his debut in WiC’s pages last November, when he turned up at Saudi Arabia’s Future Investment Initiative as one of the speakers, and talked up how the Chinese approach to regulating its tech industries could work for the Saudi government too – see WiC386.)
Keeping things private…
As the saying goes in China’s venture capital circle: if you are a tech entrepreneur but have never heard of Bao Fan, or indeed if Bao has never heard of you, then your business isn’t successful enough yet.
China Renaissance’s private equity business is one of the biggest selling points of its upcoming IPO. It ranks itself among the top 10 funds focused on unlisted Chinese tech firms, with assets under management that amounted to $4.1 billion by the end of March. According to CBN, Bao has been the ‘renaissance man’ for many of the country’s tech tycoons. “China Renaissance was one of the earliest private sector financial advisors. Its client portfolio has basically covered 90% of the smartphone apps [in China],” the newspaper notes.
China Renaissance has backed some of the biggest fundraisings and M&A deals in the internet sector, CBN suggests. These include the groundbreaking merger of ride-hailing apps Didi and Kuaidi, and the combination of food delivery firms Meituan and Dianping – forging two of the components of the TMD triumvirate (see WiC396 for more on this junior rival to Chinese tech’s BAT).
More recently, Bao was involved with Momo’s purchase of dating site Tantan, and another of his star clients is JD.com. In its prospectus, China Renaissance said it had advised the country’s second biggest e-commerce firm on almost every major deal since 2011, including a strategic investment from Tencent in 2014 and JD.com’s New York listing a year later (China Renaissance was the only Chinese house included in JD.com’s underwriting team). Last year there was the spinoff of JD Finance, as well as another private placement for the company’s logistics unit in February.
According to China Economic Weekly, Bao established a close working relationship with JD.com’s founder Richard Liu as far back as 2007 and the New York Times reckons that Bao’s biggest asset could be his personal network across China’s start-up community. “I’m not one of the princelings,” he told the same newspaper in 2014, referring to his parents, both of whom were junior officials in the Shanghai government. “The vision of China Renaissance is really to identify top entrepreneurs and build a relationship with them early on and grow with them.”
Is the IPO a good deal?
“When I was founding my own start-up and telling people that I wanted to set up an investment bank for the Chinese people, they all said I was crazy: a private sector firm cannot become a successful investment bank. We don’t have the money nor the guanxi [connections],” Bao told a forum five years ago.
Bao’s achievement has been in sourcing capital from China’s wealthy elite at a time when investment in the stock market and real estate has lost some of its allure. He then redirected the capital through his influential network of tech plays.
He’s come a long way. When China Renaissance was pitching hard for deals in 2005, Levin Zhu, son of former Premier Zhu Rongji, was chief executive of CICC – unrivalled at the time as the country’s leading state-backed investment bank. CICC was the rainmaker behind China’s biggest IPOs, including the privatisation of the state banking heavyweights. Now Bao seems to have established the same reputation among the tech firms.
His firm serves as “the full-service butler to Chinese unicorns”, Sina Finance noted last week, citing the $10 billion valuation that China Renaissance has been flaunting in the market. International financial media has opted for a lower value, however, with Reuters suggesting that Bao’s boutique advisory firm could reap a market capitalisation of around $5 billion.
In comparison, Hong Kong-listed CICC had a market value of about $7 billion as of this week.
Can we expect other mega IPOs from China in 2018?
Similar to many of the start-ups that it has been supporting, China Renaissance doesn’t have much of a profit record. It was barely in the black last year and a $5 billion price tag would equate to a multiple of 125 times its 2016 earnings of $32 million (by comparison, CICC is trading at 14 times trailing earnings).
China Renaissance’s most promising business is its private equity arm, which has invested in at least 90 tech start-ups. And China Renaissance’s financials could soon look a lot rosier as a number of its portfolio firms look set to go public as well.
“Meituan-Dianping and China Renaissance are such good friends that they filed for a listing application on the same day [to the Hong Kong stock exchange],” Bao’s wife wrote on her WeChat account last week, and China’s dominant food delivery and restaurant review app is one of the star O2O (online-to-offline) unicorns in China Renaissance’s portfolio.
According to a regulatory disclosure in Hong Kong, the company’s private equity unit put money into Meituan and Dianping in 2012 and 2014 respectively. It then acted as the financial advisor for both sides when the fierce rivals opted to merge in 2015 (the same pattern was repeated with Didi and Kuaidi in creating Didi Chuxing).
Named by Bloomberg last week as the world’s fourth most valuable start-up, Meituan-Dianping is targeting a $6 billion fundraising at a valuation of about $60 billion in Hong Kong IPO scheduled for later this year.
Meituan and China Renaissance are both joining the herd of other Chinese unicorns heading for the primary market. The eight year-old smartphone maker Xiaomi is first to test the water. Having slashed its valuation from a much-hyped $100 billion by half, Xiaomi’s trading debut next Monday will say a lot about investor appetite for tech plays. But more companies will follow, including another pair of China Renaissance’s portfolio firms: Uxin, a sales platform for second-hand cars, is raising $225 million ahead of a Nasdaq listing (it cut the targeted amount for its IPO by half as well) and Zhaogang.com, an internet-based steel exchange, is planning to go public in Hong Kong.
Another contender is Pinduoduo, which has applied for a public offering in the US. The emerging e-commerce rival to Alibaba and JD.com is said to be planning to raise up to $1 billion. In fact, China Money Network says that 14 Chinese firms have filed for major overseas IPOs during the past two months, aiming to raise more than $18 billion.
Why the rush to get to market?
The queue of IPO applications looks mistimed, given the market correction of the past two months. Hong Kong’s benchmark index has dropped more than 10% during the period (although the Nasdaq is still on a bull run, having climbed more than 20% so far this year).
Of course, the slump in the Chinese stock markets over the last few weeks is hardly ideal for Bao, whose portfolio is premised on rising valuations. China Renaissance could also be exposed to revenue declines from its investment banking unit if the government calls a halt to domestic IPOs, like it did during the stock market upheaval of 2015.
Nonetheless Bao and his team have established a lucrative niche as an ‘investment’ bank. Chinese start-ups take an average of four years to reach a $1 billion valuation, compared to seven in the US, says Bloomberg, and China accounts for half of the top 10 unicorns globally.
According to Xjbmaker, a zimeiti who focuses on private equity activity (see WiC413 for more on the zimeiti media phenomenon), many of the unicorns are under pressure to go public because their investors want to exit. More than 721 venture capital firms were set up in 2015 alone and they have raised more than Rmb220 billion ($33 billion) and taken part in more than 5,500 fundraising deals. “2018 is a testing time for most of these new asset management firms,” a private equity partner told Xjbmaker. “Good or bad, many of them are entering a reporting period [to the very rich clients they serve] this year.”
Investorcn.com, another financial zimeiti, notes that the private equity firms have also been finding it more difficult to raise funds this year and some are facing redemption pressures.
Signalling some of these liquidity challenges, Japanese automaker Nissan scrapped a $1 billion sale of its rechargeable battery business to GSR Capital this week, after the Chinese private equity group (see WiC396) didn’t come up with the funds to close the deal, reported the Financial Times. (Insiders then assured the FT the deal’s failure wasn’t due to a shortage of capital.)
Not all private equity investors are looking for an exit, however. Sequoia Capital upped the ante by raising $6 billion last week of what will be an $8 billion global fund. All the capital is coming from investors with no previous relationship with Sequoia and much of it seems likely to head for China. Neil Shen, founder of Sequoia China, was notably the man who spoke to the FT and said more of the new funds would provide late-stage capital to firms closer to their IPOs. Shen is another of the top rainmakers in China’s private equity world and Sequoia China has invested in almost all the start-ups mentioned in this article. Indeed, it even has a minority stake in China Renaissance…
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