Jiuding Capital Undergoing Business Upgrading
The rumor of the departure of a co-partner accidentally put Jiuding Capital under the spotlight of PE field.
As a matter of fact, the arguments about Jiuding Capital carried on in recent years. With the tags of PE Factory and PE Work Flow and a controversial model, Jiuding Capital ranked the Top 1 in Zero2IPO’s PE firm Ranking List last year. As China’s most representative private PE firm, Jiuding Capital, young and vigorous, has stepped into transformation while others are worried about the troubles the departure of a co-partner might provoke.
In an exclusive interview with Securities Times, Qingshan KANG, co-partner of Jiuding Capital, firstly released its future blueprint of this PE firm. In accordance with its transformation strategy, Jiuding Capital would not only expand the investment scope but also extend to M&A, bond funds and even closed-end PE securities investment funds in secondary market.
The Departure of the Co-partner
Last week, rumors of the likely departure of Bo YU, co-partner of Jiuding Capital and Chief of its pharmaceutical investment fund were widely spread. Though there has been news of core management leaving large venture institutions since the beginning of the year, for Jiuding Capital who has made investment in a number of pharmaceutical enterprises, it seems to be confronted with challenges.
This Monday, Jiuding Capital officially declared that Bo YU was not done with the departure procedures, and he would be assisting with relevant handover and follow-up service work and observing the signed non-Compete agreement strictly if he finalized his formal resignation. Bo YU told the reporter that it was not a good time to reply in the present situation.
“The main reason is that Bo YU wants to start his business and holds larger power in decision making. It is quite normal.” An insider remarked.
As is known, in Jiuding Capital, there is no gene of individualistic heroism but teamwork and cooperation. In fact, the impression of Jiuding Capital on others is not one or several investment stars to be remembered but the whole integral team.
It is learned that the absolute focus on teamwork is seen in its investment decision-making mechanism. There are seven members in Jiuding Capital’s investment decision-making committee, not including Mr. Bo Yu, and only those who win five votes or above can get the fund. It is worth mentioning that of the seven members, no one has the veto power or deciding vote, which is different from many other PE firms whose founding partners are endowed with such power.
Another detail worth mentioning here is that different from other PE firms, there is no introduction of a certain co-partner in the official website of Jiuding Capital. “It is hard to do the ranking if we list them. We put more stress on partnership to build a large platform together and accomplish a great career. It is difficult to succeed when you fight alone.” Qingshan KANG explained.
Jiuding Capital’s declaration was also trying to illustrate that one individual’s departure wouldn’t have a large impact on the whole team. As is stated in the declaration, the pharmaceutical investment team is with a complete investment system and consists of the followings: local project development team, pharmaceutical industrial development assisting team, PE pharmaceutical investment department, pharmaceutical venture investment department, risk control department, investment decision-making committee and post-investment management department. Bo YU was mainly in charge of the pharmaceutical industrial development assisting team and assistance to post-investment management department on the medicine variety screening work. The rest are managed by other co-partners.
The Dilemma of PE Industry
For Jiuding Capital, the real challenge is not from internal personnel flow but the change of investment environment.
“Since the second half of last year, it is apparently sensed that the equity investment in mature enterprises is getting more and more difficult.” Qingshan KANG talked about the background for Jiuding Capital’s transformation. Looking at the figures, the number of enterprises that Jiuding Capital invested in 2011 amounted to over 80 in 2011 and it dropped dramatically to 40 in 2012. This year, same with the whole industry, Jiuding Capital’s investment is also slowing down evidently.
As a matter of fact, Jiuding Capital, ranking No.1 in Zero2IPO’s 2012 PE firm List, burdened the most damages from the IPO withdrawal tide in the first half of this year. According to the statistics of Zero2IPO’s research center, in the IPO withdrawal tide earlier this year, Jiuding Capital has six invested enterprises withdrawing their IPO application, namely Xiangbei Welman Pharmaceutical, Linoya Consumer Electronics, Chuntch, Henan Yuhua New Material, Shenzhen LianJiaXiang Science& Technology, Kaitian Environmental Tech, being one of the PE firms that have the most invested enterprise IPO withdrawals.
Qingshan KANG told the reporter that the traditional equity investment in mature enterprises embodied certain market space and opportunities for a long time to come and currently this business was confronted with large challenges. Against the backdrop of economic growth slowing down and IPO suspension, there are less mature targets to invest and smaller market space and chances. Due to relatively lower entrance barriers, there are more and more institutions involved in the business, resulting in an obvious profit decrease. This shows that traditional equity investment business is now in competition shoals.
Lei CAI, co-partner of Jiuding Capital, remarked not long ago that the Pre-IPO Mania featuring rich and handsome, had come to an end, and the institutions with no competition edges were bound to be eliminated by the market under the new circumstances.
According to Jiuding Capital, PE capital is essentially amphibious with the features of financial capital and that of the industrial capital. The outstanding features of financial capitals lie in its liquidity and passivity, while the core distinctions of industrial capitals are chronicity and initiatives, namely long-term operation philosophy and active participation in management, decision-making and operation. The equity investment Jiuding Capital did in recent years incarnated more financial capital features than industrial capital characteristics.
It is learned that transformation has reached common consensus in Jiuding Capital and the direction is determined internally as promoting industrial capital capacity while sustaining PE’s original attribute of financial capital.
“In simple terms, traditional equity investment is to pick the boat and get on as passengers. Taking in the idea of industrial capitals, M&A in particular, it is much more than boat selection. You need to be a sailor always prepared to be chief mate in case that the captain is in danger.” Qingshan KANG remarked, “We call it Species Evolution fitting Darwin’s theory of survival of the fittest. Those who survive in the end, may not be the strongest or smartest but rather most adapted to the changes.”
Upgrading of Existing Business
Jiuding Capital’s transformation covers two aspects: one is the upgrading of existing businesses and the other is the expansion of business domains.
Regarding the upgrading of existing businesses, Jiuding Capital is to transform from the previous model as to target only those unlisted mature enterprises to the present one to expand the targets to three sectors.
The first sector is still traditional equity investment, yet with project management following the concept of industrial operation. For example, Hainan Tianhuang Pharmacy, an enterprise that Jiuding Capital invested, is with money and competition product lines. Jiuding Capital, instead of doing nothing after investment, started to search for proper acquisition targets for Hainan Tianhuang and in the end found a pharmaceutical enterprise that was willing to sell controlling interests and well suited for Hainan Tianhuang’s M&A in the large project database.
“The product of the target enterprise is complementary to Hainan Tianhua’s existing product mix while share the same distribution network. In this case, if we are not helping with the acquisition, there is no chance to get in.” Qingshan KANG commented. In the saturated market of investment in mature enterprise, this is the only way for traditional equity investors to get the opportunity at the comparatively low price.
The second sector is invested enterprises. Up until now, Jiuding Capital has accumulated a certain amount of invested enterprises for some business collaboration and industrial chain consolidation. It is said that Jiuding Capital has picked out a batch of enterprises as consolidation platforms to integrate the upstream and downstream corporations and continue M&A through capital increase, thus achieving large extension growth.
The third sector is listed companies. Jiuding Capital will also apply the concept of industrial operation, participating in the listed companies through private placement and block trading and assisting in their industrial consolidation and M&A.
Expansion of Business Domain
With the release of Interim Provisions for Asset Management Institutions to Carry out the Public Offering of Securities Investment Fund Management Business in February this year, it also open up speculations for VC/PE of new businesses. It is learned by Securities Times, as part of the transformation, Jiuding Capital also has new scheme and blueprint in M&A and bond funds as well as securities investment funds.
According to Jiuding Capital, there might be large systematic opportunities in M&A in future. The first lies in reform of state-owned enterprises. In the light of signals transmitted from the decision-making level, there might be the trend of state-owned enterprises withdrawal and private-owned enterprises entering in many fields which shall provide merger investment chances. The second opportunity lies in the fact that with the aging of China’s first generation of entrepreneurs, they are at the time of handing over their duties while many of the second generation are not willing to take it over. M&A chances may be seen with the exit of first generation. The third opportunity lies in the industrial concentration enhancement trend as most of the industries lack industrial concentrations.
In bond investment, Jiuding Capital is planning on cooperating with financial institutions in establishment of large bond funds.
“In this way, we shall have equity funds on one hand and bond funds on the other and combine them in the investment of enterprises. We can help those invested with privately raised company bonds after equity investment and buy their bond through the bond funds.” Qingshan KANG remarked that the benefit of the launch of bond funds is that it not only helps with the equity investment but also enable us to further satisfy the financial needs of the invested enterprises before IPO.
He also emphasized that the launch of bond funds should mainly embrace the core competence and main business as well as the resources of invested enterprises.
With regards to securities investment funds, Jiuding Capital is also planning on closed-end funds with small scale in the beginning which shall apply the method of private placement to small amount of clients, regulate investment terms and find the undervalued enterprises through researches over the industry and the enterprises.
“Jiuding Capital also has advantages in securities investment funds. It requires the same core competence as equity investment which is the value judgment of the enterprises. Yet we would take it slow and are now doing some fundamental work such as setting up criteria and placing those matching the criteria to the investment managers by segment so that they could do their researches by industry and enterprise. This also helps the investment managers with the continuous follow-up of the segmented industries.” Qingshan KANG commented.