Lei CAI Talks about Private PE

2009-08-20

How much is PE’s development space in future? Whether the market will become a bubble after the investment boom cools off?U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

As one of China’s earliest LP PE firms, Jiuding Capital is managing Renminbi funds in accordance with international laws.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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?U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Only invest in traditional industriesU5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

There are two elements should be focused while making investments: growth potential and moderate price, both of which can be found in traditional industries.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

 “What we interest in are traditional terminal consumption-based industries like food, clothing, catering, medicine and pesticide,” said Lei CAI.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

It sounds a bit conservative. Is it looking for a new way to earn money from traditional industries with lower returns?U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

 “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.”U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.”U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Invest in those to-be-listed enterprisesU5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

After investment, Jiuding Capital will strive to help those enterprises which have the potential to be listed on the market.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

 “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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

 “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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

After investment, Jiuding Capital will strive to help the investee be listed on the market.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Jiuding Capital helps its investees optimize financial structures and management team by integrating institutional resources like consulting companies, hunting companies and management companies.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.”U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

Chinese PE is to be popularU5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

With the advent of merger in the process of marketization, professional equity groups are required to complete such transformation.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

 “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.”U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

However, there are lots of problems to be solved. The most important task is to acquire political support.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

 “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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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.U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司


U5G九鼎投资(600053.SH)_上交所私募股权投资领域上市公司

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