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China Private Equity: High Growth For Investors In China PE Funds

Despite all the rhetoric about China slowing down, +7% growth and the world’s largest emerging market can still deliver huge returns if you have local private equity market expertise. Management of the Beijing Capital Growth Fund give their outlook for the Chinese PE market, tell why local Chinese funds are eclipsing the large foreign funds such as Hony or Carlyle, and explain why 2013 presents great investment opportunities in China’s pre-IPO market. ***SUBTITLES: ‘CC’ -> ‘En’ | SOUS-TITRES « CC » -> « Fr » ***

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Despite all the rhetoric about China slowing down, +7% growth and the world’s largest emerging market can still deliver huge returns if you have local private equity market expertise.  Management of the Beijing Capital Growth Fund give their outlook for the Chinese PE market, tell why local Chinese funds are eclipsing the large foreign funds such as Hony or Carlyle, and explain why 2013 presents great investment opportunities in China’s pre-IPO market.

In this episode, GenevaRoadShow.TV takes you back out to Beijing to meet with Beijing Capital who is set to launch a local Chinese fund which will be the first ever open to foreign investors to co-invest in China alongside the investment arm of the Beijing municipal government. Paul Song, a recognized pioneer in China’s RMB venture capital and private equity industry and Managing Partner of the Beijing Capital Growth Fund gives his views of the current private equity environment in China as a new central government is set to be elected by the National People’s Congress scheduled for next week.

Song’s other managing partners give their views with an overview of the fund from Omer Ozden, a rare non-Chinese managing partner and a member of the fund’s investment committee.  Ozden outlines the value added by leveraging the built-in government relationships of the Beijing municipal government’s investment interest and Beijing Capital’s infrastructure which includes a complete IPO infrastructure consisting of internal capital markets experts, a nationwide SME loan guarantee company, and subsidiary securities houses.

The team explain the unique advantages that the Beijing Capital Growth Fund has over rival China PE funds in sourcing RMB private equity investments in China and discuss how they add value to portfolio company exits that will be achieved through IPO listings on the ChiNext and the Shenzhen SME A-Share stock exchanges by providing assistance with the regulatory process and by leveraging these government relationships.

Don’t miss the Out-take at the end of the video…

****************** Full Video Transcript Follows ******************

This week on Geneva Road Show.TV…

Gary Ke:  There is lots of money chasing a few good deals…

Omer Ozden:  The market is moving away from foreign-controlled funds to native Chinese funds…

Wang Hong:  We can better understand than the pure investors to understand China’s market situation…

Paul Song:  I don’t think the PE market is too hot; it still has a long way to grow and rise.

Omer Ozden:  A lot a fund of funds will try to invest in what they already know, or in what has worked five or 10 years ago. However, in China that doesn’t apply.

Scott Arnell:  Perhaps, is that your wife calling?

Scott Arnell:  Welcome to Geneva Roadshow.tv.  It’s the year of the Dragon.  I’m Scott Arnell and this week we are in Beijing.  Home to the largest state-owned enterprises.  Beijing Capital Group is one of the largest. We’re going to take you to get an update from the Beijing Capital Growth Fund.  Are you ready?  Let’s go!

Beijing Capital Growth Fund in a Nutshell

Omer Ozden:  We are the private equity arm of the Beijing Capital Group, which is a state-owned enterprise of the Beijing municipal government and one of the largest conglomerates in China, focusing on real estate, infrastructure and financial services.  Our private equity arm falls within the financial services group along with investment banking, loan guarantees, retail banking and insurance.  We have focused on small to medium enterprises and have listed them on the A-share markets in Shenzhen SME, and the Chinext board.  Almost 2/3 of the companies that we’ve invested into have either IPO’d or are currently in the IPO queue in China.

We also combine native Chinese expertise with Western international expertise as well.  We have non-Chinese, including myself, who are in management positions, decision-making roles which is very rare in China for a government affiliated fund.  We also have a complete nationwide network.  We source deals from Beijing Capital’s 32 offices around China, our relationships with municipalities around the country, government agencies around the country, as well as our affiliated investment bank, First Capital Securities and our loan guarantee houses which are the largest loan guarantors for small to medium-sized enterprises in China.  Last year, we IPO’d two companies, one IPO’d at a 59 price-to- earnings multiple. In under three years, we IPO’d the company and on paper over a 11.5x return.  Another company we IPO’d, a glass technology company, IPO’d at a 45 multiple.

China Private Equity Market Outlook

Gary Ke:  But right now, for example, the PE multiple, overall, is pretty low. In China, you know, with the growth over 8%, as an emerging market, for this kind of PE, 15% for blue chips and for small-to-medium companies around 30, is pretty low and is very cheap.

Omer Ozden:  What we’ve seen, is a drop in valuations since our two IPOs on the domestic exchanges by approximately 25%.  And, correspondingly we’ve seen a drop in private company evaluations which we believe is a very good thing for the market. Valuations in 2011 and even early 2012 were too high, we believe, and now the private company valuations have dropped and we believe will continue to drop for the next year to 18 months.

Paul Song:  Lately, the hot PE market has cooled off a little bit, along with the economic downturn. This decline in PE market valuations will be better for those seeking to invest.  But, I look at it in this way: with a smooth transition of China’s economy, and also after the new central government is elected by the next National People’s Congress, my prediction is that the economic situation will develop positively in a stable manner.  There will be steady growth, and then the PE market will become more active.

Gary Ke:  We see the restriction on liquidity, because you know banks basically stopped lending money to the SMEs small to medium companies.  So they come to us.

Omer Ozden:  So the public markets have dropped for SMEs and the private markets have dropped even more so because the public market multiples have dropped and also because of the constriction of available financing.

Gary Ke:  Because of the transition from the low-end manufacturing to, you know, to technology intensive, capital-intensive sectors, we see lots of good deals from small and medium companies, more and more.

Omer Ozden:  We believe that over the next 18 to 24 months, it’s a very good time to invest equity in the private equity market for the SMEs.

Paul Song:  Under the conditions of the economic downturn, I think it is a very good opportunity for us.  I also think it is like investing in stocks. We should buy low, sell high. Before, companies were too expensive. Right now, it is a really good opportunity for PE funds to enter this market and seek out investment projects to get value.  I believe this is a very good time to be investing, not the opposite.

Advantages of Local Chinese Funds

Paul Song:  In China, I think that the local Chinese fund companies obviously are able to work more efficiently in their own backyard. The cost of raising funds and seeking out projects is relatively low. Their investment, the overall effort and financial resources required is substantially less than for foreign funds. In addition, the Chinese funds clearly have more advantages in culture, proximity and government support compared to foreign funds, such as Carlyle.

Wang Hong:  The Beijing Capital Group itself is local. You know, in the Beijing market and of course, just what I mentioned, we already have all kinds of other businesses like water, wastewater like the real estate projects separated throughout all of China. That means we can better understand than the pure investor to understand China’s market situation.

Omer Ozden:  The market is evolving quickly.  The domestic managers have eclipsed and continue to dominate now the private equity market over the foreign fund managers.  What appears to be a domestic fund manager to the LPs in the United States and in Europe such as a Hony or a CDH, are actually considered to be foreign investors from the standpoint of the Chinese private equity market.

Paul Song:  There probably are far fewer investors who are aware of our funds, but when you talk about Carlyle or JP Morgan, everyone knows about them.

Does Beijing Capital Have Too Much Government Relationship?

Wayne Hong:  Our guarantee company already guarantees more than 7000 enterprises.  There’s not any relationship with the government.  We do everything.  We do all the commercial actions.  There is not any influence by the government.

Paul Song:  The government funds are more government-guided.  To me, there are a lot of government-oriented elements.  The funds like what we have are totally market-oriented.  This is the difference.  We seek out projects according to the market-oriented way and for profit.  So we are different on this point.

This is the first point, and the second is management.  The management of the market-oriented funds is more effective and more profitable than the management of the government funds.  This is simple and obvious.  The administrators of the government funds are assigned by the government and they get their salary and bonus, so their sense of responsibility is not as strong as the market-oriented funds’ administrators.  So I think it is obvious in China, and people in the PE and VC industry all know it.  Government-oriented funds are never able to beat the market-oriented funds.  It is obvious.

Beijing Capital Growth Fund USP

Omer Ozden:  Beijing Capital is very progressive with respect to government-affiliated funds in China because we have a non-Chinese as part of the management team which we believe that no other government-affiliated fund has.

Paul Song:  Also there is one point that I want to add, which is that this fund of ours, in China, I would like to make it into a model for a joint  Chinese/Foreign investment fund that is truly localized in China that other funds will copy.

Omer Ozden:  We believe that we’re amongst the most progressive groups by having a mix of local government, Chinese local acumen as well as Western expertise and non-Chinese decision-makers on our Investment Committee and management team.

Paul Song:  We are the first, and I have confidence in this model. We have the advantages of both Chinese and Foreign funds with Chinese and Foreign investors.

Gary Ke:  The Beijing Capital Group has a big infrastructure. That’s where we can add value to the company. Our way of guiding deals is not just about price. We emphasize the value added. If we can add technology,  we can add the markets,  we can add the brand name, we can add natural resources, we can add human resources, all of these are productive elements to the company. If we can really add good value to the company, not just struggling over the price, so this is the kind of value versus price. That’s what differentiates us from other companies.

Paul Song:  The famous brands, such as Carlyle, people say that they are doing very well in China and they are very famous.  But actually, I feel like many of these better known funds have not truly become localized in China and therefore are not able to operate and become a truly Chinese/Foreign joint investment parallel fund like ours.  This is one of my visions for the future of China and for our group.

Scott Arnell:  All right, that’s it for the Beijing Capital Growth Fund.  If you have any comments or questions, or wish to contact them, just fill out the form beside the video window here.  If you have any comments for us at Geneva RoadShow.TV, click on the button below, we read them all.  Like us on Facebook, follow us on Twitter, link to our LinkedIn group.  I’m Scott Arnell for GenevaRoadShow.TV.  And remember, if it’s on the Internet… if it’s on the Internet… if it’s on the Internet… it’s got to be true.

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