China Money Podcast - Video Episodes: Recent Episodes
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Andrew Teoh, founding partner of Ameba Capital, tells China Money Podcast host Nina Xiang that when he makes investment decisions, he would consider a sale to Chinese Internet giants, BAT (Baidu, Alibaba, Tencent), as potential exits. He shares his view on what assets BAT are likely to acquire in the next year.
Andrew Teoh, founding partner of Ameba Capital, tells China Money Podcast host Nina Xiang that there will be more mergers among Chinese technology companies in 2016, which will create clear industry number twos. In particular, the O2O (online-to-offline) sector will see more mergers as the availability of capital decreases.
Andrew Teoh, founding partner of Ameba Capital, tells China Money Podcast host Nina Xiang that he likes social network-based B2C start-ups now as Chinese consumers become more sophisticated and want quality, brand and seamless shopping experience.
Andrew Teoh, founding partner of Ameba Capital, tells China Money Podcast host Nina Xiang that as China's capital markets changes, the RMB will become a more important currency in both early stage and late stage investments in China, different from the past when the U.S. dollar dominated in both investment and exits.
In this episode of China Money Podcast, guest Xia Mingchen, a Hong Kong-based principal at Hamilton Lane's fund investment team, spoke to our host Nina Xiang.
Xia says Hamilton Lane likes distressed debt and special situations strategies in China. They will likely outperform as the Chinese economic transition provides plenty of opportunities for corporate restructuring.
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In this episode of China Money Podcast, guest Xia Mingchen, a Hong Kong-based principal at Hamilton Lane's fund investment team, spoke to our host Nina Xiang.
Xia says as the Chinese economy re-balances, private equity fund managers need to focus more on sector expertise and post-investment management of their portfolios.
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In this episode of China Money Podcast, guest Xia Mingchen, a Hong Kong-based principal at Hamilton Lane's fund investment team, spoke to our host Nina Xiang.
Xia says he prefers country-specific private equity funds over pan-Asian vehicles, because local expertise is critical in achieving success in the region.
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Mark McFarland, global chief economist at private bank Coutts & Co. Limited, tells China Money Podcast host Nina Xiang that Hong Kong-listed Chinese Internet leaders and banks are preferred sectors for gradual market re-entry.
Mark McFarland, global chief economist at private bank Coutts & Co. Limited, tells China Money Podcast host Nina Xiang that China has plenty of room to loosen monetary policy if needed, and is likely to cut bank reserve requirement ratio two or three times by the end of 2016.
Mark McFarland, global chief economist at private bank Coutts & Co. Limited, tells China Money Podcast host Nina Xiang that the RMB has limited space to depreciate further and the Chinese government will be able to keep a relatively stable exchange rate going forward.
Mark McFarland, global chief economist at private bank Coutts & Co. Limited, tells China Money Podcast host Nina Xiang that investors should look beyond the current slowdown to realize that an economic slowdown in China is good for everyone as there will be less waste of resources.
Leon Liao, gaming analyst at investment bank Jefferies & Co., tells China Money Podcast host Nina Xiang that he likes Macau casino operators Galaxy, SJM Holdings Limited, Sands China Limited, and Melco Crown Entertainment (ADR).
Leon Liao, gaming analyst at investment bank Jefferies & Co., tells China Money Podcast host Nina Xiang that Macau's junket system is consolidating as casinos' revenues plummet, with weak operators shutting down.
Leon Liao, gaming analyst at investment bank Jefferies & Co., tells China Money Podcast host Nina Xiang that Macau's gaming sector may have reached bottom range after a significant drop from its peak levels.
Tian X. Hou, founder and CEO of T.H. Capital, tells China Money Podcast host Nina Xiang that Qihoo 360 Technology Co.'s US$9 billion take-private transaction will go through at a reduced price.
Tian X. Hou, founder and CEO of T.H. Capital, tells China Money Podcast host Nina Xiang that U.S.-listed Chinese healthcare companies should consider returning to the Chinese domestic stock market as their listing venue.
Tian X. Hou, founder and CEO of T.H. Capital, tells China Money Podcast host Nina Xiang that despite the market correction in China and the government's temporary suspension of the IPO market, most U.S.-listed Chinese companies with plans to go private should try to proceed to complete the transactions.
Tian X. Hou, founder and CEO of T.H. Capital, tells China Money Podcast host Nina Xiang that even though some U.S.-listed Chinese companies are pursuing go-private deals for short-term profits, but the current wave of privatization deals will be beneficial for China's stock market in the long term.
Tian X. Hou, founder and CEO of T.H. Capital, tells China Money Podcast host Nina Xiang that for big Chinese Internet companies listed in the U.S. such as Baidu and Sina, they should consider listing its new businesses branches domestically.
Manav Gupta, founder and chief executive officer of Hong Kong-based Internet Of Things (IoT) accelerator Brinc, tells China Money Podcast host Nina Xiang that Hong Kong is the best place in the world to ensure the success of an IoT start-up business.
Manav Gupta, founder and chief executive officer of Hong Kong-based Internet Of Things (IoT) accelerator Brinc, tells China Money Podcast host Nina Xiang that wide-spread human microchip implants may happen sooner than expected.
Manav Gupta, founder and chief executive officer of Hong Kong-based Internet Of Things (IoT) accelerator Brinc, tells China Money Podcast host Nina Xiang that the IoT sector's key challenge in the future is how to connect all the smart hardware and to integrate them via data centers and on the cloud globally.
Manav Gupta, founder and chief executive officer of Hong Kong-based Internet Of Things (IoT) accelerator Brinc, tells China Money Podcast host Nina Xiang that the IoT sector's future is what he calls IoT 2.0, where smart devices talk to each other and are integrated to enhance people's lives.
Manav Gupta, founder and chief executive officer of Hong Kong-based Internet Of Things (IoT) accelerator Brinc, tells China Money Podcast host Nina Xiang that the IoT sector could be a US$7 trillion market opportunity.
Theodore Shou, chief investment officer at South Africa-based fund of hedge fund manager Skybound Capital, tells China Money Podcast host Nina Xiang that China-focused hedge funds will continue to outperform despite the recent market gyrations and the slowing economy.
Theodore Shou, chief investment officer at South Africa-based fund of hedge fund manager Skybound Capital, tells China Money Podcast host Nina Xiang that some Chinese macro strategy hedge funds suffered losses after the Chinese People's Bank of China devalued the RMB last week as they made big currency bets.
Theodore Shou, chief investment officer at Cape Town, South Africa-based fund of hedge fund manager Skybound Capital, tells China Money Podcast host Nina Xiang that investors now value risk control more after the Chinese stock market correction.
Theodore Shou, chief investment officer at Cape Town, South Africa-based fund of hedge fund manager Skybound Capital, tells China Money Podcast host Nina Xiang that the most recent Chinese stock market crash reveals that many Chinese hedge fund managers merely had exaggerated "beta" in the past, and they failed to achieve "alpha" during the past few months.
David Ji, director, head of research and consultancy of Greater China at property consultancy Knight Frank, says China's ghost cities are not a problem of oversupply.
David Ji, director, head of research and consultancy of Greater China at property consultancy Knight Frank says real estate in China relating to the country's new economy are still attractive.
David Ji, director, head of research and consultancy of Greater China at property consultancy Knight Frank says the Chinese property market is stabilizing and in early recovery stage.
In this episode of China Money Podcast, guest Dr. Marc Faber, renowned investor and publisher of The Gloom, Boom & Doom Report, speaks with our host Nina Xiang. Dr. Faber shares his thoughts on why China's economic problems are solvable, explains the reasons behind his belief that China is likely to keep its currency stable, and rebukes the argument that capital may be flying out of China for a lack of confidence in the world's second largest economy. Read an excerpt or watch an abbreviated video version of the interview. Be sure to listen to the full interview in the audio podcast. Don't forget to subscribe to China Money Podcast for free in the iTunes store. Q: We are in your spectacular house in Chiang Mai, Thailand. The walls are covered with pictures from China's Maoist era and the Cultural Revolution. From where you stand, how is the Chinese economy doing? A: In order to understand China, you have to go back in history. After the revolution and the opening up, the growth during the 1990s up until now has been mind-boggling. In 1980, China consumed 2% of the world's industrial commodities. By 2000, it was 12%, and now it is 47%. Now the growth in China is obviously slowing down. But if you look at the U.S., there were 19 recessions during the 19th century, then the Civil War, World War I, the Great Depression, World War II, the Korean War, the Vietnam War, and the country continued to grow. So, I wouldn't be too worried about the problems in China for the near term. I think it's solvable. Hopefully, it is painful because the society needs some pain from time to time, then the economy takes off again. Q: Where do you think the pain will be specifically? A: Obviously, in the property market. There are a lot of property developments that will not have positive returns. There is also over-capacity in some basic industries, steel and other basic materials. That's where pain will be. Q: What is the biggest risk the economy faces? A: The biggest risk is that credit has grown far more than economic activities. The debt-to-GDP ratio has increased dramatically. Essentially, China is borrowing economic growth from the future. Once the debt reaches a level where it's difficult to maintain the pace of growth, the economy automatically slows down. But what is frequently missing in the discussion of credit is what is credit used for. If you look at Korea and Japan in the 1950s to 1970s, credit was used for capital spending, infrastructure, plants, education, research and development. That credit generates cash flow, which can repay the debt. The worst credit is what the U.S. has, which is consumer credit. People borrow to buy a car or a washing machine. That does not generate income and becomes burdensome to the household. Some people argue that China has overbuilt roads, tunnels, bridges and trains. But I don't see it that way. In the U.S. during the 19th century, the country constructed lots of canals and railroads. All the canal companies, including the Erie Canal, went bankrupt. About 95% of the railroads had to be refinanced or went bankrupt. But the network facilitated the country's trade and commerce significantly. So China is doing the right thing. Q: Sounds like you are not too worried about China's elevated debt level? A: We live in a world with excessive liquidity created by money printing of central banks. That liquidity flows into real estate, stocks, bonds, art and commodities from one place in the world to another. Relative to the U.S., China's stock market has become inexpensive. So, we had recently this huge bull market in Chinese stocks with colossal speculation. It doesn't mean that the whole thing will collapse and make new lows. But after this burst of volume, we could easily see a significant correction. I bought China Life Insurance at HK$21, and now it's close to HK$40. It almost doubled in less than six months. I think it can easily drop 20% to 30%. Q: The U.S.
In this episode of China Money Podcast, guest Benjamin Fanger, co-founder of Chinese distressed debt investment firm Shoreline Capital, talks to our host Nina Xiang about the changes he saw in the distressed debt investing space over the past ten years, where he sees future opportunities, and how his firm controls downside risks in a highly specialized investment arena.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: Can you first give us some background on Shoreline Capital?
A: I co-founded Shoreline Capital with my partner, Zhang Xiaolin, in 2004 when we were still studying at the University of Chicago Booth School of Business. Currently, we manage around US$650 million investing in distressed debt in China, with over 30 people in the company.
Q: And, you are currently raising a third fund with a US$500 million target?
A: That's correct.
Q: During the past 10 years, how has the distressed debt investment space changed in China?
A: It has changed significantly. Back when we started the firm, it was not clear what would happen in courts if you were trying to enforce debt. Since that time, the legal environment has improved significantly.
The types of investments you can do have also expanded. Ten years ago, there were probably opportunities only in the non-performing loan (NPL) space. Today, there are other types of investments given the decelerating economy.
Q: How has China's legal environment improved, specifically? In 2007, China enacted a new enterprise bankruptcy law, but the new law hasn't been tested that much?
A: I think the more relevant laws for what we do are creditor rights enforcement, not bankruptcy laws. Creditor right enforcement in China has much more predictability nowadays than before.
Let's say if you could do ten things in courts in London or New York to enforce your rights as a creditor, you could only do three things with predictability in China ten years ago. Today, you could probably do four or five.
Q: Can you give an example of the things you can do now but couldn't before?
A: I'll first say some things that a creditor has always been able to do in China. They include doing searches for titles of a borrower's assets, putting liens on those assets, and taking the borrower to court. You could also auction certain types of assets off the borrower, things that are not sensitive in the eyes of the local government.
An example of some new things you can do as a creditor in China is pursuing fraudulent conveyance. In a developed court, if a borrower transfers all its assets to another borrower, creditors can sue that (second) borrower as well. Ten years ago, courts in China were not very familiar with fraudulent conveyance. But today, it's more predictable to pursue this in Chinese courts.
Q: But there are still many things beyond your control. How do you manage that risk?
A: We price those things that we cannot do with predictability in Chinese courts to zero, and give value to the few things that we can do.
But in some cases, Western courts would be less predictable than in China. Let's say I have a borrower who has defaulted on a loan. I have a complete set of loan documents that I have bought from the bad banks in China. If I go through due diligence and find that the borrower owns an office building, but it's not my collateral, then I can go to a court in China and do a pre-trial attachment of that asset and essentially become a secured creditor. In essence, putting a second-lien on that asset.
This is a very predictable process in courts in China. But this process could be quite difficult if there are counter-claims or other complications in courts in developed markets.
Q: Your business initially was to invest in NPLs in China. Can you explain how did it work?
A: We would buy a portfolio of NPLs from the Asset Management Companies (AMCs),
In this episode of China Money Podcast, guest Eric Solberg, founder and CEO of Asia-focused private equity and wealth management firm EXS Capital, talked to our host Nina Xiang.
He discussed how he is preparing to invest in China's property sector in its downturn, and why he thinks there are attractive investment opportunities in the Chinese steel sector.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: You resigned from Citigroup Venture Capital International Asia in 2007 and started EXS Capital. What was your consideration behind that decision?
A: In early 2007, private equity deals in Asia were very expensive. The average public market PE multiple was 60 times. CVCI has raised a US$4.3 billion global emerging markets fund at that time. As all partners, I was required to invest a very large portion of my net worth, in fact, Citi was going to loan me a lot of money, so that I can make a large personal investment in this fund.
But I was concerned that valuations were too high. So I resigned. I withdrew all my money from the fund and sold my Citi stock at US$54, which went all the way down to 97 cents. That turned out to be a lucky decision.
Q: What happened to that fund?
A: In my understanding, the fund invested very aggressively in 2007 and 2008. That fund was sold recently to a much smaller group. I am no longer involved in that fund, but my guess is that the fund didn't lose a lot of money, also didn't make a lot of money. It did get investors the type of performance they were hoping for.
Q: Give us more background on EXS Capital. What does the name stand for?
A: It's a play on the initials of my and my son's name, which is Xavier. But we call it "excess" capital, because we think everybody needs "excess capital"; it's our private joke.
Essentially, we believe that the volatility in the Asian markets makes the typical closed-end, finite life private equity funds difficult. So if you can have either permanent capital, or can do this on a deal-by-deal basis, we think Asia is the best place to do private equity.
Q: Your firm did try to raise an evergreen fund, but it wasn't successful?
A: We did try to raise a permanent capital vehicle around 2011. At that time, investors are putting a lot of money into domestic Chinese or Indian funds. There weren't the appetite for that new type of vehicle.
Some day, we may go back to that idea now that we've built a longer and stronger track record. But in the meantime, our deal-by-deal basis approach has given us a great deal of flexibility.
Q: Chinese private equity firm Capital Today is planning to raise a private equity fund with a 28-year fund life. What do you think will be its biggest challenge?
A: Frankly, I don't think that's a right way to do it. Taking a standard private equity fund model, and just making the fund life very long, doesn't solve the problem.
If you look at more sophisticated evergreen funds such as Golden Gate Capital and General Atlantic, they have rolling mechanisms to allow investors in and out, and to periodically realize investments. That more creative approach is a better solution.
Q: Can you tell us more about a deal you did in China, which was a buyout of a distressed shareholder in a Chinese residential project called Project Byblos?
A: We were working with a developer who had a single project with a 3900-unit residential project in Southern China on the coast. This developer was originally financed by a Southeast Asian group, which got into trouble after the global financial crisis.
The developer saw this as a good opportunity to buy out this Southeast Asian group. We raised some money for the developer, and structured the deal to give incoming investors minimum IRRs (internal rate of return), as well as sharing the upside with the developer. That worked out well.
In this episode of China Money Podcast, senior strategist for Greater China at BNP Paribas Investment Partners Chi Lo, talked with out host Nina Xiang about the future policy direction of the Chinese central bank; why he believes the biggest risk in the Chinese economy is a property correction and its knock-on effect on banks and other sectors; as well as his advice for investors on building exposure to China now.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: Earlier this month, the People's Bank of China (PBoC) announced a selective bank reserve requirement ratio (RRR) cut of 0.5%. Now the big question on everyone's mind is: Will the Chinese central bank extend the RRR cut to all Chinese commercial banks. What's your view?
A: It depends. I think the PBoC's policy move will be data dependent in the next few months. It will depend on how the economy reacts to the selective RRR cuts and also the mini-stimulus packages implemented in the past few months. If the numbers react well, then I don't think there will be a need for a universal RRR cut or an interest rate cut.
We think the PBoC is taking a universal RRR cut and interest rate cut as a last resort. Our base case forecast is for the Chinese economy to recover during the second half of the year. Therefore, no major further monetary loosening is needed.
Q: Which economic indicators do you think the Chinese government will focus on to determine if the economy is responding well to their policy measures?
A: I think they will focus on bank credit, because that's a key leading indicator. They will also focus on electricity power output, transport volume growth, as well as the property market. Depending on how deep the property market correction will go, the authorities will decide how much easing they want to put into the economy.
Q: Some economists argue that an across-the-board RRR cut will not stimulate bank lending that much. Do you agree?
A: Overall, I do. The smaller and rural banks in China have about 7% excess reserve above the official minimum bank reserve requirement ratio. For the other banks, they also have excess reserve ratio of 2% to 3%, which means they are already putting aside 22% to 23% of reserves, above the official 20% official RRR. So it's hard to tell if the RRR cut will be effective.
The problem with the Chinese economy is that the system is too used to bailouts when something goes wrong. This time around, Beijing has been holding off any significant bailout because its policy objective has changed from "growth quantity" to "growth quality". It's not easy. It's painful.
Q: So you see there will be more pain, more bankruptcies in the economy?
A: You already see property developers and corporates jumping and yelling that there is not enough liquidity. But the truth is that the amount of liquidity now is just less when compared to past cycles, but it's still (ample). When you look at the total aggregate financing numbers, there is still a lot of money being pumped into the economy. This is a normalization of liquidity growth in China.
Q: In another word, it's China's own tapering?
A: You can say that. Actually, China tapered much earlier than the U.S. Federal Reserve. China started tapering about a year ago.
Q: How should China manage the process of injecting market disciplines in the economy, but also not to go too far to cause unwanted social pressure?
A: On a macro level, a growth rate of 7% to 7.5% is what I call the "pain threshold." China's Premier Li Keqiang recently reiterated that he wanted to see 7.5% GDP growth this year. I don't think they will be very strict about the 7.5% objective. As long as there is progress on structural reforms, Beijing will be okay with growth lower than 7.5% but above 7%.
Bankruptcies will also rise, and this is part of Beijing's game plan.
In this episode of China Money Podcast, returning guest and legendary investor Jim Rogers, chairman of Rogers Holdings, spoke with our host Nina Xiang in Singapore.
Mr. Rogers shared his views on the world economy and markets, in particular, why people should be concerned about tough times ahead as the unprecedented artificial liquidity comes to an end. He also discussed bitcoins, and why he missed the best opportunity to invest in the virtual currencies. He shared some personal experiences about returning to his hometown of Demopolis, Alabama, and the joy of seeing his daughters excel in the Chinese language.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: What worries you the most in today's world and economy?
A: What worries me the most is that for five or six years, all the major central banks have been printing huge amounts of money. It's the first time in recorded history that we have the Japanese, British, European and Americans all printing money at the same time. So we have this artificial ocean of liquidity, which is making markets do well, but it's not doing much for the economy worldwide. When it ends, we will all pay a terrible price.
Q: What's your assessment of the current geopolitics risks?
A: There is always geopolitics risk. We have had wars since the beginning of time, and we will have more. Politicians have always made foolish mistakes throughout history. They will make mistakes again, and we will all pay for it.
Q: Do you see that any potential conflict will be limited to regional and small-scale ones?
A: Let's hope so. Unfortunately if you look back at history, all wars started with small incidents. I would expect we'd see bigger conflicts in the next ten years.
Q: In China, we have seen more frequent terrorist attacks and mass protests lately. Just last week, there was another bombing in Xinjiang province. How big a threat do you see this type of turbulence pose to the economy?
A: Whenever there are bombs going off, people become worried. People tend to get more aggravated or agitated when things slow down. China is slowing down at the moment. But will this mean the end of prosperity in China? I doubt it.
Q: What is the best way for the Chinese government to handle this?
A: Normally, the best way is to try to provide some kind of accommodation, so the Chinese and the Uighurs can be satisfied. Killing each other doesn't usually solve the problem.
Q: Do you think the Chinese government will be able to keep stability and avoid the dramas that are currently going on in countries like Thailand?
A: China will see more social unrest going forward, but I don't see the Chinese government failing.
In fact, we are going to see more social unrest throughout the world, because we are in this artificial situation where a lot of money is being printed, but many people are not participating in the recovery. We are going to see more turmoil in the next decade.
Q: Strangely, I also have this vision that I'm going to experience starvation one day, or worried about being trapped in dark rooms...
A: That's what a lot of people are going to experience, because we are in this artificial liquidity. So, you should go back to that dark room, if you can find it, and put some food in the closet. So when that period comes, you have some extra food, or a flashlight. If it doesn't happen, then it doesn't matter.
Q: You have always said that the RMB will continue to appreciate much more in the long term. So the 3% depreciation of the Chinese currency this year is only a temporary adjustment, right?
A: The market has 3%, 13%, 23% correction all the time. So it's good that the Chinese currency is starting to fluctuate. That's how the markets work. If it's only going up, it's artificial.
Q: Have you invested in virtual currencies like Bitcoin?
A: No,
In this episode of China Money Podcast, guest Bing Lin, portfolio manager at Hong Kong-based US$1.4 billion-under-management Keywise Capital Management, speaks to our host Nina Xiang about why he believes there are still many major overseas listed Chinese companies with fraudulent accounting practices, and how 2014 will be a great year for shorting certain overseas-listed Chinese stocks.
Read an excerpt below, but be sure to listen to the full interview in audio, or watch an abbreviated video version. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: China announced plans to launch a Shanghai-Hong Kong stock connect pilot program in six months. How will this impact hedge funds investing in the Greater China region?
A: In general, I think it's good news. We will see the valuation gap among large cap stocks between the two stock exchanges close up.
Also, for some small- and mid-cap stocks listed in Hong Kong, their valuation might increase. While for some domestic Chinese small- and mid-cap stocks, they will see negative impact because of their relatively high valuation.
Q: We did see the Hang Seng China AH Premium Index, a measure of the valuation gap between the A-share and H-share market, rise to 95 on the news. That's very close to the 100 level that signals parity between Shanghai and Hong Kong listed shares. What type of trading opportunities does this create for hedge funds before the program's official launch in about six months?
A: We are buying high quality names (based on fundamental research). For example, there are many small- and medium-sized companies listed in Hong Kong that are generating earning growth of 20% to 30% year after year.
But they are traded at single digit multiples. The reasons are that there is little (research) coverage on these stocks, and big institutional investors and local Hong Kong investors tend to buy mostly big-name stocks.
In China, the small- and mid-cap stocks are trading around 30 to 40, over even higher, multiples. So with the current regulatory change, we think it will serve as a catalyst for value to be realized.
Q: The Shanghai Composite is valued at 7.6 times 12-month projected earnings, compared with five-year average multiple of 12.1. Do you see the market sentiment turning any time soon?
A: The Chinese macro environment is weak, and the stock market is undervalued. But it's hard to time the market. If the macro issues in the Chinese economy, including bad loans in the banking sector, risks in shadow banking, over-supplies in the property market, are dealt with, they might provide catalysts for the stock market to turn around.
Q: Now let's talk about Keywise Capital. Give us a brief introduction of the firm?
A: We are a Hong Kong-based hedge fund with US$1.4 billion under management. Our strategy is long-short equities. We typically buy high quality names at reasonable prices, and short those with broken business model or accounting fraud in the Greater China region.
Q: A short position Keywise engaged in was China Metal Recycling Holdings, which has been wound up because of accounting fraud. Do you still see many opportunities to short Chinese companies based on accounting fraud?
A: Based on my experience and observation, I think there is still widespread accounting abuse among listed (Chinese) companies, even some large ones.
There are no strong forces in Asia, in general, to go against those companies. Due to culture issues and regulatory framework, hedge funds here have not been aggressive in pursuing those opportunities.
Q: What type of accounting abuse is there?
A: For example, revenue recognition. We are seeing some companies booking revenue on a gross revenue basis, which will massively inflate their revenue.
A lot of companies also have unfair related party transactions, such as acquisitions. They may be paying inflated price to a small business,
In this episode of China Money Podcast, we feature guest Theodore Shou, chief investment officer at Cape Town, South Africa-based fund of hedge fund manager, Skybound Capital.
Shou talked with our host Nina Xiang about his projections for the development of China's hedge fund sector, why he is bullish for China-focused hedge funds' ability to continue to outperform global peers, and why fund-of-funds in emerging markets will remain relevant for limited partners for a long time.
Read an excerpt below, but be sure to listen to the full interview in audio, or watch an abbreviated video version. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: What do you think are some new exciting policy initiatives in China that will spur the growth of the hedge fund sector here?
A: One is the Qualified Domestic Limited Partners (QDLP) scheme that Shanghai initiated about one and half years ago. But it's progressing behind expectations. There are six global hedge fund managers who have been granted the QDLP quota.
Also, fifty onshore domestic hedge fund managers are registered with the Asset Management Association of China (AMAC) last week. This is probably the first time that the Chinese regulators are recognizing private collective investment schemes. Previously, it was mostly long-only mutual funds who are recognized.
Going forward, I would expect most of the relatively big hedge funds to register with AMAC. Some of the smaller funds will choose not to register, so there will be sort of a differentiation between fund managers.
Q: Why do you think the QDLP scheme hasn't progressed as well as expected?
A: I think the largest drawback is the lack of transparency from the regulators. The QDLP program was launched some time ago for private equity funds. The rules relating to private equity funds were made clear almost on day one.
But when it comes to hedge funds, the effort was mainly led by the Shanghai Municipal Office of Finance Service. It's not at the central government level. No official rules have been laid out by any regulators, and you can't see the name of the six global hedge funds on any official website.
As to the six global hedge funds, they have been very quiet regarding their fundraising activities. From other sources of information, I learnt that the Shanghai government is encouraging and facilitating them to raise capital. But the actual situation is very opaque to the outside.
Q: What kind of new financial instruments do you think will be launched soon to facilitate hedging strategies?
A: In the past few years, we've seen the launch of stock index futures, which allow hedge funds to short the market. More recently, China introduced a pool of single equities that are available for shorting. This pool works very much like a central clearing mechanism, making it easier to monitor and track stock borrowings. That pool has been growing to cover more than 500 stocks.
I think single stock options will be launched this year. There are already warrants to retail investors now. Why not introduce better structure instruments for institutional investors.
Another key development will be more relevant to large cap and blue chip names. Currently stock trading is settled on T+1 basis, meaning that stocks you buy today will only be settled tomorrow. This year, we think the Chinese exchanges are likely to begin settling trades on a T+0 basis, at least for the top 500 stocks. This will improve the turnover of hedge funds' books.
Q: In 2013, China-focused hedge funds outperformed the Hang Seng Index, returning 16.1% on average compared to the index' 0.1% performance. China-focused hedge funds also outperformed global peers. Is this a one-time occurrence?
A: Not at all. I think this is a natural outcome from the developments of the Chinese markets and its macro economy. Nowadays, investors are flooded with negative news on China: concerns of a financial crisis,
In this episode of China Money Podcast, our featured guest is Goodwin Gaw, managing principal and founder of Hong Kong-based private real estate management firm, Gaw Capital Partners, which manages US$7.5 billion.
Gaw talked with our host, Nina Xiang, about where in the Chinese property market he sees price corrections this year, why his firm is staying on the sidelines investing in Hong Kong, and his thoughts on Gaw Capital's performance.
Read an excerpt below, but be sure to listen to the full interview in audio, or watch an abbreviated video version. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: Are you concerned about the recent market jitters on the financial health of Chinese property developers?
A: In China, you have to go along with the government policy. The government policy now is actually to promote steady growth in the housing sector. Every time when the market goes up too much, the government puts the brakes on.
We are in this type of situation where the government is trying to take away excessive liquidity in the market, so that the (housing) prices may correct or slow down. There will be tightening in some of the developers' finances. It's actually a good opportunity for us to put capital to work in China.
Q: How big will this type of distressed opportunity be?
A: I think it could be quite big. This new government has strong resolution to change the economy structurally, which will create volatility in the market. Particularly in high-end homes in tier I cities where there are a lot of speculative investments, meaningful correction should take place.
Q: How big a correction?
A: For some of the high-end residential projects in Beijing and Shanghai, a correction of 10% is probably not excessive.
I'm less concerned about residential properties in tier II or tier III cities because they are still experiencing high growth. The government policy there is to encourage more supply and better housing to meet housing demand.
Q: But you believe that's where troubles in commercial property might be?
A: Yes. There have been massive investments in shopping centers and office space in a lot of these tier II and tier III cities.
The problem is that these cities are populated more by domestic companies, private entrepreneurs and state-owned enterprises. They historically would rather own their property than rent. So it's harder to build investment grade asset and fill them with enough multinational companies.
Q: Any predictions here about the scale of price corrections?
A: I would say for the big tier II cities like Chengdu and Nanjing, correction is less. But a 10% to 15% correction is not out of the question in the next five years.
(The bigger concern) is the retail property sector in certain cities like Shenyang. I've never seen so many shopping centers in one city. On top of that, Chinese consumers are quickly adopting e-commerce. As a result, there might be a shake up for these type of properties.
Q: With your projections in mind, what kind of impact will they have on Chinese banks?
A: It may be a little bump. Remember, China is a closed system. Municipal debt is central government debt. Banks are state-owned. Banks lend mostly to SOEs. So it's almost a test of the will of the central government. Do they want someone to fail? As a private businessman, you have to take a bet on the government's resolve.
Q: Your bet is that this government will let default happen?
A: If they believe it's not contagious, they will probably let some small firms fail. Just to set an example that they are not going to protect everyone. That's purely my own guess.
Q: For Hong Kong's property market, do you agree with the mainstream projection that a correction is coming this year?
A: Hong Kong's low tax environment, as well as it's currency being pegged to the U.S. dollar and the high-growth economy of mainland China,
In this episode of China Money Podcast, we feature guest Kevin Parker, CEO of New York-based investment management firm, Sustainable Insight Capital Management. From 2004 to 2012, Parker was the global head of Deutsche Asset Management, which managed US$750 billion as of January 2012.
Parker shares his thoughts on the growth of sustainable investing, explains why China is setting the global environmental policy this year, and how China is likely to lower the cost of electric vehicle productions going forward.
Read an excerpt below, but be sure to listen to the full interview in audio, or watch an abbreviated video version. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: Let's start with something fun. You own and have run a bio-dynamic winery in Southern France called Chateau Maris Cru starting from the late 1990s. What's the best and the most difficult part about running your own winery?
A: The best part is drinking (the wine), of course. After a career on Wall Street with a telephone in one hand and sitting in front of a computer and moving money around, (it's nice) to make something tangible. Something that people can taste, feel and enjoy.
(Our) winery has been bio-dynamic, or organic, for 17 years. Being a sustainable farmer for 17 years gives me certain credibility (to discuss sustainability issues). But it takes about seven years to convert a vineyard away from the use of pesticides, fungicides and synthetic chemicals to a completely natural approach. You see that the soils really come alive. Being a New Yorker and naturally impatient, it taught me something about time and patience.
Q: You left Deutsche Bank at 2012, and Sustainable Insight Capital Management (SICM) started operation in February 2013. Tell us some background of your company?
A: Back in the early 2000s, many organizations such as the Carbon Disclosure Project, Investor Network Against Climate Risk, popped up to focus on sustainability. Today, there are signatories representing over US$90 trillion that have signed the carbon disclosure principles. There are almost US$40 trillion who have signed the United Nations' principles for responsible investing.
Our research shows that managements who are focused on sustainability outperform their peers (financially). But markets are inefficient and are not accurately pricing this factor. Therefore, SICM was founded to capitalize on this opportunity. We believe that the reallocation of capital based on sustainability principles is the only powerful source large enough to solve our environmental problems.
We are an asset management business with the backing of two prominent investors in the sustainable investing field. One is The Kresge Foundation; the other is a family office from Palo Alto, California. Currently we have about US$120 million under management.
Q: Is it a traditional asset management business?
A: At the moment, it is. But on our list of things to do is to introduce alternative (investment funds) as well.
Q: Your firm just published a report, in which it forecasts that China is going to set the pace of environmental policy this year. How?
A: I think China has been underestimated in terms of the (impact) of its environmental policy. China has created enormous problem for itself. In the theory of the tragedy of the commons, one of the players has to realize that the path they are on leads to their own destruction. Because China has the biggest problem, it leads to a necessity of leadership.
Q: And China is investing a huge amount right now. During the 12th Five-Year Plan, the environmental protection sector in China is going to reach RMB5 trillion in market size, and it will grow at about 15% to 20% a year. Are these reasonable projections?
A: We haven't looked at China specifically. But globally, it is around US$1 trillion a year (of investments in this sector) required. But during the last several years,
In this episode of China Money Podcast, guest Tim Draper, founder and managing director of Menlo Park, California-based venture capital firm Draper Fisher Jurvetson (DFJ), speaks with our host Nina Xiang about the history of DFJ's investment activities in China, where he is focused on funding the next big tech companies, his big misses in China, and his views on the next tech bubble that he thinks is coming right now.
Read an excerpt below, but be sure to listen to the full interview in audio or watch an abbreviated video version. Don't forget to subscribe to the podcast in the iTunes store.
Q: Let's start with the Macro. Investors, particularly foreign investors, have been concerned about an economic slowdown in China. Do you share that sentiment?
A: Even an economic slowdown in China means a growth rate much higher than most of the world. So I'm not concerned at all about a slight lowering of the Chinese growth rate. I actually think that the Chinese economy is one of the most promising in the world.
Q: DFJ is closing down its China and India offices. Why?
A: We found that we are better off working with affiliates in these countries, rather than (running) DFJ company owned (operations). We have DFJ Dragon, DFJ Compass and DFJ ePlanet in China.
We found that trying to make decisions on companies that far away was a very difficult process. We want more local control, so that the local partners can make decisions.
DFJ is still very active in China (through our affiliates). It's just that we've made a shift in strategy to make decision-making more local. This does not impact any of our global network (funds), including DFJ Dragon and DFJ Compass.
Q: DFJ first entered the Chinese market in 1999 with a partnership with ePlanet Capital, running a US$650 million fund. How did that fund get started?
A: I have always wanted to invest in China. In the beginning, we invested in things that seemed to have good government connections. Those didn't work out. Then we started to invest in young, driven entrepreneurs who wanted to make great things happen. Then we invested in Baidu, Focus Media, ePay, Fastweb, Skype, etc.
Q: This fund reportedly realized over 30% gross internal rate of return (IRR)?
A: We never disclose this information. But the investors are very happy. The IRR would depend on when the investor sold their Baidu (stocks). If they are still holding (those shares), they are doing really, really well.
Q: But DFJ ended the partnership, and started DFJ Dragon in 2006. Why did you move on with another partner?
A: We had different approaches to venture capital. ePlanet went on to raise their own fund, and we set up DFJ Dragon, DFJ China and DFJ Compass.
Q: DFJ Dragon's first fund was a US$200 million vehicle raised in 2006…
A: No, it's less than that.
Q: Less than US$200 million, and you invested in around 30 companies. What are some proud investments from that fund?
Q: YeePay looks very promising. Hudong is exciting too. It's a for-profit Wikipedia in China. Also, advertising network for mobile Donson is growing very quickly too.
What's really remarkable about that fund is that…here in Silicon Valley, if we invest in 30 companies, we would expect about half of them to go out of business. But DFJ Dragon only lost one, maybe two companies out of 30.
Q: Why do you think that is?
A: For one thing, the growth rate in China is providing great opportunities. If their business isn't quite working out, they might change direction a little bit and go after other opportunities.
Q: For those companies that didn't work out, what went wrong?
A: They tend to be either too early, the founders didn't get along, or they came up with their product and nobody wanted it.
So our business is very simple. If the founders are getting along, they keep at it no matter what, don't run out of money, and find a market of customers who they can delight,
In this episode of China Money Podcast, guest Anla Cheng, partner at Sino-Century China Private Equity Partners, talks with our host Nina Xiang, about the importance of protecting intellectual property for companies in China's financial information sector, why she thinks China's IPO market might open sooner than expected, and her hopes for the realization of substantive reforms in China.
Read an excerpt below, but be sure to listen to the full interview in audio or watch an abbreviated video version. Don't forget to subscribe to the podcast in the iTunes store.
Q: Can you give us a brief introduction of Sino-Century China Private Equity Partners?
A: Sino-Century was founded in 2005 by three partners. Our founder, Dr. Hong Chang, used to work at the municipality in Pudong, Shanghai. He was one of the 25 financial architects who built the Pudong district. Therefore, he's very close to the build-up of China's financial center.
We launched our first RMB fund in 2007 focused on small and medium enterprises (SME). We focus on three sectors: financial information and services, which is the mainstay of our fund. About 50% of our assets are invested in this area. The other two are high-end manufacturing and sustainable environment.
Q: Do you currently only manage one fund?
A: We are onto our second fund. Our first fund initially planned to raise US$150 million. Then the financial crisis hit and we closed at US$73 million. It is mainly in RMB, but also has about 15% of assets in U.S. dollars.
We had several exits already and were hoping for another exit last year. Then the IPO market got closed. But we are on the "queue," of which there are about 800 companies waiting to go public in China. There are about 40 to 80 companies that already received approval to list, one of which is a company we invested in the financial information sector.
We are in the final stage of marketing our second fund, which we are targeting US$250 million. It's going to be predominately in U.S. dollars because our founder has always a vision to become an international fund.
Q: There are media reports saying that Sino-Century invested RMB84 million in Wind Info for a stake of 7% to 9% in 2007. Are they accurate?
A: Yes. Initially, we invested about US$12.7 million for a stake above 7%. Two years after we made the investment, CITIC PE bought a share at about three times of our valuation, and our share got diluted a bit.
Q: Intellectual property is critical in this sector. Wind Info has sued competitors for IP infringement last year, and others have sued Wind Info for the same cause. Do you think lawsuits are effective in protecting IPs in China?
A: Probably not as effective as in other places, but at least it's a beginning. Wind Info's pending lawsuit (against Zhejiang Hithink Flush Information Network Co.) is dragging on a bit but I believe Wind Info has a strong case.
Q: What are some other tactics for companies in China to protect their IPs?
A: One thing they could do is to always stay on top of the changing curve, and constantly come up with new products and ideas.
Also, if you look at Bloomberg, it probably faced similar issues. But it got very big very quickly through acquisitions. I wouldn't be surprised if Wind Info does the same thing.
Q: Among the biggest five companies in China's financial information sector, Wind Info is the only one that remains private. How do you see it evolve in the future?
A: Right now, the competitors are more focused on retail, not institutional. Wind Info still has a strong hold among financial institutions.
Earlier on, when we initially started working with Wind Info, it wanted to expand to Europe and the U.S. quickly. We advised that it would probably be more prudent to have a foothold in areas within Southeast Asia that read and speak Chinese.
So Wind Info expanded into Singapore, Hong Kong and Taiwan first, and then into other regions within Asia.
In this episode of China Money Podcast, returning guest and veteran investor Jim Rogers, chairman of Rogers Holdings, talked with our host Nina Xiang on his reading of China's third plenum meeting, why China should open its financial markets completely "this afternoon", and what Chinese stocks he has been buying lately.
Read an excerpt below, but be sure to listen to the full interview in audio or watch an abbreviated video version. Don't forget to subscribe to the podcast in the iTunes store.
Q: The just completed third plenum meeting provided a road-map for China's future reforms. It created this renewed sense of optimism about China's future. Do you share that feeling?
A: I was quite delighted to see what they said. The one overriding point is that the market is going to make the final decision. That is contrary to what is happening in the U.S., and that is why the world is moving to Asia.
Q: The policy initiatives may look near perfect on paper, but no doubt the most challenging part will be implementation. What do you see as the biggest risk in implementation?
A: In the past few years, the momentum (for reform) in China has slowed because of vested interests and their fear of losing power. The new leadership now says let's move on and just do it. But it won't happen with a snap of the finger.
Q: What would you like to see in China's financial reform?
A: They should make their currency, the RMB, convertible this afternoon. They started (currency reforms) in 2005 and have taken many small steps. But China is no longer a weak economy. It is the most successful country in the past thirty years. There is nothing to fear.
Q: Interest rate liberalization, floating the currency and opening up capital accounts, which one should come first?
A: I would think all of the above this afternoon. But they've been very slow and only taken small steps. Deng Xiaoping says you cross a stream by feeling one rock at a time. That's correct. But there comes a time when you get to the other side, and let's move ahead. China is on the other side now.
Q: How worried are you about capital outflows if the capital accounts are opened now?
A: Of course there will be capital outflows. The RMB may even go down for a while. But just do it and get it over with. There will be a lot of capital inflows as people like me want to put money into China.
Have you ever heard of people smuggling money into a country with capital controls? No. People in China are trying to get their money out. But there are also many people who want to rush into China. This is the point of a free and open market. Trust me, it's not the end of the world.
The Australians, Germans and Japanese used to worry about (opening up capital accounts). But somehow they all survived. Trillions of dollars flow in and out everyday in the foreign currency market. China will survive too.
Q: You have been bullish on the RMB for a long time, but the RMB only appreciated for roughly 12% since 2008. You can't say that it's a great performance as an investment?
A: That depends on what you compare with. There are many other currencies that were down. We presume one has earned interest as well even if it's just put into a CD (certificate of deposit). Don't forget that those interests get compounded.
But you are right, there are many other investments that could have made a lot more money. But the point is the currency has continued to appreciate and will continue to appreciate. It may be double or triple in the next 10 to 20 years.
Q: Are you buying Chinese company shares now?
A: Yes.
Q: Can you give us a couple of those names?
A: I've never bought Chinese domestic A shares in my life because it's always more expensive. But I've been buying H shares and overseas-listed Chinese companies for the first time in a while.
One company I bought was HollySys, a supplier of automation and control applications to China's subway and railway sectors.
In this episode of China Money Podcast, our guest is Stephen Roach, current senior fellow at Yale University’s Jackson Institute of Global Affairs and former chairman of Morgan Stanley Asia and the firm's chief economist.
He spoke with our host, Nina Xiang, on the Fed's tapering of its quantitative easing programs and its impact on China; a potential U.S. default and what that means for China's over US$3 trillion foreign reserves; and why he believes the fears of a China slowdown are vastly overblown.
Listen to the full interview in the audio podcast, watch an abbreviated video version (coming soon) or read an excerpt below. Be sure to subscribe to the podcast in the iTunes store.
Q: What impact will the U.S. Federal Reserve's reduction of its quantitative easing (QE) programs have on China?
A: The policy experiment of the Fed is very risky. It's untested. It's unconventional. In my view, it's a big mistake.
Initially, the policy grew out of a deep and legitimate concern of the U.S. and the world economy in crisis. Lacking a leeway in cutting interest rates, which were near zero, the Fed embarked on asset purchases, or liquidity injections.
The Fed continued to do it even as the crisis ended and the economy attempted to recover. Last month, when the Fed surprised the market by backing off from QE, it found out that it might be difficult to get out from what could be a "policy trap" that it set itself.
China would be adversely impacted if the global economy were dealt a blow by the Fed's policy withdrawal. Where China is exposed to any direct impact (from the U.S.) is if the U.S. were to default on its sovereign debt. China, with its US$3.25 trillion foreign exchange reserves and the biggest share being U.S. dollar assets, could be hit very hard.
Q: With the U.S. in the middle of a government shutdown, can you walk us through what you think is the worst-case scenario if a U.S. default takes place?
A: It's pretty straightforward. The yields of U.S. treasuries will go up. They will no longer be given the premium of the riskless assets that lies at the core of the world's financial systems.
How much it will go up, for how long? It's hard to know. That would certainly result in a loss in the value of any Treasury-based securities.
Q: If you were the governor of the People's Bank of China (PBOC), how would you manage China's foreign reserves differently?
A: The dollar-denominated concentration of China's reserves is very much tied to the currency policy of the PBOC. If the Chinese government were to significantly reduce their exposure to U.S. dollar-based assets, then the RMB would rise, possibly significantly, against the U.S. dollar.
The RMB has risen close to 35% against the U.S. dollar since mid-2005. The Chinese exporters have dealt with it well and managed to maintain their competitiveness. If there were to be a sharp further appreciation of the RMB because of a U.S. default or other reasons, it would put pressure on Chinese exporters.
A U.S. default, which I still believe is a low probability outcome for a sustained period of time, or intensification of U.S. trade frictions that could cause retaliatory reactions from the Chinese, could cause the RMB to appreciate suddenly. But ultimately, I think the best case is to expect gradual further appreciation of the RMB.
Q: What policy initiative would you like to see coming from the Third Plenum of the Party Congress in November?
A: I like to see initiatives aimed at providing broader support to Chinese consumers. The top of my list is to inject public funds into the social safety net institutions like social security and healthcare. The enrollment has increased a lot, but the assets in these plans are small and the benefit streams are limited.
I like to see interest rate liberalization for deposits, and I'd like to see Hukou reform.
Q: About China's property market, when do you think the bubble will burst?
In this episode of China Money Podcast, guest William Shen, senior partner and head of Greater China at Headland Capital Partners, talks with our host Nina Xiang, about why he sees 4S automotive dealerships in China as the next great opportunity, how Chinese consumers are changing, and what the impact of the economic slowdown has on Headland's investments.
Listen to the full interview in the audio podcast, watch an abbreviated video version or read an excerpt below. Be sure to subscribe to the podcast in the iTunes store.
Q: Can you give us a brief introduction of Headland Capital?
A: Headland Capital was established in 1988. For the past 25 years, we have invested an aggregate of US$2.7 billion into around 150 companies based in Greater China, South Korea and Southeast Asia.
Our main focus is either providing growth capital for high growth companies or helping companies perform buyouts. We were part of the HSBC Group and did a spin out in 2010.
Q: Headland has invested heavily in the Chinese consumer sector. How has the economic slowdown impacted the companies you've invested in?
A: The Chinese consumers are still consuming. We are still talking about double-digit annual growth in retail sales. But there are far more choices today than five years ago.
If someone's total budget for clothing, for example, has increased 40% or 50% than five years ago, the amount of choices may have doubled or tripled during the same time. Therefore, as a brand, maintaining their market share becomes more challenging.
For example, in the apparel industry, the old model of operation is to use a good brand sponsor, advertise on TV and sell your products via a wholesale model. You, as the brand owner, do not operate the retail outlets. You rely on a few thousand wholesale distributors across China to sell your products.
In the old days, when choices were few, this model worked for well-managed brands. But with the influx of fast fashion and foreign brands, consumers are becoming far more discerning. So without decent control at the retail level, you wouldn't know which design is selling faster or slower, and inevitably there will be inventory buildup. So in order to do well in the apparel industry, you need to operate your own stores or work very closely with selected distributors today.
Q: So the consumer companies you've invested in, did they experience a dip in sales?
A: Sales are still growing but at a slower rate since 2011 and 2012. It's keeping a steady rate now. Under this operating environment, if you try to make your shareholders happy by beating industry benchmark, eventually you could get into trouble. Because the demand is just that much.
So under the current environment, what we need is steady growth in revenue but more focused on operational efficiency.
Q: What do you mean by steady growth?
A: Let's take the example of Yonghui Superstores. It was growing at a compound annual growth (CAGR) of 40% to 45% before 2010. Last year, growth moderated to 40% or slightly lower than 40%. This year, growth slowed to 23% during the first half.
Obviously, as your base gets bigger, your growth rate should slow down. But even from same store sales growth, it has slowed. But I think it's important that you don't pursue growth for the sake of growth.
Q: With the Chinese consumers changing, where do you see great future investment opportunities in this sector?
A: We feel one type of company that can reach gross revenue of more than US$10 billion is in the luxury auto sales market, meaning the 4S auto dealerships. 4S stands for Sales, Service, Spare parts and Survey, so it's not just about new car sales. A very well-managed hyper market could potentially generate RMB500,000 to RMB600,000 on a daily basis.
In China, a 4S store is affiliated with certain brands, such as BMW or Audi. But a group operator can simultaneously run multiple brands.
Q: How fragmented is this market in China?
In this episode of China Money Podcast, guest Arthur Kroeber, founding partner of GK Dragonomics, talks with our host Nina Xiang, about why he's less optimistic about China's growth in the next couple of years, how the alarmist headlines about capital outflows from China is overdone, and why the 7% number that everyone believes to be the minimum rate required to provide sufficient employment for China's labor force is total nonsense.
Listen to the full interview in the audio podcast, watch an abbreviated video version or read an excerpt below.
Q: Lately, there have been some media stories on capital outflows, or even capital flight, out of China. How concerned are you about this possibility?
A: I'm not terribly concerned for two reasons. One is that the Chinese government still maintains significant capital control measures. There have been some talks that the government will eliminate these controls in the next few years, but I think it's unlikely.
The broader point is that China has been used to having one-way capital flows for a long time. Everybody wanted to get their money into China, no one wanted to take it out. Many people thought it's a big problem for the world that China was like a Hotel California for capital: you could check in, but you could never check out.
But now we are seeing capital flows in both ways, and with various volumes. Foreign reserve accumulation slowed down dramatically. Lately, we saw some net capital outflows. But this is part of the normal process of the economy adjusting from rapid economic growth on intensive investments to a slower one that's more consumer-driven.
Q: What are the specific capital control measures in place right now?
A: It's very difficult for Chinese institutions and individuals to move money out of China. Any outflow is regulated under the qualified domestic institutional investor program (QDII) and limited by an annual quota. For individuals, it's close to impossible to move large amounts of money offshore.
Chinese companies have been going out to do mergers and acquisitions or greenfield investment overseas. The outward foreign direct investment now runs somewhere between US$50 billion to US$80 billion a year.
These are regular capital outflows for every economy. The only concern is if people lose confidence in the economy and everyone takes his or her money out. But that's a very remote possibility.
Q: During the Asian Financial Crisis in 1997, some Southeast Asian countries had foreign debt-to-GDP ratios well above 100%. What are some factors that caused the Asian Financial Crisis but are not existent in China right now?
A: I think the similarity between the two is that both had incredibly high investment-led growth for a long time. But the differences are huge.
First of all, the Asian economies were mainly running current account deficits in the 1990s. China has been running a very sustained current account surplus. Secondly, the Asian countries did a lot of external borrowings, while China has basically none. Finally, China's domestic financial system has a lot of liquidity across diversified assets. That's not the case back in 1997.
Q: What would make you become concerned about capital outflow getting out of control in the future?
A: On the domestic front, if you see a continued rapid increase of credit-to-GDP ratio, then I'd be concerned that the foundation of China's growth is unstable. That could lead to economic malaise and make people want to put money elsewhere.
The second concern is if the government relaxes capital control measures too early. Historically, some sort of financial turbulence usually follows the freeing of interest rates. China is in the process of liberalizing its interest rates now. Any problem caused by interest rate liberalization can be contained with capital control in place. But if capital control is loosened too early, that could lead to problems.
http://www.youtube.com/watch?v=5LAiHWAvIMk In this edition of China Money Network, Tian X. Hou, founder and CEO of T.H. Capital, shares her thoughts on why Qihoo's stock is just starting a major bull run, why Sina is undervalued and what Baidu should do to advance forward in a mobile world.
Listen to the full interview in the audio podcast, watch an abbreviated video version or read an excerpt below.
Q: How will China's economic slowdown impact Chinese overseas listed Internet stocks?
A: Not that much. The Chinese Internet companies raise money from private funds and public markets. They spend their money buying advertising and traffic online. So the Internet becomes a self-feeding economy. China's credit crunch and liquidity issues have little to do with Chinese Internet companies.
Q: In May, Qihoo 360's stocks were trading just above US$40, and you had a buy rating with a price target of US$52. Today, the stock is trading around US$51. Where do you think it will go next?
A: Currently, we are using 2014 earning projections. I think if we use forecast numbers further out, we could see the stock trading between US$67 and US$87 at the end of next year.
Qihoo's strength comes from several places. One is its monopoly in PC security software, or its anti-virus software. It's literally used on every single PC in China. When users install the software, they are asked to use Qihoo's browser and set up a Qihoo personal page.
This set-up enables Qihoo to gain search market share in a second. Qihoo launched search service last August. Over night, it gained 8% market share. Today, it has 16% of the search market.
Another strength is Qihoo's web game hosting business. Because they have a lot of traffic, they are able to sell traffic to web game owners or developers. Even though each web game may be small, but the aggregate of all the games is huge. As the host, Qihoo is growing this business very rapidly.
Lastly, Qihoo's Android app store is number one in China with 110,000 apps and billions of downloads. Just two months ago, it was number two. Qihoo can do two things with this platform. It distributes enterprises' mobile apps. Everybody needs a channel to distribute their apps. Qihoo plays that role and charge money. Qihoo also operates a mobile game hosting service. It's similar to web game hosting service but on mobile. There is great revenue potential in this business as well.
So Qihoo's potential growth is just starting and the company is in a fast-moving upward trend.
Q: What are some major risks you see with the company?
A: The company could raise more money in a secondary offering, or they could buy other companies. These could cause the stock to set back temporarily. Also, the strong personality of Qihoo's CEO Zhou Hongyi could potentially create issues for the company.
Q: For Sina, you've had a price target of US$89 for some time, but the stock seems to suffer from a lack of direction. It's currently around US$55. Are you still holding on to your projection?
A: Very much. All the Chinese stocks that we recommended "buy" have enjoyed a good run. Sina is the only exception.
Sina's Weibo is more than social media. It has a very authentic user base. Sina somehow thought it could monetize Weibo quickly so monetization schedule got pushed back several times. Some investors therefore doubt whether Sina can monetize Weibo.
Weibo's traffic, including mobile, is 1 billion times a day. That compares with 800 million for Baidu and 400 million for Alibaba's Taobao. But if you look at advertisers, Baidu has about 400,000, Alibaba has almost 800,000 vendors. Weibo's advertisers are negligible.
If we look at Weibo's recent strategic alliance with Alibaba, the potential value creation is being under-estimated. What you see now, display of Taobao vendors on Weibo, is just regular traffic direction. There will be another potential revenue source coming from a specially designed product that is...
http://www.youtube.com/watch?v=e__tu2rWRew In this episode of China Money Podcast, co-founder of Amalfi Capital, Tristen Langley, talks with our host, Nina Xiang, on Alibaba Group's US$586 million acquisition of an 18% stake of Sina's Weibo, her investment firm's winning and losing bets, and the future challenges facing China's e-commerce industry.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below.
Q: Alibaba Group just bought 18% of Sina's Weibo for US$586 million, valuing the Chinese twitter-like site at US$3 billion. Do you think it's a fair valuation?
A: Weibo has almost 500 million users, and is still growing. Compared to Twitter and other U.S. comparable, the valuation is probably modest. But this is a very strategic alliance. So a lot of the valuation is driven by Alibaba's motivation to leverage Weibo's audience. It's estimated that 14% of Weibo's traffic is being pushed onto Alibaba's Taobao site. That sort of potential synergy makes the valuation very reasonable for Alibaba.
Q: Sina expects that the new strategic alliance will generate US$380 million in extra revenue over the next 3 years. Do you think users' habits will be changed?
A: Any group who communicates on a free platform and doesn't expect to be marketed to can be disengaged (when there is an effort to sell products to them). But by this alliance, Taobao has an opportunity to innovate around product discovery (among Chinese consumers). I think the ways consumers become aware of products still haven't been fully explored in China.
Another thing is, Alibaba has a lot of cash. I did a quick tally of Tencent, Netease, Baidu, Focus Media, Qihu, Sina and Alibaba, there are all together US$13 billion of cash sitting on their balance sheet.
Q: Where do you see as some good new venues for these companies to invest the cash?
A: We've seen (misjudgment) over time. Netease, for example, was putting their cash towards pig farms in 2010. Thank goodness that Netease is now looking to develop their own content and games.
So I think the cash should go into their own innovations. It's estimated that about 18% of the options from 2010 to 2012 were given to Weibo's management team as an incentive to create value in essentially a start-up within a big public company. Tencent has proven that this kind of investment (into start-ups within a big company) can have a clear internal rate of return (IRR) and be extremely advantageous.
Q: Alibaba is facing competition on all fronts. How do you see China's e-commerce industry's competitive landscape evolving in the next few years?
A: The offline and online worlds are going to meet in ways that present unprecedented challenges. For example, Suning Appliance bought Redbaby, an online e-commerce site for baby goods and now expanded to other products. Redbaby started from catalog services, developed into online e-commerce, to telephone ordering. This merger with Suning will present extreme challenges just integrating the back-end systems.
But Alibaba and Taobao are still well ahead of the game. It's up for others to catch up, form alliances to take on the gorilla in the room.
Q: Tell us some background on Amalfi Capital that you co-founded?
A: Amalfi Capital is a global technology investment fund with a long-short equity strategy. Co-founder, Paul Waide, and myself founded the firm in 2010.
We interview around 500 entrepreneurs, engineers and CEOs from around the world every year. We build this thematic approach to profile about 50 companies from that group. Then we choose about 20 to 30 companies that we invest in. Our portfolio has a 60% to 80% exposure in China.
Q: When you were working at venture capital firm, DFJ (Draper Fisher Jurvetson), you led its investment in Skype. What was the most difficult judgment you had to make at that time?
A: Back in 2003 when Skype was launched, Voice-over-IP was nothing new.
http://www.youtube.com/watch?v=U3maSJJfaiQ
In this episode of China Money Podcast, founder and CEO of Beijing-headquartered, US$500 million-under-management HAO Capital, Simon Eckersley, talks with our host, Nina Xiang, on HAO Capital's investments in the healthcare and environmental protection sectors, the firm's plans for future fundraising, and some key methods it uses to help portfolio companies grow.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below.
Q: First, give us a brief introduction of HAO Capital?
A: HAO Capital is a Beijing-based private equity firm. We take minority stakes in growth businesses in China, and focus on healthcare, consumer and light industrial (including clean tech) sectors.
We started raising our first fund in 2005, and closed in 2007 with US$100 million. We raised our second fund of US$400 million from 2007 to 2008. We've done a number of co-investments worth around US$50 million as well, so we currently manage over US$500 million.
Q: Going back in history, can you share with us your experience of raising your first fund back in 2005 and 2006?
A: At the time, there was less competition in terms of the number of (China-focused) funds. But then, a lot of LPs (Limited Partners) were also not really focused on China, as it's still a fledgling private equity market. It's different today. Looking at our own LPs, they are invested in (many more) China funds compared to back then.
Q: What is the average size of your investment, and how many active investments do you have now?
A: On average, we look at investments in the US$20 million to US$50 million range. We currently have 14 active investments between the two funds. The first fund is almost fully paid back. We've exited a lot of the investments from that 2006 and 2007 investment vintage, and are only managing a couple of investments from that fund.
We started investing the second fund in 2008, and is now about 80% invested. We've exited or partially exited a couple of investments, but are still managing most of that portfolio.
Q: And one of the portfolio companies is SKR, a company focused on diagnostic imaging medical equipment. It has a joint venture with Chinese electronics maker, TCL Corp. Can you share with us the latest on this investment?
A: The per capita spending on medical equipment in China is a few dollars compared with hundreds of dollars in the developed countries. It's obvious that China's healthcare market has enormous potential for growth.
But there are actually very few medical equipment companies of any scale in China. There are a lot of small regional companies. Many of them don't have the research capabilities to develop Generation II or Generation III products after launching Generation I products. They also tend to lack management talent.
Today, the high-end medical equipment market in China, such as MIR, PET-CT scan, ultrasound, is really controlled by GE, Philips and Siemens. They take, in certain subcategories, 75% to 100% of the market share. So, we partnered with a group of executives headed by Zhi Chen, former president of GE Healthcare in China, to form SKR. And SKR has a joint venture with well-known Chinese consumer product manufacturer, TCL Corp., to create TCL healthcare whose vision is to enter that high-end medical equipment market and become a national champion.
Several decades ago, GE, Philips and Siemens, all moved from consumer products to healthcare equipment, leveraging their manufacturing capabilities, brand and scale. So from TCL Corp.'s perspective, it is following the trajectories of its Western predecessors.
One of the central themes for this business' growth is through acquisition. That's something we have been focusing on during the past six months. There are a number of opportunities that we are in the process to realize and will give a significant boost to the business.
http://www.youtube.com/watch?v=NUmWy3CI8XQ In this episode of China Money Podcast, head of non-listed real estate Asia in APG, one of the largest pension fund asset managers in the world with assets under management of approximately €325 billion, Daan van Aert, discusses with our host, Nina Xiang, APG's investments in China such as car parks and logistic warehouses, his views on the Chinese residential property market and if distressed properties in China present good opportunities for investors.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below.
Q: APG is one of the largest pension fund asset managers in the world with €325 billion under management. Give us some background on AGP's investments in Asia, and what kind of role does Asian real estate play in APG's overall strategy in Asia?
A: APG started an office in Hong Kong in 2007 with a mandate for private equity real estate and infrastructure investments. Shortly after, we expanded our team to include listed real estate equity and emerging market equity. Since we started, our portfolio in Asia has grown from €1 billion to €9 billion under management.
Of the €9 billion assets currently under management, €6 billion is in both listed (€4 billion) and private (€2 billion) real estate. In terms of geographical breakdown, about 70% to 75% of our total real estate portfolio is in developed markets such as Japan, Hong Kong and Australia. The rest is in emerging markets, and China takes about half of this portion.
Q: How much capital are you deploying every year into private real estate?
A: We don't have a target. What we do is to look at our already large existing portfolio and focus on strategies and the right partners to add value. If we can find interesting strategies and strong partners, then we will invest more money.
During the last few years, we have been investing considerable amount of money continuously. Our real estate portfolio has grown from €1 billion in 2007 to €6 billion, from both investment appreciation and new allocations. That gives you a sense of our growth.
Q: What is the average size of your investments and how many investments do you usually keep in your portfolio?
A: We serve very large institutional clients, therefore we won't look at transactions under US$75 million. In terms of the number of investments we have, we don't really have any preferences, as our global real estate portfolio is already very diversified.
Q: Among some major categories of real estate: residential, retail, office buildings, logistics, which segment(s) do you find the most attractive in China right now?
A: We think logistic warehouses are the most attractive sector. China's strong growth - not only in imports and exports, but also in domestic consumption - is leading to enormous amount of flow of goods. The need for quality logistic warehousing is gigantic. In addition, the amount of capital spending for developing logistic warehouses is less compared with office buildings and retail properties, for example.
The challenge is that it's difficult to buy land to develop logistic warehouses, as the land sales and tax revenues are less attractive to local governments. We have already invested in a logistic property in Shanghai, and we think there is still room to increase our investments in this category.
Q: You've invested in Australian logistics properties, Indian hotels and car parks in China. Are there any sectors that you would avoid in China now?
A: In general, we are less interested in the office sector because of its cyclical nature. In China, you usually cannot buy and hold a whole office building because lots of transactions are what we call "strata title sales," where the developers are selling the building floor by floor. This makes it harder to buy and manage a whole building, and creates difficulties later on when you want to sell.
http://www.youtube.com/watch?v=6wlELp1QMI8 In this episode of China Money Podcast, guest Chenggang Jerry Wu, principal investment officer of IFC's (International Finance Corporation) climate change fund, discusses IFC's commitment to Chinese private equity funds in the climate change sector, the new opportunities arising from China's pollution treatment efforts, and what he looks for in a first-time fund manager.
Listen to the full interview in the audio podcast, watch an abbreviated video version, or read an excerpt.
Q: Can you first give us a brief introduction of IFC's climate change fund and your role in managing the fund?
A: IFC is the largest multilateral organization focused on emerging markets' private sectors. We invest more than US$10 billion a year into private sectors across emerging markets. We started investing in private equity funds in 2000, and have invested in more than 130 funds in emerging markets. I believe IFC invested in roughly 10% of all the private equity funds ever existed in emerging markets. We currently have an active portfolio of more than US$2 billion.
Clean tech and energy efficiency is one of our focuses in our private equity investments. IFC started investing in these areas in 2007. Up until now, we have invested in 17 funds in total, and on average we invest in three to four funds per year. The main focus includes traditional clean tech, renewable energy (both upstream manufacturing and downstream power generation), and all sorts of resource efficiency and environmental services (such as recycling, water efficiency, sustainable agriculture and sustainable forestry).
IFC has a subsidiary called IFC Asset Management Co., which is a fund manager that leverages IFC's own expertise and resources with the capacity to raise funds from third party investors. IFC Asset Management Co. set up a Fund of Funds (officially called the Climate Catalyst Fund), which just had its first closing of US$500 million, to invest in climate change funds. IFC put US$75 million into it, and it will do further fundraising in the future.
I'm not directly managing that FoF. I started in the current position in 2011, and my role is to provide pipeline and resources of the IFC to the FoF, so that they can decide whether to co-invest with IFC or not. I also manage IFC's own investments in the climate change area.
Q: On IFC's website, it describes the IFC Climate Catalyst Fund as part of IFC's strategic focus on addressing climate change across emerging markets. Specially in China, what investments have you made?
A: Given our investment focus, you can probably guess that China is the largest focus of the fund's portfolio. Up until now, roughly 30% to 40% of the fund's portfolio is focused on China. Our focus includes environmental services, waste recycling, renewable energy and energy efficiency. We have also invested in funds investing in water efficiency, water recycling and water treatment.
As you may know, the clean tech and renewable energy sector in China has gone through tremendous adjustments during the past two years. The issue of overcapacity, the European debt crisis and changes in subsidy schemes in Europe have negatively impacted China's export-oriented clean tech sector, especially the solar sector, and to a less extent, the wind sector. A large number of Chinese companies will not survive. But I believe we are at the end of the adjustment, and in fact, it may be a good time to get into the sector again.
Moreover, given the recent headlines about China's (grave) pollution situation, we see this area as having great potential. The new leadership will take pollution treatment seriously.
Q: Do you invest only in private equity funds, or individual projects, or both?
A: IFC does both. For myself, I invest only in private equity funds. We prefer to avoid venture capital funds because intellectual property rights are often at the risk of compromise in emerging markets.
In this episode of China Money Podcast, guest Sam Gupta, CEO of Grand Trunk Capital, explains why he is bullish on the Indian economy and markets, why Indian banks will consolidate in the next two years, and the reason why he prefers to work with the management team.
Listen to the full interview in the audio podcast, watch an abbreviated video version, or read an excerpt.
Q: First give us a brief introduction of Grand Trunk Capital?
A: Grand Trunk Capital is a private investment partnership, (managing money) for institutions and family offices. We focus on special investments in India. Previously I managed a fairly large fund in partnership with Soros Management called QIF Management. QIF Management was at points in time the largest overseas investment fund in India.
The strategy (of Grand Trunk Capital) is to focus on five or ten best investment ideas across sectors and geographies within the Indian markets. We are not a trading fund. We tend to take longer term and focused positions in Indian companies where we think there is sufficient mispricing and where we see sufficient upside down the road. Our strategy is very search based, value driven and focused on catalysts.
Q: Can you talk about the performance of the (Grand Trunk Capital) fund?
A: The fund was up 42% in 2012. We had a very bullish view on the banking system in India, and started buying some Indian banks towards the middle of the summer. That worked really well for us. We also took opportunities in the media space because of the catalyst of regulatory changes. One of our largest investments, (United Spirits), was bought out by Diageo, the world's largest liquor maker, at a significant premium. That's an investment we got into in early 2012.
Q: Now you are raising more capital for Grand Trunk Capital. What do you think makes India more attractive?
A: What's interesting about India vis-à-vis Russia, Brazil and China is that India is primarily a domestic market. It has a young population. Most of the economic activities are about feeding and satisfying their needs. So when the world slows down, India is impacted much less than other emerging markets.
India also has a very diversified economy. Almost 50% of the Indian economy is services based. So it is a bit of a paradox that the Indian economy is both a more diversified economy and also a more basic economy.
Q: Normally, how big a stake do you take when investing in a stock?
A: We try to take less than 10% of a company, but we've taken more than that in some companies in the past.
Q: Are your investments passive, or do you try to influence the management of the company?
A: Once we take a minority position, we try to stand on the same side with the management. In India, management team tends to control half of any given company. So their well-being and wealth is tied up with the price of the stock. The legal system is also stacked in favor of the management, so as an investor, you can only do so much.
But we feel comfortable with most management teams in Indian companies, at least those managers we like. They generally are appreciative if we give them good advice.
Q: You also offer special situation investment opportunities to investors. Tell us more on that?
A: Sometimes we work with management in unlocking the value of their company. It might involve halving off a division, making an investment in a new project. Of course, we invest along with the management, which is probably the best price you can get to invest. So we give co-investment opportunities in these special deals for our core fund investors.
Q: Can you give us an example of a recent special situation opportunity that you have looked at?
A: We launched a fund in late 2012 to take arbitrage opportunities among Indian banks. Some Indian banks are trading at a massive discount to their larger peers. Some of them are good acquisition targets in the next two years.
http://www.youtube.com/watch?v=r56ZNhS54z8
In this episode of China Money Podcast, guest Prof. Chen Zhiwu, professor of finance at Yale University, discusses why he is an overall pessimist when it comes to China's long-term economic prospects, why he is worried about the economic spillover from China and Japan's dispute over Diaoyu Island for 2013, and why he thinks inflation will run rampant in China for the next ten years.
Listen to the full interview in the audio podcast, watch an abbreviated video version, or read an excerpt.
Q: Economists are generally optimistic about China's growth this year -- you included. What are some potential roadblocks that could surprise us all on the down side?
A: I think whatever domestic economic challenges there may be in 2013, the Chinese government will be able to use policy tools, or if necessary, accelerate infrastructure spending, to fight them off on a temporary basis. But whatever they do for the short-term benefit can create structural problems that will be difficult to overcome down the road.
For 2013, the geopolitical risk may surprise people, especially given the noise from Japan and China over the disputed islands. Such hot button geopolitical factors tend to be underestimated by financial market participants. So I'm personally concerned for its impact on the economy.
Q: Looking at longer term prospects, the idea of "New Normal," meaning an extended period of lower growth and higher unemployment, has been accepted in the U.S. Do you see that China will go into a "New Normal" of its own kind in the next ten years?
A: I think it's highly unlikely for there to be a smooth transition from the "Old Normal" for China, meaning high growth in excess of 8% or 9% a year, to a lower growth "New Normal." For China to keep growing at 6% or 7% a year for another 20 years, major reforms have to take place. But I don't think those reforms are realistic unless some crises take place to make China's entrenched interest groups to sacrifice what they have.
Q: What kind of crises do you envision?
A: First, an economic crisis. As long as temporary growth can be sustained, the government will continue such a path, even at the expense of long-term structural balances. When growth slows down eventually, corporate loans and local government loans will become a problem for the banks. But the banks' problems won't become a major national crisis as long as the fiscal accounts of the central and local governments are healthy. That's why it will take two or three years for the fiscal crisis to really surface, causing social disturbances and unemployment.
If the real estate market is not freed up more, local governments will face more fiscal challenges. But I don't think this year will be the year local governments will collapse. They can still play along for another one or two years before a crisis will emerge.
Q: From a foreign investor's perspective, where do you see the most attractive investment opportunities in terms of asset class and industries? The H-share market? Or is it time for bottom fishing the A-share market?
A: For the last 20 to 30 years, the best investment strategy for foreign investors has been to invest in foreign multinational companies that receive a large fraction of their revenue and profits from China. If you look at those companies' stocks, compared to the H-shares or the A-shares stocks, they have done much better. This strategy will continue to work going forward.
If you really have to invest in Chinese stocks, the A-share market will probably do better than overseas listed Chinese stocks. Prices in the A-share market has been depressed for a few years, even with an 8% to 10% rebound during the past months, valuations are still low.
Q: Foreign investors can only invest in the A-share market through the QFII (Qualified Foreign Institutional Investor) program, which has been significantly expanded lately and will continue to open up more.
http://www.youtube.com/watch?v=BxOpT-xrD_k In this episode of China Money Podcast, guest Jenny Gao, managing partner of Mandarin Capital, talks about how her fund helped an Italian company to penetrate the Chinese market, and why she is betting on the future of China's Dagong Global Credit Rating's future in Europe.
Listen to the full interview in the audio podcast, watch an abbreviated video version, or read an excerpt.
Q: You are only the second female guest on our program's one-and-half-year history. So let's start with your personal career. You initially worked at one of China's three policy banks, the Export and Import Bank of China. How did you get into the private equity industry?
A: I worked at the Export and Import Bank of China (Exim Bank) ever since the beginning of its operation in 1994. The Bank is very much involved in the business of providing loans to Chinese companies to invest abroad, as well as undertaking big construction contracts and exporting machinery goods.
During that time, I accumulated lots of networks among big Chinese State-Owned Enterprises and big Chinese private companies that were engaged in China's "Go Global" businesses.
When Mandarin Capital Partners was set up in 2007, my managing partner, Alberto Forchielli, asked Exim Bank to provide the best support in terms of talent to support the fund's business in China. I was picked by the Exim Bank's management to work at Mandarin, and that's how I started doing private equity.
Q: In way of background, Exim Bank is one of three major investors in Mandarin's first fund. The other two being China Development Bank and the second largest Italian bank, Intesa San Paolo?
A: Yes, they were the three cornerstone investors and each provided EURO 75 million in the fund. At the end of 2007, we raised EURO 328 million in total.
Q: From my previous conversation with Alberto Forchielli, Mandarin Capital's strategy, as I understand it, is to invest in China-Europe cross border deals, helping Chinese companies to expand in Europe and European companies to explore the Chinese markets?
A: Exactly. To be more specific, we invest in Chinese companies, and then help them to expand in Europe through mergers and acquisitions, or finding strategic partners. Vice versa, we invest in European companies, and help them expand in China through M&A, building a joint venture or investing in green field investments. We see strong synergies between such team-up.
Q: Can you give us a specific example to illustrate your strategy?
A: We invested in an Italian company called Dedalus. Its main business is to make medical software for hospitals and other healthcare related institutions. One of the major products is the platform software that can link hospitals, drug stores, government agencies and insurance companies together, so that all of these institutions can efficiently exchange data and information to improve efficiency of the whole healthcare system. The company has already successfully implemented four platform software systems in Italy.
In China, this kind of software started only two years ago. This market is in a very early stage. China just began implementing similar software for medical records. So Dedalus' technology is very relevant to the Chinese market. But Dedalus is a medium sized company, and couldn't navigate the Chinese market by itself. After we became a shareholder, we helped them to look at many potential acquisition targets in China. We probably looked at more than 30 medical software companies, and finally we decided to choose Sanwei Technology, a company located at a third tier city in Northern China. The city is an ideal location because it was launching one of the biggest projects in platform software in China. Sanwei became Detalus' China platform to develop the software in Chinese and also to set up a model project in the city.
Q: Financially, what kind of targets have Datalus been able to achieve through al...
In this episode of China Money Podcast, guest André Loesekrug‐Pietri, founder of A Capital, explains why his fund's China-Europe cross-border strategy will thrive even in the current world economic malaise, how did he become attracted to the Chinese markets, and why his new fund was able to secure two star institutional investors.
Listen to the full interview in the audio podcast, watch an abbreviated video version, or read an excerpt.
Q: First, a brief introduction of A Capital?
A: We are a European growth capital fund focused on investing in European companies that have strong growth potentials in China. Once we make the decision to invest in (a European company), we bring a Chinese strategic co-investor that has the resources and expertise to make this European company succeed in China.
Q: You have both a Euro fund and a RMB fund. The Euro fund has a target size of €250 million. How much have you raised so far?
A: We have raised a significant amount of that. Our fund is relatively new, just a bit over a year old and we've done two deals so far. Several months ago, we had our first closing with two major investors, one from China and the other one from Europe.
Q: These are the Belgian Federal Holdings and China Investment Corporations?
A: Yes, both of them invested in our Luxemburg fund. Our fund is actually a regulated fund, even thought only funds with over €500 million are required to be regulated in Europe. We decided to be regulated by the Luxemburg Financial Authority because of the quality of our investors.
We have a second, RMB fund that we have set up in cooperation with the Beijing Municipal government, specifically, Beijing's Office of Financial Works. The fund is unique in that it is allowed to raise money in RMB in China and invest overseas. The two funds invest in complete parallel terms. The RMB fund is a tool for us to allow Chinese LPs to invest overseas through our vehicle.
Q: There are several funds with similar strategy to yours. Mandarin Capital has a China-Italy/China-Europe focus, whose founder was featured on our program previously; Cathy Capital has a China-France focus. What are some similarities and differences between you and them?
A: First, this is a new strategy. It's always good to have someone else with whom you can benchmark yourself. I'm both German and French. There are around 120 private equity funds in Germany, and maybe around 140 funds in France. If there are two or three funds doing cross-border deals, it's only healthy.
Secondly, our focus is the whole European continent. Our strategy is focused on one theme: urbanization, which is a trend that will continue to be very strong in the next twenty to thirty years in China. We invest in three sub-areas: 1, Retail and consumer brands. Our two done deals in Club Méditerranée and Bang & Olufsen are in this category. 2, Transportation and logistics. 3, Quality of life including food safety, environmental technology and healthcare.
Europe has the expertise and resources in all these areas to offer. Germany has automotive expertise. The Nordic countries and France have water treatment technologies. In France and Italy, there are solid consumer brands.
Lastly, once we have taken the decision to invest, we bring along a Chinese co-investor who has the industrial skills needed to create true value. We then work hard to make sure these synergies are realized during the lifetime of the investment.
Q: With Europe saddled with the Euro crisis and China's economy slowing, how will your ability to successfully implement your strategy be affected?
A: Our strategy is to invest in European companies that have strong potential to grow in China. It was a niche strategy in Europe until two or three years ago, because until then companies were able to grow well within Europe. Now, with poor growth prospective in Europe, to be successful in China is no longer a nice-to-have, but an absolute obligation.
In this episode of China Money Podcast, guest Yukon Huang, senior associate at Washington D.C.-based Carnegie Endowment and former World Bank China director, shares his observations on China's next leadership, the possibilities of any bold reforms and the Chinese economy's long-term trend in the coming decade.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: China's economy has been growing at an average of over 10% for the past twenty years. No economy can grow that fast forever. Third quarter GDP was out at 7.4%. Do you think the turning point has finally arrived?
A: Over twenty years, China has actually never grown lower than 7.8% for the annual basis. So it's very likely that, of course, this year's growth is likely to be lower than anything that has been experienced over the last two decades. But over the last month, there are some positive signs. Investment seems to be responding, or picking up. Retail sales is a little bit better. The export picture improved a little bit. So, some would guess, and I think it's probably true, that some time over the next month or two, the economy will bottom out, and will actually turn upwards.
But even a rebound will probably not lead to GDP growth next year much higher than 8%, because the global environment is still lackluster. Special thanks to China World Summit Wing for providing a great venue for this interview
Q: Does that mean China is going to enter a phase where lower economic growth is the norm?
A: China's economy is a maturing economy, a middle-income economy. It's going to move to upper middle-income (economy). Ten or fifteen years from now, China will enter what you would call high-income (economy). You don't find high-income economies growing at 10%, or even 8%. A 5% or 6% is actually a very strong performance.
Why should China want to grow at a higher rate? Ten years ago, China wanted to grow at 9% or 10% because it had a major employment concern. But China today is quite different. It's an aging society. The labor force is already shrinking. So China doesn't need to grow very fast to generate jobs, but to create better-paying jobs with higher value. So now, it is the quality of the growth that matters, not the quantity.
Q: Do you see any chance that China might be growing at a rate much slower than 7%?
A: It's possible. Growth is determined by consumption and investment. Consumption has been growing at about 8% to 8.5% a year. Combined with the government, it accounts for about half of the economy. Investment grew double digits in the past, but has slowed down. It could only grow by 5% or 6% in the future. Suppose it grows at 4%, for example, and consumption grows at 8%, essentially this economy will be growing at 6%, which is too low.
So, the real trick is to continue to grow at 7% or 8% for another ten years. And then, I think we will see China's economic growth moving closer to 6%. But how do you grow at 7% or 8% for another ten years? The key is to increase productivity. China has been trying to improve productivity by innovation and technology. But these are generational changes, and can't occur in five or ten years. A more immediate method is to allow people greater mobility in moving around, or liberalize the Hukou system.
Q: Next month, China will have a once-in-a-decade leadership transition. What are some key policy initiatives the new government should take on?
A: The three choices that I would say are: 1, what is the role of the state in comparison of the role of the private sector; 2, what is the proper balance between banking and the fiscal budget; 3, the speed and pattern of urbanization in China.
For the role of the state and the private sector, the question is not which one should dominate. The key is to create a fair playing field so that the two can compete. For the second issue, the national budget is too weak.
In this episode of China Money Podcast, guest Thomas Hugger, CFO of Leopard Capital, a private equity firm focused on investing in Asian frontier markets, discusses the successes and failures of his firm's investments in Cambodia, the impact on frontier markets from a slowing Chinese economy, and why frontier markets offer better risk-return profiles than emerging markets.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: First give us a brief introduction of Leopard Capital?
A: Leopard Capital was founded in 2008. Our general goal is to make private equity investments in frontier markets. We've raised two funds so far. In March 2008, we raised our first private equity fund to invest in Cambodia. Another fund was raised to invest in Haiti. We are hoping to launch two additional funds to invest in Bangladesh and Bhutan this year.
We've met hundreds of potential institutional investors or high-net-worth individuals. They are extremely interested in Asian frontier markets, but they are concerned to invest their money for ten years in a private equity fund in a single country like Cambodia. They want more diversification and more liquidity. So earlier this year, we launched a fund to invest in listed equities in Asian frontier markets, including Cambodia, Bangladesh, Laos, Vietnam, Sri Lanka, Pakistan, Mongolia, Papua New Guinea, and Myanmar. This is our Leopard Asia Frontier Fund, which I manage at the moment.
Q: How much capital do you have in these funds?
A: The Cambodia fund has US$34 million. The Haiti fund has US$20 million. For Leopard Asia Frontier Fund, we start with money from family and friends, and we are going on road shows to raise more money. At the moment, we are at US$2 million.
Q: There is certainly lots of interest in frontier markets now. When you talk to potential investors, what's the biggest concern that they have?
A: Their biggest concern is liquidity and execution of investments. Their question is: Are these countries ready for private equity investments?
We try to tell them that it's possible to make private equity investments in these markets. For our Cambodia fund, we are in our fourth year. We are fully invested and had two exits. So we are convinced that it's possible.
Q: Can you give us more background on the two exits you achieved in Cambodia?
A: One is a pre-IPO deal in Laos (Cambodia funds normally invest in the Mekong region). We invested a couple of months before an electricity stock was listed. The other is a structured deal in a telecommunications company in Cambodia, which is supposed to run for two years, but we exited at one year and three months.
We source these deals through our own relationships. We have about 20 shareholders in Leopard Capital. Our chairman is Marc Faber. So we get a lot of referrals.
Q: For the Cambodia investment, how did you exit, exactly?
A: In this particular case, the deal was financed by a Chinese bank. There are a lot of interests from the Chinese on Cambodia's telecommunications sector. In general, when we invest, we don't assume we can exit through an IPO. We will normally do a trade sale.
Q: What kind of deal volume is there every year in these markets? How does valuation compare with other markets like China and India?
A: Don't forget our fund is only US$34 million. We want to have a diversified portfolio, not only by industries, but also by investment styles. The average deal size is anywhere from US$1 million to US$5 million. And it's 100% our own equity.
It's difficult to compare valuations because some of our investments in Cambodia are bordering venture capital. Some are green field projects (meaning you start a business on a green field where nothing is there). We did one mineral water project and one beer brewery called Kingdom Beer in Cambodia.
We also invested in a very small microfinance company when everyone was chasing Indian microfi...
In this episode of China Money Podcast, guest David Pierce, CEO of Squadron Capital, a fund-of-funds manager with over US$1 billion-under-management, talks about China's private equity industry in a slowing economy, lessons he learned from investments that have gone wrong, and why his firm doesn't want to become a QFLP (Qualified Foreign Limited Partner) yet.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: First give us a brief intro of Squadron Capital?
A: We are a boutique fund-of-funds manager, focused on private equity funds principally in the Asia Pacific region. We also have a separate account program that includes the private equity portfolio of our sponsor, The Research Investment Group, which is the family investment office of Mr. Robert Miller, a co-founder of the Duty Free Shoppers.
Q: What sets you apart from other fund-of-funds in the region?
A: I think it's mostly our longevity in the market. My own experience of investing in private equity in Asia goes back to 1995. Most of the FoFs here, frankly, have arrived in the last few years. So we have a history with GPs (General Managers) in the region, so they are not fearful that we are carpetbaggers who are coming in for a bull market moment. So we are in for the long haul.
Q: You have been in the industry for a long time, so where do you think the PE industry in China is right now, and where is it headed, particularly considering the slowing economy?
A: Right now, there are a lot of uncertainties in the world, with China's economy slowing and troubles in Europe and the U.S. All these make investors and companies more cautious. China's private equity industry has also gone from the go-go period into a period of more reflection. Right now, people are thinking to themselves: Let's think about (our strategies) more carefully. Let's focus on how to create value for the long-term.
Q: Can you give us some examples of the funds that you backed and you are very proud of today?
A: China's private equity market is much deeper and broader than other markets in the region, with strategies ranging from early stage investment to buyouts. So we have the luxury of choosing from different strategies.
At the later stage end, we've invested with Hony Capital for a series of funds now. We identified John Zhao and his team fairly early on before he was out raising money and became famous. Hony Capital has changed with the overall private equity ecosystem. It is focusing increasingly on the things that other private equity firms can't do, such as having in-house consulting teams, and working with portfolio companies to transform the business. So they can do state-owned enterprise restructuring and controlled buyouts.
At the other end of the spectrum (on the growth capital side), we've long been a backer of Orchid Asia. It is a fund founded by Gabriel Li. It's on their fifth fund now, primarily investing in smaller companies to provide growth capital. Their investment process involves finding the right entrepreneurs and finding a way to work with them to transform their businesses through persuasion, rather than control.
Q: Going forward, which strategy do you think will become more advantageous?
A: Eventually, controlled buyouts will become more important in China, but I think we are some years away from that. First of all, there aren't a lot of companies for sale. Good companies that are established by first-generation entrepreneurs are never really for sale. The plan for them is to become a public company. So there are still lots of room for growth capital investing to continue to dominate. But we will see a maturing and deepening of the growth capital sector.
Q: What are your thoughts on the outlook of state-owned enterprise buyouts?
A: It's a very difficult strategy to execute, but those who can execute it should have lots of opportunities.
In this episode of China Money Podcast, guest Fritz Demopoulos, founder of Queen's Road Capital, shares his thoughts on China's Internet sector and entrepreneurship. As founder of two successful Chinese Internet companies, Shawei.com and Qunar.com, Demopoulos is now hoping to capture the next big opportunity in China's Internet evolution by deploying his own capital.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: Last time when we talked, it was five years ago during the early days of your last start-up Qunar.com. This time around, you just founded Queen's Road Capital. What's your strategy and targeted industry?
A: It's my personal investment vehicle that I use to invest in early stage companies. I try to focus on media and Internet companies, including consumer Internet, consumer facing models, and e-commerce related companies that are creating market places, that are thinking about how to deliver advertising better and more targeted (products and services) to consumers, as well as mobile consumer opportunities.
Q: Any examples of companies that you have invested in?
A: I'm an investor in a company called Wodache, a ride-share company. Everyone knows in the major cities of China, there are lots of traffic and it's very difficult to get a taxi. This company helps consumers to share cars through a mobile platform. It provides very strong functional value, so I'm very excited about it.
Q: You were a successful entrepreneur before. Now you are an investor. Does the change of role make you think differently when looking at a start-up?
A: Many investors are entrepreneurs and many entrepreneurs are investors. When I was an entrepreneur, I was always thinking about investing, and vice versa. So it's a constantly revolving door.
Q: For those areas that you mentioned previously as places you look at intensely for investments, what specific elements do you try to find in a start-up that can lead to success?
A: At least for me, the last thing I want to do is be where everyone else is. I always wanted to be the first within a category. You can't underestimate the value and advantage that a first-mover has. The team and concept is just a little bit down the learning curve than everyone else.
Secondly, the team has to be completely focused on what they do. We need to see that the management teams and founders have skin in the game. Have they invested their own money? Have they given up other opportunities? Have they convinced their families and friends to invest?
Thirdly, it's important that the founding teams understand their limitations. If they understand what they do well and what you are not good at, then they can simply hire the missing pieces.
In terms of technology, clearly we live in a mobile world. Very rapidly, we are seeing the rise of mobile commerce, e-commerce, real transactions happening online, not just an order entry but proper payment processing all the way up to fulfillment. It is all about being able to present great product information to consumers in innovative ways that meets their specific needs. That entire chain is undergoing a significant revolution, especially with mobile and social media elements.
Q: You are investing in early stage companies. What kind of failure rate do you expect?
A: China is different because with a small amount of capital, you can survive for a long time. You give 20 companies a couple of million dollars a piece, they are going to last for five or six years even if those models haven't been successful. I'm not sure if that's the right way to look at it. If failure means going bankrupt, not many companies go bankrupt because you can last for a long time in creative ways in China.
Q: You have been involved in the Internet sector in China for a long time. How do you make of the fact that the Chinese Internet space is so much more fragmented than in the West, where Yahoo,
In this episode of China Money Podcast, Gary Rieschel, founder of Qiming Venture Partners, shares his thoughts on the Chinese economy, the technological evolutions of the Chinese Internet sector and why he is confident that Qiming will be well within the top quartile performers among China's venture capital firms.
Founded in 2006, Qiming Venture is one of the most successful venture capital firms in China, having invested in and successfully listed companies including Jiayuan, ChinaCache and Touchmedia. Qiming recently closed its second RMB fund, raising RMB700 million in merely four months. Gary Rieschel talked to China Money Network in Shanghai.
Listen to the full-interview in the audio podcast, watch the shortened video version, or read a transcript summary.
Q: Let's start with the macro economy. It looks certain that the Chinese economy will grow at the slowest pace in more than ten years. How has your businesses been impacted?
A: The Chinese economy this year will grow slower than in the past, but I don't think that's a great surprise. I think it's a natural evolution as China starts to go to (an economic model) more of a consumption driven, more higher valued-added products in the economy. There is some hesitancy by foreign investors, so you have seen a slight drop in foreign direct investment this year. But I think this is all relatively healthy as China starts to go through a transition.
I think what's happening in our business is that you have to be more selective. You are not going to be bailed out of your mistakes by the fact that the market is growing very quickly. In the past for Qiming, we've made approximately 70 investments during the last six and half years. We had less than 10% of the companies fail, which is extraordinarily low for the kind of investing that we do compared to what would have been in the U.S. or other markets.
So as our (venture capital) market matures, we expect more failures among early stage companies. In the U.S., somewhere from a third or half of the start-ups fail, but we have been nowhere close to that. This means we have to pick better CEOs, look for more complete management teams, and have a better idea of how technology will evolve. So for example, in healthcare and clean tech, we align ourselves more with government policy initiatives, such as the twelfth five-year plan as the leadership decides how they want the sector to develop.
Q: You founded Qiming Venture Partners in 2006. What sets you apart from other venture firms in China?
A: In the beginning, our premise of founding Qiming was to combine venture capital investing with operating expertise. Secondly, we are a flat organization. All of our employees who share the same title are paid exactly the same. Lastly, we look at everything from a sector lens. We don't have generalists who do a deal in healthcare today and a technology deal tomorrow.
Q: You've been in the IT/internet sector for a long time. Where do you see the best investment opportunities within China's IT/Internet sector?
A: The most attractive opportunities are clearly in mobile, and it's clearly the migration of all the services that you do on the Internet, on your PC, on your laptop or desktop, the migration of all those to mobile. People doing more electronic commerce transactions, people doing more monitoring of their life, whether it's keeping track of your steps or your calories, keeping track of your photos, it's more and more moving everything you would normally have had tethered to your desk, and having that with you wherever you want to be.
And I think also it's interesting here to see how privacy evolves, and issues around privacy. There is no Facebook in China unless you go through a VPN. But there are other companies that have tried, but I don't think anyone has achieved that yet to the extend of what Facebook has done in the U.S. People express themselves through Weibo on Sina,
http://www.youtube.com/watch?v=auwC9Qa7G-U&feature=plcp In this episode of China Money Network, Huaming Gu, co-founding partner of Baird Capital Partners Asia, talks about his fund's fund raising during the depth of the financial crisis, and how his firm works with small and medium enterprises in China to clean up corporate governance and establish financial discipline, while hoping to achieve nice returns.
Listen to the full-interview in the audio podcast, watch the shortened video version, or read a transcript summary.
Q: First, give us a brief introduction of Baird Capital Partners Asia and your strategy?
A: We are a China-centric growth equity fund that is dedicated to the small end of mid-market. We invest in three sectors: health care, manufacturing and business services, where we have deep knowledge globally.
We look at companies with EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) north of US$2 million. We take significant minority stakes and work with the company to improve the business.
Our current fund has US$75 million under management in China. Globally, we have US$2.4 billion under management and have invested in over 250 companies.
Q: China's private equity industry faces many challenges right now. Many fund managers say that right now is the time for private equity firms to add value. What have you done to deepen your own niche and create value?
A: For us, it's actually a good thing. We never bank on IPOs as our primary exit route. We are more toward building a business for M&A exit. We are very operational intensive. We tend to look for companies that we can help them to make them better. We are investing more into operating expertise to our portfolios, an essential part of our strategy. For example, we add an in-house financial director to a portfolio company and try to put in place financial discipline at the company.
Q: What kind of specific financial discipline do you try to instill in the company?
A: The companies we invest in are smaller companies, which are probably run by an entrepreneur. Often times, they don't have a good financial controller. They probably will have bookkeeper or a cashier.
We go in there to help them to first keep the records straight. We also install the discipline of expenditure, making capital investments and collecting money. Some industries in China are known for longer receivables. We help companies to manage cash flows to support their continued growth.
Q: How do you plan the M&A exit process, and how do you help companies to go through that process?
A: For us, we only invest in those three sectors where Baird understands, part of that is to understand the landscape of those sectors around the global. We have a good mid-market investment banking team where we get market intelligence from. We know who are the potential buyers, in the U.S. or Europe, increasingly they are companies within China.
Q: Your first deal of leading a US$10 million investment was in Frontage Laboratories. What have you done and where is the company now?
A: We invested in Frontage, which is a contract research organization for pharmaceutical and biotech companies in China and the U.S. in 2008. We identified a clear path of value creation. We improved the management team by recruiting a CFO and a sales director, replaced the general manager in China operations. We brought an industry veteran to serve on the board, and helped set strategy. Also, we help them to integrate a small add-on acquisition.
Therefore, we doubled the revenue of the company in the space of three years. We are planning an exit through an M&A transaction right now.
Q: In the three sectors where you invest, where do you see attractive opportunities?
A: We still see lots of opportunity at the small end of the mid-market. Take health care, for example, it has two subsectors: medical services and medical devices. We are looking at a couple more medical servic...
http://www.youtube.com/watch?v=oZksjDV6txE In this episode of China Money Podcast, guest Bob Partridge, managing partner of transaction advisory services at Ernest & Young, explains why it is a good time for overseas institutional investors to invest in China's private equity right now, and what is in store for the industry next year.
Listen to the full-interview in the audio podcast, watch the shortened video version, or read a transcript summary.
Q: China's private equity industry is in a challenging position right now with a large capital overhang and difficult exit channels. Some are calling for an industry consolidation. What's your view?
A: There are a lot of concerns going on in the public markets right now, and that's driving activities on both sides of the deal picture. On exits, there are certainly lower opportunities for private equity to exit. But on investing side, it creates better valuation opportunities.
As a result, we are seeing a mixture of expected lower valuations, and the old problem that we always have in this market, that sellers always want to hold out as long as they can before they recognize changes in valuations. But overall, deal volume and fundraising are up, so it's not a bad time to invest in PE in China.
Q: How has fundraising and deal volume been?
A: In the first quarter, we had a good quarter. The second quarter, fundraising came down on concerns of what RMB funds really mean for the industry. In fact, last year, all the funds raised are unrealistic.
The most recent quarter, deal volumes are up 9%. Because we see things before they become public, I can say deal pipelines are very strong. We predict that the third quarter will be up slightly because of the summer months. The fourth quarter, deal volume will continue to go up. Overall, total dollars deal volume will be up in 2012 year-on-year.
Q: The somewhat strange phenomenon in the Chinese markets now is that valuations in the public markets are lower than private markets. What does that mean for investors?
A: There is lots of insanity out here. It's easy to zero in on some high valuation deals. But a lot of things here aren't as transparent as New York or London. Entrepreneurs expect high valuations, when they hear a public deal getting done at 20-times multiple, for example, they think their company should be worth at least 21 times.
So you have mixtures of exaggerated reporting and embellishment of what the real valuations are. But in general, we are seeing valuations are coming down on a historical perspective.
Q: Exiting has been the most challenging part for private equity this year. Will M&A and secondaries really emerge as viable alternatives?
A: If you look at seasoned international private equity investors, they all position their companies for a variety of exits. That's happening now in greater China. Private equity investors are not desperate to sell unless their fund life requires them to do so, which is not really the majority of the funds.
Private equity here are buttoning down and trying to create value at their portfolio companies. They are looking at next year (for exits). So for the time being, they are thinking what can we do to close out 2012 as strongly as possible, clean up corporate governance, expand channels and improve profitability. Of course, that's also positioning the company for trade sales.
Secondaries are developing. Clearly, it will increase this year and next year. Some of the secondaries that were done are long-time held investments where the GPs really have to close down and return to LPs.
Q: There are lots of uncertainties now in China's macroeconomic outlook, and companies are more prudent on M&A. Will we really see more M&A deal?
A: M&A will probably be soft compared to last year, as companies are staying more prudent. Next year, with Europe's situations improving, the U.S. elections over, and China's inflation coming down,
http://www.youtube.com/watch?v=F5sojx6iXm0&feature=g-all-u In this episode of China Money Podcast, Goodman Group's Hong Kong-based managing director, Philip Pearce, discusses opportunities in China's logistics property market, and why his firm is expanding investments in China ten-fold in the next five years.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: Where is China's logistics property market compared to other places?
A: It's not as developed a market as the developed countries around the world. The percentage of outsourcing is very low. A lot of manufacturers, for example, have their small warehouses tagged onto their manufacturing facilities. But we have seen significant growth in the market, and there is significant demand.
We are seeing that outsourcing in China is accelerating. And a lot companies are looking at outsourcing their logistics and warehousing to companies that focus and specialize in that area. As a result, we are seeing very strong demand for our warehouse facilities.
The other trend that is going on in China is that traditionally, it's been a very much export-focused market. Over the last two or three years, what has been really driving the market is domestic distribution. We see that segment of the market growing very rapidly over the last few years, as urbanization continues at a high rate in China and the middle class' disposable income increases.
Q: What are the key drivers for the logistics property market in China?
A: Another driver for the market is e-commerce. It's not just in China. It's a global phenomenon. As an organization, we serve companies like Amazon in Europe. We've done about five or six (warehouses) for them over the last four or five years. We've done a few (e-commerce warehouses) in China. We recently announced a build-to-suit project for a company called Moonbasa.com. We have recently signed another local e-commerce company called VIPSHOP.com, which is a NASDAQ listed e-commerce company.
We look at our portfolios all around the world, typically in each country, you'll see consistent names. In Australia, DHL is a big customer. They are also a big customer in Hong Kong, China and in Europe. But amongst that, you will see large local companies. In China, for example, our largest customer is Sinotrans, a local freight dealer.
Q: In the midst of an economic slowdown, why is Goodman expanding investments in China ten-fold to US$2.5 billion during the next five years?
A: I think we can only go (ahead) as what we are seeing in the market. We are very confident despite the slowdown we are seeing out there. But our segment of the market is under-supplied. You are seeing the residential property market, which is obviously very high profile and quite highly publicized, has slowed. That is in some extent overbuilt, so there is an excess of supply.
Our segment of the market is very under-supplied, because of the domestic economy and because of e-commerce. I'm seeing demand for (our) product at the moment in our China portfolio the strongest I have ever seen. So well, yes, the export side is slowing down, (but) we are seeing retail side growing – not as high as what the (government) would like, but still growing at 14%, which is pretty strong growth, and the pie (is bigger) at a high base.
Q: What is the underlying economic growth rate you are factoring in?
A: I would say 7 or 8 percent. We are definitely not going for 9 or 10 percent. That is just not sustainable.
Q: What are the biggest challenges for warehouse developers like you going forward?
A: Obviously, we are looking at Europe and the U.S. closely. That would be a substantial external challenge. Secondly, securing land in China would become more difficult as the government controls the amount of farmland that can be turned into industrial land. Lastly, human resources. We will expand our team in China to 80 from the current 5...
http://www.youtube.com/watch?v=sAVwi0VwCa4&feature=relmfu In this episode of China Money Podcast, Pantheon Venture's global head of investment, Chris Meads, talks about how private equity in China has to shift strategies to succeed in the future, and how his firm is looking to back more control-oriented funds.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: You are the first fund-of-funds to focus on Asia. How has the fund-of-funds space evolved in the region?
A: I guess when Pantheon started, there wasn't really a private equity industry to speak of in the region. It was very small, very niche, only a handful of funds. So, we sort of started with the industry as a whole in Asia.
Certain countries you just couldn't invest in, such as Korea. Australia was effectively shut because of tax reasons. China was opening up, but it didn't really have a private equity industry. India was very closed in those days, and had to go through deregulation.
Since then, it has grown a lot both in terms of the number of funds, the variety and the scale of money under management in the region.
Q: So which geography and industries do you favor in the region nowadays?
A: It almost doesn't matter, because by the time it becomes obvious, it will be too late to change (your focus). We are investing over the 10 to 12 year horizons. If we go back to, say, 2003, which was probably at a period of time when Asian private equity generally, but particularly China, was not perceived as favorable by foreign investors.
But paradoxically, returns from those vintages were absolutely fantastic. So it's the old story when no one wants to invest, that's when the good returns were made. I think when we looked at that market, it seemed obvious to us that most of the growth or the growth story in Asia were being driven by exports, and it's going to be switched to domestic consumption. Nowadays, it's an incredibly fashionable thing to say. But in early 2000s, that was quite hard to put yourself in the shoes that it was going to really deliver strong returns.
I think the challenge now is most of the very rapid growth opportunities in China have probably been made. So more of the growth now is going to come from productivity-led growth as opposed to just providing more capital into the system. So I think that means that we have got to focus much more on efficient investment as opposed to the quantity of the investment going into China.
I think that the domestic consumption story, which has driven growth over the past ten years in Asia more generally, has become a bit more subtle. Because like everywhere, Asian consumers are getting more sophisticated. (Investments now will need to focus on) developing the distribution networks that will be able to sufficiently meet consumer demands. So the fundamental drivers of profitable investments are changing, so we have actually backed some managers who are taking a more control-oriented investment approach to fast growing markets such as China.
Q: Beside what you just mentioned, what other qualities do you look for when you look at a fund to back in China?
A: I think we are not specifically focused on particular industries. What we are looking for is the recognition from the managers that we back, that simply investing in a very large theme like consumer growth is not enough. So we are looking, for examples, within their deal flow pipeline: were they able to carve out a niche where it's not quite so expensive? Where it's not so much competition? Or maybe it's investment in the distribution channel, because that's the bottleneck, which needs to be fixed.
All of these things will ultimately be driven by overall consumer demands, but the ability to carve out a niche which is just less competitive in terms of the investment process itself, or is able to maintain margins because there isn't much fierce competition,
http://www.youtube.com/watch?v=mr35Ac4mYmk&feature=context-cha In this episode of China Money Podcast, guest Amir Gal-Or, founder and managing partner of the Infinity Group, discusses investing in deals that transfer foreign technologies to China, partnering with local governments to run RMB funds and how to instill professional management to state-owned enterprises.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: You just had an exit last month, selling your portfolio company Mate IP and I-China Security’s marketing and distribution rights to Anxin-China for US$30 million. You took a controlling position in Mate in 2007. What did you do during the holding period of the company?
A: Between 2007 and 2011, we localized the product in China. We established a local Chinese company to localize not only the software and language, but also the sales channels. We built a track record of the company (with initial sales). On the Israel side, we try to focus on reducing the price and making sure the product will suit the Chinese market.
In China, it’s easier to sell the hardware than the software. We always try to put products into boxes as much as possible. Also, when you sell in China, it is more relationship-based. We developed a whole sales process that focuses on a few customers but with very deep relations.
Q: China doesn’t have a great track record of IP protection. What challenges did that present to you and how did you handle them?
A: Sure, but the trend going forward will be different than the past. It’s quite clear that it will be the right direction. If China wants to be the leader of the world, it must include technology leadership and protection of IP. It’s not going to happen overnight. But we believe in the long run and we are a long-term player.
Q: Have you encountered local competitors copying your technologies?
A: Of course, across the board. The question is what did they really copy. When we were copied, it wasn’t necessarily bad for us, because it’s not copied by people who are capable and who fully understand what they are copying. Yes, their prices are much lower, but the reality is that they can’t support the product and cannot go to the next step.
Customers who are really price sensitive will never buy the real product. So you can say that local competitors are taking away market share from you, but I would say in many cases they are accessing a market share that’s not accessible by the brand.
In Mate IP, there was also a copy by local competitors. Their price is about half of our price. Even though the customers didn’t want to buy the copy, they want something more solid and stronger backing, but they would still negotiate and renegotiate the price. So the damages are mostly on the margin. I’m not sure if we really lost a lot of customers.
Q: This deal is the 10th such exit you’ve done in China, selling a company with intellectual property from overseas to a Chinese company. What experience can you share about selling to a Chinese company?
A: We did our first exit in 2005. It’s very complex to do a trade sale with IP related technology companies because the assets are intangible.
The basic assumption in China is that most of the employees won’t stay with you for the long run in an M&A situations. So what assets are you really buying in a country that is relationship based. Second is what happens to the customers. How do you build loyalty of customers to the company before the deal? And lastly, how to build a deal. In the Western world, it’s mostly based on the facts. In China, facts can change quickly. It’s a different DNA. It’s mostly soft skills.
Q: Two years ago, Infinity and an investor group invested 120 million RMB (US$ 18 million) in Harbin No. 1 Tools Manufacturing Company, a state-owned Chinese precise and complex cutting tools manufacturer. What have you achieved with this company.
http://www.youtube.com/watch?v=kPtqB7yQLxw&feature=plcp In this episode of China Money Podcast, guest Chris Brooke, president & CEO at CBRE China, discusses whether China's property market recovery is real, and how can foreign investors make money in the crowded commercial real estate market in China.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: CBRE entered the Chinese market very early in 1988. Have you seen the commercial real estate part of the market as hot as it is now?
A: As we stand here in the middle of 2012, the commercial sector has obviously grown considerably. In terms of investment volume, RMB88 billion of investment properties in the commercial property sector traded, compared to RMB84 billion in 2007. So it’s on a similar level to even the peak of the market.
During the first half of this year, we’ve had RMB42 billion. We are expecting this year to turn out similar to 2007, even though it has been a bit subdued during the first half.
Q: Since China loosened monetary policy, the overall property market looks to be recovering, is it? Or is this just a temporary blip on the way down?
A: Well, you got to distinguish the residential or commercial part of the market. In residential, sentiment has definitely improved with sales and transactions recovered to some extent. I think the government will still remain a restrictive policy around anything that will result in more speculation and a rebound in prices. So residential prices will stay stable at least until the end of this year. Obviously, the leadership transition next year means policy uncertainties, so it’s difficult to see beyond that.
On the commercial side, we still see rents increasing in major cities like Beijing. We are also seeing tenant demand moving to the western regions, like Chengdu, Chongqing and Wuhan.
Q: Where do you see the biggest risks right now in China’s property sector? There have been lots of commercial building, and there is concern that they might not attract enough people to keep them afloat?
A: I think that’s a genuine risk, particular in secondary cities or provincial capital cities. There is definitely a mismatch between the timing of supply and demand. A lot of cities are developing new CBD (Central Business District) areas and new commercial districts, and a lot of that supply are coming on simultaneously.
Another broader risk relates to what happens globally. If demand continues to be impacted by uncertainties in the U.S. and Europe, it would mean some organizations might delay decisions on expansions, which will clearly impact the demand of office space.
Q: From foreign investors’ perspective, where do you see they could most likely succeed?
A: It’s clear that the time when foreign investors can come and buy assets at relatively low price, reposition them and resale them for capital gains – those days are over.
Investors need to think about either coming in and pay true market value for high quality assets, or they have to develop their own projects. If you look at strategies employed by some Singaporean funds, such as CapitaLand and Mapletree Investments, they are clearly coming in and buying land for future hold of their fund. Flexibility is what investors need to get into their plan going forward.
Q: So they need to get their hands dirtier. But there are another set of challenges in this, particularly when you go into second and third tier cities?
A: Absolutely. There is a need for very strong local knowledge and having people on the ground, who understand the dynamics of the market. When you get into developing, there are a whole host of risks surrounding transparency of the market, the land acquisition process and bringing capital onshore, etc.
Q: Lastly, is distressed opportunity a safe place for foreign investors to get into?
A: There are obviously developers facing funding difficulties right now.
http://www.youtube.com/watch?v=oK-1l35pPUk&feature=plcp In this episode of China Money Network, guest Monte Brem, CEO of private equity firm StepStone Group, shares his firm's investments in China and how offshore investors can protect themselves when investing with local Chinese managers.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: You have been relocated to China for more than two years, and StepStone’s office in Beijing opened about two years ago. How have your businesses in China grown during this time?
A: We’ve increased the amount of capital we invest into China by a huge amount. We used to invest around US$25 to US$30 million into Chinese managers and deals. Now we are investing around US$300 to US$500 million a year. So on the investment side, there has been huge growth.
Q: So where do you see attractive opportunities right now?
A: Almost all the money we invest into China is somehow connected to the consumer market. (Because) a lot of markets like mining and resources are very difficult. Most of them are not accessible to foreign investors anyway. The consumer markets tend to be more open and less politically oriented.
We’ve invested in a firm called QiMing Venture Partners, which is a private equity firm that does both consumer and health care investments. The other one is CDH Private Equity that has a focus on consumers. We’ve also done some nontraditional investments as well, such as Citic Capital, which does SOE (State-Owned-Enterprise) buyouts.
Q: What kind of return are you targeting?
A: Most investments are targeting return of 30 percent IRR as China is such a growth oriented market. Globally, the target is in the range of 20 percent on a growth basis.
Q: Do you mostly invest in overseas funds or Chinese locally run USD funds?
A: As a firm, we tend to favor local managers, particularly in China, so those managers with local approach and have a local team.
When we invest in local managers, one of the challenges we face is that we can’t invest in RMB funds because we are not a local Chinese entity.
So today we are investing in offshore USD funds of Chinese managers. Most of these managers manage both a USD fund and a RMB fund.
Q: There may be potential conflict of interests when a manager invests both a USD and a RMB fund. What’s your observation on how managers handle this?
A: Overall, it has been a major headache. It’s one of the things that makes the Chinese market more complicated and less appealing.
But those managers who are committed to their offshore businesses have gotten very good in balancing the conflicts and put together structures that protect the offshore investors.
I think the most important thing is that you have to find the managers who really value the offshore part of their strategy. That’s the main protection you have as many managers understand that foreign capital tends to be more institutional and long-term. About Monte Brem:
Monte Brem is the CEO and founding partner at StepStone Group, a San Diego-headquartered private equity firm overseeing more than US$53 billion of private equity allocations. Previously, Brem was the president of Pacific Corporate Group and a lawyer with Gibson Dunn & Crutcher LLP. He holds a JD and MBA degree from the University of San Diego.
http://www.youtube.com/watch?v=W-JOTF4pxeI&feature=plcp In this episode of China Money Podcast, guest Howard Marks, co-founder and chairman of Oaktree Capital Management, reveals his thoughts on China’s economy and its investing environment. He also gives a surprisingly frank evaluation of Oaktree Capital Management’s performance in China.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: You’ve just completed a trip in China, and Oaktree has had an office in Beijing since 2007. How would you rate China’s investment environment?
A: I have a lot of respect for China’s long-run economic outlook. But this is a period when (China’s economy) is slowing. There are some questions about how it will land – whether it’s hard or soft – of course you know I don't claim to know the answers.
Also, China’s customers – the U.S. and Europe – have been growing very slowly themselves. So that will have a retardant effect on China’s economy as well. The combination of the two suggests that China is in for a slow period.
On the other hand, valuations in China have corrected quite a bit from two or three years ago when everybody assumed China’s outlook was flawless for eternity. Prices have come down considerably both relative to valuations in other countries and in absolute terms. That’s very healthy for the investment outlook.
Q: What unique challenges do you face investing in China?
A: A controlled economy probably has the ability to do better in the short term. In the long run, there is not much experience with that. Many (such experiments) in the past haven’t lasted. Of course, China is making a compromise between a controlled economy and a less controlled one.
The world has yet to see how it is to do business in China dealing with issues such as property rights: whether foreign private investors can do well as owner of businesses. It’s important that people do not assume that business-as-usual in China is the same with business-as-usual elsewhere.
So if you don’t know how property rights will be treated, then you should try to avoid situations that pivot on that issue. For example, in our distressed debt investing, we often invest in the debt of the companies that fail to pay for their debts because we have creditor rights that can give us access to the value of the company. We don’t know how creditor rights will be treated in China, so we probably won’t invest in (this method).
Q: Is that why Oaktree’s operations in China has been in private equity?
A: (Yes,) in private equity and slow going. We raised a fund a few years ago. We invested slowly. It’s not fully invested yet, and probably won’t get fully invested. It did not invest in distress-for-control or loan-to-own situations for the reasons we discussed. We will continue to move carefully.
Q: So can we look at Oaktree’s presence in China as first, to be there, secondly to learn how to handle those challenges?
A: We of course try to make money. But you are right, it’s important for Oaktree to plant its flag and learn the way. As we gain experience in China, hopefully, we will perfect our methods. One thing I want to stress is that we are not going to go in and assume that the methods we applied in U.S. and Europe will work there.
Q: How would you score Oaktree’s performance in China?
A: First, let me say that it’s hard for me to talk about Chinese investments as opposed to Asian (investments). We haven’t done that much in China properly to have a meaningful sample.
I would say it’s been about a C+, in absolute terms. We haven’t lost money, but I don’t know how others have done. So maybe the answer is “as good as anyone,” but I really don’t know, and I wouldn’t venture to guess.
Q: Now onto your book, which you just launched the Chinese version last week. This is a book that contains your secret recipe for success accumulated during your 44 years of investment career.
http://www.youtube.com/watch?v=JepVfNUEufM&feature=plcp In this episode of China Money Podcast, guest Hellen Song shares her views on where great investment opportunities exist for venture capitalists in China, and what type of entrepreneurs are more likely to survive -- and succeed -- in the rough markets of China.
Q: We are sitting in this beautiful Beijing courtyard hotel, which you have invested in. Tell us how did you find out about this opportunity?
A: During Tsinghua University's hundredth anniversary, I (as an alumni) came to Beijing and found it’s hard to find a boutique hotel with an (old) Beijing flavor.
I walked into this area and found this hotel, but it's under very poor management. Though they only charged 100RMB, the hotel was still empty.
I stayed here for seven days. When I left, I asked the owner if I invest with him and get a good manager to run this hotel, would he work with me. That’s how we started.
Q: I’m surprised to hear that you didn’t previously know the hotel owner. We all know how important Guanxi is in China?
A: It depends on which industry. If it’s government dominated sectors, then Guanxi is of course very important.
For us, we are looking for a person or a team to invest, it’s not really Guanxi that we are looking for. We are looking for a good CEO with good experience and good execution skills.
Q: In terms of industry and strategy, where do you see attractive investment opportunities?
A: My favorite investor is Peter Lynch. I admire his strategy, which is “follow the consumers' money.”
So I focus on three sectors. One is children-related industries, because in China, it’s six people’s salaries (two parents plus four grandparents) raising one child. Also, this sector is not a mature market yet in China.
Second, women dominate families’ cash flows in China. So I want to invest into the industries where women are spending money.
Third, older population-related industries. In China, there are 115 million people who are over 60 years old. Therefore, bio, medical equipment and health care are all very attractive.
Q: What kind of investment process do you go through from reading the initial business plan to making the final investment decision?
A: We use six elements to screen through the business plans that we receive.
First, understand what do they do; second, how is the market; third, why do THEY do it; fourth, their strategy to fight in the market; fifth, their financial planning. Where do they spend money to grow their market?
Sixth, have they thought thoroughly how they exit the company? After a few months or a few years, where will they be? If they want to sell, who will they sell to? If they want to go through an IPO, what is the specific steps they will take to go through that process?
If they answer all these six questions properly, then we will meet with the team to have further discussions.
Q: We know that venture capital firms in China do not necessarily only focus on early stage companies. Do you also invest in companies across different development stages?
A: Yes, this is very different from Silicon Valley. In China, the environment is so different that we cannot focus only on early stage. We have to diversify in terms of companies’ development stages.
China’s investment landscape is still the Wild, Wild West.
Q: What unique challenges do you face (as a venture capital firm) in China compared with the U.S.?
A: Yesterday, I got off this television program on start-up businesses, we started joking that if 10 percent of our investments succeeded, we would be lucky.
That’s the score for the industry. Every year we have a portfolio company go under, and every year we invest in new companies.
It’s not because we didn’t see the investment right. Sometimes, it’s not even the CEO’s fault. Or, it is the CEO’s fault...in fact, if they shifted the direction early enough, they might land in a different place,
http://www.youtube.com/watch?v=rfOr1yTj7jo&feature=plcp In this episode of China Money Podcast, guest and veteran investor Jim Rogers shares his bearish views on the Chinese property sector, and explains why those who argue that the RMB is approaching fair value are wrong.
Listen to the complete interview in the audio podcast, watch a shortened video version, or read an excerpt below.
Q: We are in this high-speed train from Tianjin to Beijing going at 350km per hour. Are you impressed?
A: Yes. I am. I came over today and it’s very quiet and very smooth. I couldn’t believe how wonderful it is. It’s better than an airplane.
Q: This is a perfect showcase of China’s infrastructure boom during the past few decades. How much longer can this boom go on?
A: I’ve driven across China a few times. I know there are a lot of space and a lot infrastructure needed to be done, so there will be more to come.
Q: Last time we talked, you said the Chinese property bubble will have an ugly burst. We’ve seen housing prices drop, but by small margins. Will it get much worse?
A: It’s actually been dropping a lot in some places. But, what I’m worried about is that the Chinese government is loosening interest rate and bank reserve requirement ratios too soon. If they loosen too soon, as they did once before, the bubble got much worse, and people will lose more money ultimately.
Q: You predict that the U.S. economy will go into a downturn next year and 2014. How will that affect the Chinese economy?
A: With the largest economy in the world having problems, everybody feels it. If you sell to Wal-Mart, you will feel the pressure. By the way, Europe is slowing down. So you have two of the largest economic blocks slowing down, China's (prospects) will be clouded too.
Q: As you know, many economists are calling for the Chinese economy to warm up again, if not during the second half of this year, then early next year. You don’t think it’s the case?
A: No, because I expect the U.S. and Europe to slowdown in 2013 and 2014. Sure, some parts of the Chinese economy will be fine, but most of China, especially those dealing with Europe and the U.S. will have problems.
China is spending billions of dollars to clean up its air and water, so (environmental technology and) water treatment sectors will do very well. If you are in agriculture, you will not care if America is in trouble.
Also, some parts of the Chinese economy will still have a hard landing, such as the property sector. So it’s a mixed bag.
Q: Now, let’s look at something more immediate, the Euro-zone crisis. If Greece and other countries exit the Euro-zone, how big an impact will China feel?
A: Greece leaving the Euro-zone will have no effects on China, but the knock-off effects will be felt in China. Most Chinese don’t care where Greece is. They don’t care what happens to Greece. They don’t care if Greece falls into the sea because it’s not going to affect them.
But the subsequent economic slowdown will affect China and the Chinese people.
Q: You have been a long-term bull in commodities, despite a downturn at the present. What is the best way to play the trade right now?
A: If you are very good at stock picking, you can buy stocks of commodity producers. But studies show that you will be the most better-off if you buy the commodities themselves.
If you don’t know commodities, you can buy an index or an ETF. Index and EFT investing outperform most investors 75 or 80 percent of the time, year after year. So If you know what you are doing, buy stocks and the commodities themselves. For most people, it’s best to buy an index or ETF.
Or, you can invest in countries like Canada or Australia where commodities are produced.
Q: Imagine yourself as a Chinese citizen. Stocks have been in disarray; the property market is in the middle of a correction. There aren’t many choices for good investments. Where would you put your money?
http://www.youtube.com/watch?v=lAIsTn6zIhc&feature=plcp In this episode of China Money Podcast, guest Nick Cao, China head of investment and capital transaction at Knight Frank, discusses China's commercial property sector, which has gone through an explosive growth phase after early 2010, when home buyer restriction policies dragged down the residential property market.
Q: Since the government launched home buyer restrictions, the commercial property sector has been going rapidly. Some are concerned about a bubble. Are you?
A: It depends. I would say China's commercial property sector is still less developed than the residential side.
We see two different groups in the commercial sector. One is the large developers in China, such as China Resources and China COSCO. They moved into commercial properties before the tightening measure was initiated.
But the other group is forced into the commercial sector because their residential sales have stalled. And they operate the commercial sector as if they are still running residential properties. Lots of these (commercial properties) are poorly designed. Some of them are in tier two and tier three cities.
Take the city of Shenyang. There are oversupply issues. We see ten large shopping malls within two kilometer distance. So that’s scary and there are a lot of concerns for investors.
But, overall I wouldn’t say it’s a bubble because in China, there still lacks good quality shopping malls (in many cities).
Q: For the past few years, the transaction volume in commercial property has doubled. Do you see that continue?
A: I would say, yes. Because China's economy is moving from manufacturing-based to services-based, so this generates stronger demand for office space. Some international firms are expanding into second tier cities in China, which requires high quality office space.
Also, the government is promoting domestic consumption. That’s demanding more retail shopping malls. Moreover, the insurance industry in China is just allowed to invest in commercial real estate so (investment) demand will still be quite high.
Q: We have seen residential property prices double in the space of one to two years. Will the same happen in commercial property?
A: No, I don’t think it’s going to happen that fast. It’s all case-by-case. For example, if there were two shopping malls next to each other, their prices would move very differently (depending on how well they are managed).
Q: But we often read reports on ghost shopping malls across China. It seems as if you still believe that the fundamentals of commercial real estate is strong demand driving up supply?
A: When you talk about ghost shopping malls, you still have to look at it case by case. In China's tier two and tier three cities, it’s still very hard to find good quality shopping malls.
Yes, there are lots of them that are vacant. But that's because the developers don’t know how to run a successful shopping mall.
Q: So where do you see attractive investment opportunities in the property sector right now?
A: It’s mostly still in tier one and tier two cities. In tier one cities (Beijing and Shanghai), the problems are that supplies are limited. As we know, foreign investors are not allowed to buy assets. They can only buy offshore equity, and those have already been acquired by investors already.
Most of the opportunities are available in second tier cities. There is very limited competition in the retail sector. If you have strong capabilities in running a retail mall, there are great opportunities.
But of course, In China, the leasing term, general market practice and the tenants are very different. so foreign investors really need strong local partners to succeed.
Q: So, how much price appreciation do you see in commercial real estate?
A: For retail properties, you can get eight percent yield on retail properties in good locations.
Q: Now, for local investors,
http://www.youtube.com/watch?v=9T1KHE-527s&feature=plcp In this episode of China Money Podcast, guest Ludvig Nilsson, co-founder and managing director at Jade Invest, discusses the challenges facing China's private equity industry and where he sees attractive investment opportunities.
Listen to the podcast, watch the shortened video or read an excerpt:
Q: Last year, you described China’s private equity industry as a hyped market with strong fundamentals. Have you changed your opinion?
A: Not really, I think the hype is still on. The inflows of new capital into China are actually increasing, not just from overseas investors but also from local institutions. Specifically, China’s insurance companies.
The insurance industry is only now allowed to allocate significant money into private equity. On an overall basis, the potential is very large. The combined assets of the insurance industry are a few hundred billion dollars. If you apply a percentage of two to three percent that could arguably be invested into private equity, that’s a quiet a large number.
Q: You answered the first part of the question, but how about the fundamentals? People are concerned that there is now too much money chasing too few deals?
A: Yes, but that’s always been the case for as long as the industry has been around. There are new opportunities right now and they derive from two areas. One, there are a range of newly emerged industries that need capital for consolidation, the consumer industry, for example.
On macro basis, China has never seen as tight a credit condition as the present ever. Some six months ago, it was the tightest condition I’ve ever seen since I moved to China 15 years ago. China has always had lots of money sloshing through the system. Now a lot of that money has dried up.
What I think we will see is that there are currently two thousand (private equity) funds. They will consolidate into perhaps one thousand or so funds. And, only half of them will make seasonable returns. That sounds like a lot, but (it means) 75 percent of the funds you see in the market will not do well.
Q: So that should mean valuations for private equity deals are attractive. Do you find that’s the case?
A: The real questions about this private equity overhang leads to high valuations or low valuations, that’s all down to the quality of the company. Yes, companies that perhaps are not great or those with issues or problems would raise money at very attractive prices. But you need to factor in the quality of the companies to work out if it’s a bargain.
Overall, a lot of deals are happening at low prices. But great companies can still command high prices. They can pick who they want to work with, and it’s all up to what kind of value-add can the fund bring in.
Q: With China’s private equity industry facing a wave of consolidation, have you adjusted your strategy in selecting funds?
A: Yes, we have. The way we have adjusted our strategy in this cycle is we are focusing more heavily on resource-heavy managers. Basically, managers with strong connections in the political and financial systems in China that can help companies to navigate the IPO process and other significant developments.
The other aspect is that we focus more on fundamentals. That means alignment of interests. It goes down to co-investments. We want fund mangers to co-invest into their own funds properly -- not just the standard one to two percent. We are looking at co-investment of over ten percent. Many of the fund managers that we work with co-invest 10 to 20 percent into their own funds, which are very high comparing to Western funds.
Q: So does it mean most of your funds are smaller funds?
A: We invest in funds across all spectrum of size and stages. Most of our money are going to small and mid market type of funds from two to 400 million in size, that’s where we see the best risk-return return metrics at the moment.
http://www.youtube.com/watch?v=3Ht5nwmW-j0&feature=plcp In this episode of China Money Podcast, guest Alberto Forchielli, managing partner at Mandarin Capital Partners, discusses China-Europe cross-border deals, the challenges Chinese companies face when expanding overseas, and the mistakes he has made but never regretted.
Listen to the full interview in the audio podcast, or read an excerpt.
Q: First, give us a brief introduction of your fund and its strategy?
A: Mandarin Capital Partners is set up to encourage Chinese companies to invest in Europe, and European companies to invest in China. It’s a bi-lateral fund, cross-border (focused). We have invested all of 300 million plus euro we had. Plus, we did a number of leveraged buyout. So our overall volume of investment has been one billion euro.
Q: For Chinese companies expanding overseas, what are the biggest challenges that they face?
A: First one is to find a good deal. To find a good deal, you have to find out (about the deal) early on. Generally, good deals are done by insiders. So the trouble for Chinese companies is to become insiders.
Secondly, speed. They are not used to do mergers and acquisitions, particularly overseas deals. And also, there are many permissions they have to go through. So they need to sign a temporary contract with a very heavy break-up fee. That puts them at a disadvantage verses international competitors.
Q: Your focus is industrial companies. For this sector, how does valuations compare historically?
A: With the crisis, the multiples have been coming down. We’ve never bought anything for more than seven times EBITDA. We even went down to buy great companies at 3.2 times (of EBITDA), which is unheard of in China. In China, you pay 20, 30 or even 40 times.
(We also buy) companies with technologies, profitable and full of cash. So you can definitely do an incredible multiple arbitrage with those companies. We did an exit yesterday. It was four companies that we bought and merged in the pharma business. We sold one year later at three times of our original investment, only because it was restructuring plus China exposure.
Q: That all sounds great. But I’m sure during this process, you face many challenges and risks. Can you tell us about that?
A: We got where we are, not because we figured everything out, but because we’ve made every possible mistake that can be possibly made. We’ve made them all. The first mistake is when people want to talk to you just to gain knowledge. They want to use you and make you work like crazy. We went through that, and now we are very quick in trying to do a closing.
The second is never co-invest with Chinese companies, because they slow us down. Their process is so slow that what I can discuss with a Swiss lawyer for half an hour takes me two days to explain to my Chinese partner. It’s a big burden. It’s like running a marathon with a 20-kilo bag on my back.
The third thing is not to go after a Chinese who comes to you and says, I want to buy something. Never. Whether it’s a European or Chinese, forget about it. It’s a waste of time. You only have an opportunity when you are in China or Italy (where a company needs to expand overseas), but never the other way around. About Alberto Forchielli:
Alberto Forchielli is managing partner at Mandarin Capital Partners, a private equity fund that focuses on investing in Chinese and European companies. Primarily, the fund invests in Chinese companies seeking overseas expansion and European companies in search of local presence in China. Among many previous positions, Forchielli was at the World Bank in Washington, D.C. for three years. He was also president for Asia Pacific at Italian industrial conglomerate, Finmeccanica S.p.A.
http://www.youtube.com/watch?v=bBpZDy_ISkU&feature=plcp In this episode of China Money Podcast, guest Michael Werner, senior research analyst covering the Chinese and Hong Kong banks at Sanford Bernstein & Co., discusses Chinese banking stocks, their exposure to local governments and the property sector, and whether Chinese banks will see their non-performing loan ratios skyrocket.
Listen to the full interview in the audio podcast, or read an excerpt.
Q: First, let’s look at Chinese banking stocks. In terms of valuation, are they attractive?
A: I still think the banks are attractive. We’ve seen a very strong increase in terms of the share prices over the past three to four months. But I still think you will get incremental news that will help the valuations of the banks.
As China’s Central Bank eases monetary policy that will help with valuations, thought it might not be the best for earnings. I still think for the next two to three months, we still have some upside for the banks.
Q: Now let’s turn to the fundamentals of the banks. Many people are concerned about the banks’ exposure to the property sector and local governments. How big a risk are these?
A: Yes, these are certainly risks to the banks. But I think the market has overstated the risks. We really saw that toward the end of last year. The market was pricing in for some of these loans to go to zero in terms of valuation, which in our view is simply not going to happen.
The listed banks that we cover, they had around 11 to 12 percent of their loan book exposed to local government loans. On the property side, you have around 15 percent going into residential mortgages and maybe another 10 to 12 percent going into commercial real estate. In our view, the residential mortgages are very safe with very low loan-to-values. There is a very good track record of people paying off these loans.
On the local government financing vehicle side, certainly there will be some problems. But I think the bulk of the loans are going to end up healthy. But there will be a good five to ten percent of the loans that will have trouble repaying. That’s a couple of years out, and the banks will have enough time to earn up enough reserves to provision against that.
On the commercial real estate side, the banks have actually reduced their exposure. They do have exposures, but they tend to have exposure to the largest, the best and the most liquid of the property developers. So I don’t think that will be a problem.
The largest concern that we have are the local government financial vehicle (LGFV) loans.
Q: So, where do you think the non-performing loan ratio will peak?
A: Our best guess right now is around 2.5 percent. Right now, the NPL ratio for the whole banking system is around one percent. Getting into 2 or 2.5 percent in the next couple of years is actually in line with what we have seen in other countries that experience slowdowns.
We think the Chinese economy will slow down to 7 to 8 percent at the end of this year to early 2013.
Q: So are you saying there are not as much trouble as people fear?
A: That’s absolutely correct. What we have seen in China is relatively good underwriting standards. I think that Chinese banks are going to surprise people on how well they are provisioned and what the ultimate NPL ratio will be.
Some people have been forecasting 8 to 12 percent (NPL ratio). That does not seem likely in our viewpoint. The government will definitely help put in place policies that will mitigate these risks. Just like during the past few years, the banks have been earning a lot of money, and the government has put in place very restrictive policies in terms of capital and provisioning.
Now on the other end, when economic growth is slower, the regulators will relax some of those restrictive measures. That counter-cyclicality (in policies) is actually positive for the banks. About Michael Werner: