Zhao, who's firm is ten years old this year, sat down with Private Equity International on the sidelines of Hony’s annual meeting in Shenzhen.
In 2012, Zhao said the investment pace slowed due to uncertainty in China, which included slowing GDP growth that proved to be structural, a change in China’s top leadership and a freeze on IPOs.
[The mezzanine fund] fits in with the cluster of things we do between pure debt and qualified equity
John Zhao, CEO, Hony Capital
“We took time last year to work with existing portfolio companies and not rush in to close new deals,” Zhao said. “But with clarity coming back to government policy orientation and the feeling that we’ve probably seen the worst, we’ve started to pick up our investment pace.”
The firm has also had five exits so far this year, including the September trade sale of leather goods company Shenzhen Longhao to Chinese conglomerate Belle International in a deal reportedly valued at $114 million.
Hony is continuing to test the water in new asset classes. Earlier this month, it closed a debut mezzanine fund, an RMB 1 billion RMB (€121 million; $163 million) vehicle that was oversubscribed, Zhao said.
The firm has also begun to raise a small special situations fund in US dollars. The two funds will have synergies with each other and will provide some liquidity to SMEs in China.
“It fits in with the cluster of things we do between pure debt and qualified equity.”
The greater picture is that the country has evolved, so we see more significant state-owned enterprise restructuring. At the same time we are starting to see succession opportunities with private companies where the founder will not hand the business to the next generation
John Zhao, CEO, Hony Capital
Zhao also spoke about the continuing integration of the investment team and Hony Consulting, the operational team, which now has 25 individuals with expertise in operational areas such as supply chain management and human resources.
Plans are underway to build a team of operating partners made up of ex-CEOs and ex-COOs who will work with the firm as a partner or senior manager, Zhao said.
In addition, the firm intends to build a network of CEOs who may not want to take a longterm position, but would step in to company for a couple years.
“Without any doubt we want to form the strongest post-investment management capabilities,” he said.
“The greater picture is that the country has evolved, so we see more significant state-owned enterprise restructuring. At the same time we are starting to see succession opportunities with private companies where the founder will not hand the business to the next generation. They may be willing to consider working with us, maybe sell it to us or a portion of it and we will bring in professional managers. In any case, having strong capability to take over a business is becoming important.”
China’s freeze on IPOs, in effect for about a year, has some impact on Hony, which has portfolio companies in the listing queue, he said. However, the impact is less severe for Hony than other private equity firms.
“All our companies are well qualified to remain in the holding pattern, but some have pulled out to seek listing elsewhere or decided to pursue M&A opportunities as an alternative. We’d love to see our companies go IPO as planned, but the window is not open. That doesn’t impact the well-being of our companies, but if you are a pre-IPO investor you’re probably in bad shape.”
Zhao was optimistic about China’s economic growth in the longterm and cited several macrotrends in China that will be beneficial to private equity, including a “great age of consumption” and an “environmental revolution”.
Sketching out Hony’s role for the next ten years, he added: “We’ll go from a leader in China’s private equity industry to a comprehensive asset management company. We’ll be a financial company with global influence.”