PEI: Why is the pre-IPO play not an option in China anymore?
If you look at RMB funds, which now number in the thousands, almost all of them say they focus on pre-IPO investments, and that strategy has not really worked out so well in the past two years. If the market is booming, obviously pre-IPO investments can be quite successful in generating returns.
The problem is, all markets go through cycles; and in Asia, cycles are more frequent than in some of the developed markets. The capital markets as far as IPOs are concerned are pretty much shut down; in China they are literally shut down. There are so many [companies] waiting to IPO, but the regulator has not opened the floodgates yet. Therefore, if your strategy is to do pre-IPO investments, you will find yourself stuck because the market is so depressed.
Because of this, I think that many LPs have got cold feet – which is why fundraising for RMB funds last year was probably a fraction of the amount raised the year before. I expect RMB funds to do even more poorly this year.
Can global funds really compete with local RMB managers and their extensive networks?
If people understand where the weakness of the Chinese growth story is, they would know how to avoid it. The Achilles' heel of China's economy is too much capacity
Weijian Shan, chairman and CEO, PAG
Network is always important, but it is not enough. If I look at our peers, I can put them into two categories: one is global firms, the other would be local RMB firms. Global firms embody best practices. Local firms’ advantage is better access to relationships, because they are better connected locally. [But] if I were an LP asked to choose between the two, I would [choose a global firm]. The reason is through market cycles, eventually best practices will win out – even if they don’t have the best network of relationships.
Is the recent enthusiasm about Japan justified?
Japan is a country ripe for restructuring, but it has been ripe for restructuring for the past 20 years. The problem is, [Japanese companies] don’t ever want to do it. Now, you see so much hype and enthusiasm about Abenomics – [but] if you can fix the economy simply by printing money, that would be too easy.
The challenge for Japan is whether it can restructure the inefficiencies in its industries. If companies are willing to do that, there would be many opportunities in Japan. Theoretically Japan should have many opportunities. In reality, however, it is very rare to find good buyout opportunities in Japan.
How can firms mitigate the macroeconomic risks and find growth in China?
All the investments we made in China last year registered growth of 20 to 30 percent, both top line and bottom line. This is because we don’t invest in sectors that are saturated with overcapacity. If people understand where the weakness of the Chinese growth story is, they would know how to avoid it. The Achilles’ heel of China’s economy is too much capacity, particularly in the industrial and heavy manufacturing sector.
Look, for example, at the automobile industry. China sold probably about 19 million cars last year – so high demand and large market. But there are 170 car manufacturers in China.
So there is an enormous amount of overcapacity in the automobile sector. If you understand where the growth comes from, you will find that China is attractive. If you don’t understand it you will get burned.