Though private equity is still a fairly new asset class in China, it has been around long enough for a handful of key players to assert themselves as the country’s indisputable private equity elite.
And in a country where names and connections matter more than most, it is no surprise that behind every standout firm, there is a standout name. Hailing from careers in finance, government, or a combination of both, these men have built private equity brands which in most cases pack a punch far greater than that justified by the number of years they’ve been around.
A brief glance through the biographies of these private equity pioneers will tend to reveal time spent in senior positions at one or more of China’s most prominent financial institutions, like China International Capital Corporation, Legend Holdings, Industrial and Commercial Bank of China, or CITIC Group. However, perhaps surprisingly, the most fertile territory for the grooming of private equity stars has proven to be Goldman Sachs’ China operations, which has spawned two firms so far (Hopu Investment Management and FoutainVest), with a third reportedly in the making (see The one to watch? below).
Of course, close ties to the government at Central and regional level always help in a country like China. In fact, some (if not all) would say it’s impossible to get anywhere without them. That said, the men at the helms of these private equity firms have been quick to assert that there is a limit to how far government connections can get you. As Hony Capital’s John Zhao told PEI Asia in an interview last year, “The government doesn't decide who gets to invest. The entrepreneurs do.”
But it’s LPs that really set the seal of approval on a fund or firm. And the (in most cases repeated) fundraising successes of the GPs named here show that LPs from around the world are more than happy with the performances and track records they are seeing.
It could be argued that the list below should have been longer. Firms like New Horizon Capital (whose co-founders include Wen Yunsong, Chinese Premier Wen Jiabao’s son), CITIC Capital and FountainVest, have also made a significant name for themselves in the Middle Kingdom. However, our list is not intended to be exhaustive: it is, instead, only a snapshot of the firms that have led the bedding in of private equity in China, and/or look set to lead its development in the future.
Key man: Shangzhi Wu, managing partner
Established in 2002 as a spin-off from investment bank China International Capital Corporation (CICC), CDH Investments was one of the first managers off the block in China.
As of April 2009, the firm managed $3 billion across private equity, venture capital and long/short public equity. However, it is in the final stages of fundraising for its fourth private equity fund (CDH Fund IV), for which sources told PEI Asia earlier in the year it had received subscriptions well in excess of its (revised) $1.4 billion hard cap.
Such is the might of the CDH name that sources told us the firm could “easily have raised a fund twice that [$1.4 billion] amount”. It now has the job of sorting out allocations and deciding who to disappoint among its LP base.
Existing CDH LPs include China’s National Social Security Fund (NSSF), which reportedly invested RMB2 billion into the firm’s maiden RMB fund, launched in 2008; CDC Group; GIC; International Finance Corporation; and Hong Kong-based fund of funds manager Asia Alternatives.
Recent investments include the reported $293 million acquisition last year of a 20 percent stake in car maker Chery Automobile alongside Bohai Industrial Investment Fund Management; and the $100 million investment into Himin Solar Energy Group alongside Goldman Sachs in December 2008.
CDH took the 2009 Private Equity International award for Best Private Equity Firm in China (see page 30), having also won it in 2008.
Key man vitals: Wu led the spin out of CDH from CICC, having held the role of head of the private equity group at the investment bank since its launch in 1995. Prior to his time at CICC, Wu did stints as a senior investment officer at the International Finance Corporation and an operation officer at the World Bank.
Key man: John Zhao, founder and CEO
Hony was launched in 2003 as a captive private equity platform for Legend Holdings, the influential government-controlled conglomerate that is also the largest shareholder in computer manufacturer Lenovo. Today, Legend remains a key source of capital for the firm’s funds and a shareholder in Hony’s management company. Hony has four USD-denominated funds under its belt – the most recent closed on $1.4 billion in 2008 – and one RMB-denominated fund – which raised RMB5 billion exclusively from Chinese public sector institutions in 2008. The firm's assets under management stand at $2.8 billion.
Though Zhao has played down the importance of Hony’s ties with government when it comes to making investments, the firm’s closeness to Legend and some of China’s other leading financial institutions have been key factors in the firm’s advancement.
“They are close to the government and the progressive forces inside the Department of Finance who are trying to develop China's private equity culture,” one industry insider told PEI Asia last year.
Hony counts the NSSF as an LP in its RMB fund, and Goldman Sachs, property developer Sun Hung Kai, Temasek, CalSTRS, Stanford and Notre Dame endowment funds, Rothschild, Pantheon, Partners Group, Squadron Capital, and Asia Alternatives as LPs in its USD funds.
Recent deal activity include an undisclosed commitment to Hong Kong-listed Chinese mall operator China Golden Development Holdings in February this year; and the sell-back of its 40 percent stake in Lenovo Mobile Communication Technology to the company's original parent, computer giant Lenovo Group, in November 2009, generating around 2x returns in less than two years.
Key man vitals: Zhao was reportedly “handpicked” by Legend to lead its private equity operation, having recently returned to China in 2002 following 15 years working and studying in the US. In his time abroad he worked at several venture capital-backed technology businesses in Silicon Valley, where, he told PEI Asia in an interview last year, he learnt that “with every deal, it's crucial to develop an operating strategy and then execute”.
Hopu Investment Management
Key man: Fang Fenglei, founder and CEO
Launched only in 2007 and headed by ex-Goldman Sachs China heads with no prior experience of private equity, Fang Fenglei and Richard Ong, Hopu has wasted no time in making waves and stretching boundaries.
The firm quickly raised a $2.5 billion fund, collecting $1 billion from Temasek and a further $300 million from Goldman Sachs itself in the process. Since then, it has raised eyebrows with its investments, straying far from the growth-oriented remit of many other domestic funds and involving itself in some very high profile – and high cost – transactions.
In 2009, the firm surprised everyone by leading a consortium which allegedly purchased a total of $700 million worth of shares in Bank of China from exiting shareholder Royal Bank of Scotland, reportedly keeping $400 million of the shares for itself. Keeping on the theme of buying a slice of financial institutions from distressed sellers, in May Hopu reportedly joined a consortium which bought a 6 percent stake in China Construction Bank from Bank of America for an alleged total of $7.6 billion. It then changed tack later in the year, reportedly partnering state-owned enterprise COFCO for an investment of around $800 million in China Mengniu Dairy Company in return for a combined 20 percent holding.
More recently, Hopu became the only Chinese ‘domestic’ fund to invest outside of China when it paid $45 million for a 4.9 percent stake in Lippo Karawaci, the Indonesian-listed real estate and hospital developer, in October last year according to a report by the Financial Times.
This year, Hopu has stretched the definition of a domestic Chinese private equity firm once more by reportedly advising Argentine energy company Bridas Energy Holdings on the setting up of a $3.1 billion oil and gas production joint venture with Cnooc, China’s largest producer of offshore crude oil and natural gas.
Key man vitals: A former Red Guard (a radical anti-bourgeois student group formed during the Cultural Revolution), Fang went on to run two state-owned enterprises, Central China International Trading Company and Henan Food & Oil Import-Export Company, before co-founding investment bank China International Capital Corporation. In 2004, Fang began his relationship with Goldman Sachs after the US bank loaned him $100 million to set up Gao Hua Securitites, which became a joint venture between the two. A renowned rainmaker, Fang left his role as Goldman’s China partner when he set up Hopu, however, he retains an advisory role at the bank.
The new kid on the block
CITIC Private Equity
Key man: Liu Lefei, chairman and member of the investment committee
Not to be confused with CITIC Capital, also one of China’s biggest private equity names, CITIC Private Equity was launched in June 2008 as the private equity arm of state-backed CITIC Securities.
Though still untested as a private equity manager, LPs were more than happy to put their faith – and their money – in this firm which, in the words of its president Wu Yibing, “has strong institutional and government backing and is managed professionally and independently” (see page 22 for an interview with Wu).
In fact, CITIC PE recently set a new RMB fundraising record when it closed its maiden fund, the CITIC Mianyang Private Equity Fund, on RMB9 million in January. Counting the NSSF as its single biggest investor, the fund also garnered support from state-owned enterprises (SOEs), and listed and private companies in its fundraising.
CITIC PE invests across four sectors: financial services, consumer goods, energy and resources and manufacturing. It has wasted no time in getting started, in fact, according to a statement it put out at the time of its fund close, the last 12 months have seen it make 10 investments valued at a total of more than RMB2 billion. Portfolio companies include Chinese liquor brand Kuaijishan and data services provider Wind Info.
CITIC PE appointed Wu Yibing, formerly a managing director at state-backed investment holding company Legend Holdings, as president in November, adding another star name to leadership of its 60-strong investment team.
Key man vitals: Liu Lefei joined CITIC PE from a role as CIO and general manager of the Investment Management Department at China Life Insurance. Before that he had director roles at CITIC Securities and Guangdong Development Bank and stints at China Galaxy Securities Company, Capital Securities, and Everbright Securities. Recently, Liu has been highlighted by media including the Wall Street Journal as one of a number of so-called “princelings”, or sons and daughters of China’s political elite, who have risen to prominence in the private equity world. Liu is the son Liu Yunshun, Politburo member and senior propaganda official.
The foreign elite
The Blackstone Group
Key man: Antony Leung, chairman for Greater China
While Blackstone is only one of several global firms working hard to make inroads to China’s lucrative private equity market, there are signs it may have some edge on the competition.
The arrival of Antony Leung at the firm in January 2007 directly preceded the sale of a stake in the US firm’s management company to China Investment Corporation (CIC). CIC bought 101 million shares in Blackstone for $3 billion before the US firm listed in June 2007. It upped its holding in the company the following year, although it has not yet reached the 12.5 percent maximum holding the two firms had agreed.
While Leung’s involvement in this deal was unclear, the power of his personal brand in China – and therefore his strength as an asset to Blackstone as it attempts to ingratiate itself there – is more than obvious.
A former Financial Secretary for Hong Kong, one of the climatic moments of his time in this position was the signing of the Closer Economic Partnership Agreement (CEPA) with China, which had a principal aim of strengthening trade and investment ties between the mainland and the former British colony. With his high profile background in banking and marriage to a former Chinese Olympic champion diver to boot, his face most definitely fits with the upper echelons in China.
“Among the international private equity players, he probably has some of the most direct contact with the Chinese government,” commented one China-focused private equity lawyer recently.
Though Blackstone doesn’t look to be granted any special favours in China, it has been ahead of the curve on several developments in the private equity industry. Most notably, it was the first foreign firm to announce that it would be setting up its own RMB fund (targeting RMB5 billion) under the policy initiative launched by the Shanghai government in June 2009.
More recently, in its second China investment and first pre-IPO investment in the country, Blackstone joined Capital International in acquiring a reported 30 percent stake for $600 million in agricultural company Dili Group in March ahead of the company’s Hong Kong listing later this year.
Key man vitals: After 28 years in the financial services industry across Asia, Leung left his role as Asia chairman of JP Morgan Chase & Co. in 2001 to take up the position of financial secretary for Hong Kong. A scandal over his purchase of a Lexus shortly before the introduction of a tax increase on new vehicles led to his resignation in 2003, but not before he had married Fu Mingxia, a Chinese Olympic diving champion and national celebrity, securing his A-list status. Leung joined Blackstone in January 2007 to spearhead its push into China. He is also an independent director of the Industrial and Commercial Bank of China, China’s largest commercial bank, and chairman of Heifer International in Hong Kong.
The one to watch?
Fred Hu, former chairman of Greater China at Goldman Sachs
Fred Hu, chairman of Greater China at Goldman Sachs, retired from his role in April amid a flurry of media reports stating that he was preparing to follow in the footsteps of former colleagues Fang Fenglei and Richard Ong (see above) in launching his own private equity fund later this year. Singaporean sovereign fund Temasek Holdings, Goldman Sachs and an investment arm of China Construction Bank are expected to commit to Hu’s fund, sources told Reuters in March.
“Given Hu's high influence in China and now strong support from his investors, I believe Hu's new private equity fund will make the tough competitions for China deals even tougher,” a source told the newswire.
Key man vitals: Hu joined Goldman Sachs as chief economist for China in 1997. Prior to this he worked at the International Monetary Fund in Washington where he was engaged in macroeconomic research and policy consultation for a number of member countries including China. Hu has also advised the Chinese government on financial reform, pension reform and macroeconomic policies. Following his retirement from Goldman Sachs, he will remain an advisory director to the US bank.