Asia Private Equity Review - Greation China Edition

This online issue of the Asia Private Equity Review - Greater China Edition is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

DECember 2009 Issue

Content 內容提要




Case Study


Institutional Corner




The Lens

  • An Industrious Agenda

    Window of the world

    People on the Move

    Summary : Subscribers’ weekly

    Summary : Deal

    Index & Exchange Rates


  • China PE Redefined

    For more than 10 years, China has been planning to launch its own version of NASDAQ, in the hopes of grooming its own Bill Gates. On 30th October, the ChiNext market commenced trading operations. A total of 28 companies were listed and together they raised an aggregate Rmb15.52 billion (US$2.28 billion). ChiNext marked the first major step in China’s pursuit of technological supremacy, as well as breeding its own technology talent. In this ambitious undertaking by the world’s third largest economy, private equity and venture capital investors, both local and foreign, will be a central component for this modus operandi.

    The Selected 28
    In its quest to build up this capital raising platform for young and promising technology companies, China chose 28 companies that have enjoyed high growth in recent years. During the first three quarters of the year, the average growth rate of these companies was 75.58%, compared to the same period in 2008. In presenting this first batch of companies, Beijing has ensured that they are representative of a broad spectrum of industries including healthcare, information technology and industrial manufacturing.

    However, the market values of this celebrated maiden list of companies are far from small. Lepu Medical Technology (Beijing) Co. Ltd. (樂普(北京)醫療器械股份有限公司)(‘Lepu’) backed by Warburg Pincus, is the largest. Based on its initial public offering price, it boasted a market capitalisation of Rmb11.77 billion (US$1.73 billion). Of the remaining 27 companies, their market values ranged from Rmb7.33 billion to less than Rmb786.4 million. A substantial portion fall within the range of between Rmb1 billion to Rmb3 billion, or around the US$400 million mark.

    Significantly different from those currently listed on either the Shanghai or Shenzhen bourses, ChiNext’s first 28 listees are all privately-owned enterprises, suggesting China’s determination to groom the country’s next generation of technology talent without the state’s influence.....

    This online issue of the Asia Private Equity Review is made available with abbreviated content. To read the full content together with more in-depth news, perspectives, and analysis, please subscribe or contact us to purchase back issues.

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    Analysis 本期關注
    Buyers at Home
    Once the invested, now the investors

    For the past five years since private equity in China proved its ability to return capital to investors, the stock markets outside of the Middle Kingdom and foreign trade buyers have been investors’ principal exit platforms. But as China’s foreign exchange reserves surged to a staggering US$2 trillion by June this year and it firmly secured the title of third-largest economy in the world, it is the surging pool of domestic investors that are on the prowl for private equity assets. The changing exit equation is witnessing the return of private equity-backed assets to the hands of domestic investors. The development is another example of how China’s strengthening economy is altering the private equity landscape.

    Since 2004, private equity investors clocked an aggregate US$16.9 billion in realised capital from their portfolio companies in China. The stock markets have been the artery of capital returned as over 73%, or US$12.4 billion, has been returned to investors’ coffers through this exit platform. The bourses in both Hong Kong and the USA were the principal sources of returned capital, accounting for an aggregate US$11.5 billion.

    Buyers from Home Turf
    With the impacts of the global financial crisis beginning to wane in the second half of the year, China’s own domestic investors were ready to demonstrate their prowess in securing those enterprises that had partnered with foreign private equity investors. This became most evident since the beginning of the fourth quarter of the year.

    Despite the adverse macroeconomic situation, since January there were 11 parcels of private equity assets being sold and acquired by domestic investors. The number virtually doubled that for all of 2008, suggesting that domestic trade buyers have an appetite for companies that had partnered with private equity investors. The computation does not include the impending Rmb11.4 billion (US$1.7 billion) acquisition of TPG’s 16.5% stake in Shenzhen Development Bank (深圳發展銀行) by Ping An Insurance (Group) Company of China Ltd. (中國平安保險(集團)股份有限公司).

    The Legacy of Private Equity
    Two of the sales that are testimonials to the long-term merits of private equity are Hurray! Holdings Co. Ltd. (華友世紀通訊有限公司)(‘Hurray!’) and Digital Media Group Co. (數碼媒體集團)(‘DMG’), as the acquirers were not only leaders in their respective industrial sectors in China, but had also journeyed closely with private equity investors during their formative years. Shanda Interactive Entertainment Ltd. (盛大網絡)(‘Shanda’), which brought Hurray! under its corporate umbrella, ascended to reign over China’s online game industry through capital from private equity investors. The buyer of DMG, VisionChina Media Inc. (華視傳媒集團有限公司)(‘VisionChina’), also owes its growth and development to a list of prestigious private equity investors as its shareholders.

    In China’s online game cosmos, Shanda is a pioneer. It was among the first in this segment to receive funding from private equity investors. In 2003, before the China investment story gained momentum with foreign private equity investors, Shanda raised US$40 million from Softbank Asia Infrastructure Fund, a fund that was managed by SAIF Partners (賽富亞洲投資基金管理公司).

    Shanda was the pride and joy of its investors. In May 2004, it became the first online game operator to go public on NASDAQ. After an investment holding period that spanned over two years, SAIF Partners sold all its holdings through a variety of exit mechanisms and clocked an estimated ten-fold of its original invested capital. The investment remains a legend in SAIF Partners’ track record.

    During the past four years, Shanda has learnt to grow without partnering with private equity investors. By mid-November, its market capitalisation stood at US$3.3 billion. This, compared with US$768 million when it went public in 2004, is a testament to its own success. With an annual income growth of 250% for the past three years ending December 2008 (fig. 8), Shanda is in a solid position as an investor itself. In the second half of 2009, it took control of Hurray!, which had raised over US$12 million from a host of investors, including GGV Capital (紀原資本).

    VisionChina is one of the largest out-of-home advertising network operators in China. It provides LCD advertising panels on buses. Prior to its initial public offering in 2007, it raised an aggregate US$40 million from a pool of private equity investors, including Milestone Capital Partners (麥頓投資管理公司) and Goldman Sachs Group Inc. With cash in its coffers of US$108.4 million at the end of June this year, VisionChina has the ammunition to embark on an acquisition trail and consolidate its position (fig. 9). In October, it announced a US$160 million buyout of DMG. It was the largest merger and acquisition in the digital media industry since Focus Media Holdings Ltd. (分眾傳媒控股有限公司) took over Cgen Digital Media Co., Ltd. in late 2007. VisionChina’s takeover of DMG concluded a 54-month long investment holding period by a consortium of global investors that had earlier allocated capital to DMG. They included the US-based Oak Investment Partners and Sierra Ventures, as well as the Shanghai-based Gobi Partners (戈壁合伙人有限公司) and Daiwa SMBC Capital.

    A year after the global financial crisis, while uncertainty continues to cloud the world’s economies, China is set to win the race as the first to recover. Its aspiring entrepreneurs, many of whom had earlier partnered with foreign private equity, are displaying the financial strength that they have gained over the years, and are on the prowl for private equity-back assets. For the first time in the China private equity market, those who had once been invested in by private equity are now the investors of private equity-backed assets.

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    Funds 基金動向
    Venture Capital Drive
    Beijing promotes hi-tech investment

    When ChiNext, China’s own version of NASDAQ, commenced trading at the end of October, Beijing cemented a central fund raising platform for domestic technology companies. With the successful launch of ChiNext, Beijing proceeded to sponsor the creation of a host of venture capital funds.

    In one of the most ambitious undertakings by an Asian government, two government units, the National Development and Reform Commission (中國國家發展和改革委員會) and the Ministry of Finance (中華人民共和國財政部) have signed an agreement with seven local governments to initiate 20 venture capital funds. They will focus on specific industries such as telecommunications, biomedical and new energy. Each of these funds will have a target size of no less than Rmb250 million (US$36.8 million).

    In creating this pool of venture capital funds, Beijing is eager to secure participation from the private sector. The sponsoring organs from the central government have earmarked Rmb1 billion as seed capital to these pool of venture capital funds, but will subscribe to no more than 20% of the capital raised by each of the fund.

    The seven provinces or cities chosen to participate in this venture capital drive are Beijing, Shanghai, Chongqing, and Shenzhen, as well the provinces of Anhui, Hunan and Jilin.

    The private sector and state-owned enterprises are responding to the state’s venture capital drive as two such funds were launched during recent weeks.

    The Hina Group (漢能集團) and China Capital Management Group Inc. launched a US$100 million joint venture fund, Zhongguancun Digital Media Industry Investment Fund (中關村數字媒體產業投資基金). The fund will invest in new generation technology applications, e-commerce innovation and software development. The fund is named after the Beijing-based Zhongguancun, a hi-tech centre in China known as “China’s Silicon Valley”. The capital city of China harbours towering goals for Zhongguancun, which has the charter to become the nerve centre of China’s venture capital industry.

    Separately, China Everbright Ltd. (中國光大控股有限公司) announced the launch of Everbright Guolian Capital Co. Ltd. (光大國聯創業投資有限公司), a Rmb500 million venture capital fund with Wuxi Gualian Financial Investment Group Co. Ltd. (無錫國聯金融投資集團有限公司). It will primarily focus on investments in new energy or those engaged in hi-tech, as well as venture capital companies aiming to list in China. The industries of these companies would range from alternative energy to precision manufacturing.

    After a period of supporting the investment in growth companies, China is now attending to its agenda in promoting the growth of technology companies, in which a complete venture capital infrastructure is paramount.

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