Post on 03-Apr-2018
transcript
7/28/2019 China Capital Markets - PE in China
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Ahmed Tariq
Ameya PatkarPeidong Qiu
Syed Ibad
PRIVATEEQUITYI NCHINA
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China PE Market and its Regulatory Aspects
Opportunities & Challenges
VIE and Issues related to it in the Chinese PE Market
Precedents Shaping the Future of PE in China
INTRODUCTION
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Deal Origination
- Deal flow and supply of capital
- Lower fundraising and investments for 2012
Issues:
- Exemplary Management
- Proper Accounting Standards
- Multiple Set of books
CHINAPEMARKET
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PE funds:
- Affiliated Funds
- Princeling Funds
- Independent Funds
- Foreign Funds
Foreign v/s Domestic PE firms
- Partnerships with local Firms/Governments
- Access to cheaper debt markets
PE Deal potential = US $43 billion
PESTRUCTUREANDCOMPETITION
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OPPORTUNITIES
Population of 1.34 billion
Consistently increasing per capita Gross National Income at $4,940
Growing middle class with discretionary income and an appetite for varied goods and
services
First Generation companies established in late 1970s - in need of growth capital and
professional management services
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
1993
1994
1995
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2010
2011
GNI per capita (cur rent US$)
GNI per capita (current US$)
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Global Macroeconomic conditions have been volatile
GDP growth rates have been tapering off
Volatility in stock market has brought down valuations
Expect greater returns in the future by allowing firms to deploy capital in a prudent
manner
OPPORTUNITIES
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Not only have falling multiples affected Chinese stock exchanges, but other exchanges
as well
Puts pressure on prices, hence incentivizing companies to de-list their stock
Shanghai based Focus Media was taken private for US $3.1 billion
2005 - Listed on the NASDAQ with a forward earnings multiple of 35
2012 - Forward earnings multiple was down to 8.3
2012 - Distressed companies recieved PE injection of US $4.6 billion
2010 - Insurance companies allowed to invest 5% of their assets in China based PE
funds, hence providing PE funds access to a potential pool of US $ 1 trillion
2012 - Regulation was eased to include foreign PE funds. Cap increased to 10%
National Social Security Fund increases investment in PE funds from US $3.1 billion
to US $3.7 billion.
OPPORTUNITIES
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China Securities Regulatory Commission halted IPO approval process in October 2012
The process was stopped to reform and support the growing PE domestic market
The cessation of process made it impossible for PE firms to exit via an IPO
Since 2000, over 7,500 PE deals are Un-exited
PE firms that solely focused on IPO eligible companies were immediate victims
Firms such as Kunwu Jiuding Capitalpromised investors redemptions within a 4 to
6 year time periodhalf the usual cycle and a mismatch of asset and liabilities
Mid-tiered PE firms found it difficult to raise funds in light of the IPO cessation
Possible regulations that would treat PE funds like securities - require additionaldisclosure agreements
Repatriation of exit proceeds are subject to review by SAFE
Delay in repatriation may risk funds being disguised as foreign loans
CHALLENGES
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Sectors that cater to the upcoming middle class should warrant more attention
Private equity industry professionals should consider chanelling funds into:
- Energy, mining and utilities
- Consumer goods
- Technology, media and telecommunications
Hony Capitalraised 3 billion RMB (US $489 million) to invest in the entertainment
segment
National Film Capitalraised 1.5 billion RMB to build movie theatres across mainland
China
CVC Capital Partners invested in Hong Kong Broadband Network - providing highspeed internet and telephony services
ATTRACTIVEINVESTMENTSEGMENTS
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Help Foreign Investors while dealing with regulatory restrictions on certain industry
sectors
Help Foreign Investors avoid complicated government approval procedures with
respect to foreign direct investment
A TYPICALVIESTRUCTURE(SINA)
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May 2011 - Without notifying Alibabas board,Alipay was transferred to a domestic
Chinese company that was controlled by Jack Ma
July 2012 - Michael Yu restructured his VIE ownership to 100%. SEC launched aninvestigation over possible accounting irregularities
RECENTISSUESWITHVIES
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Regulatory risk
Contractual Arrangement risk
Procedural accounting standards
Control issues - Tax & Foreign exchange
RISKSWITHVIES
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Formalize VIE structures by clearly defining
regulations - help reduce uncertainty
Enhance local PE firm practices
- Provide training platforms
- Provide policy support
FUTUREVIE&PEMARKET
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Chinese Whispers over valuations
Shortened IPO durations
Pending approvals
Kunwu Jiuding Capital
- Perfectly adapted or traditionally developed ?
Gold mine and CSRC scapegoat ?
PRECEDENCEFUTUREOFPE
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TRENDS
Sexy market ! A decade of opulence
2001 - 2012
Losing steam and statistical anomalies
CSRC bossing and economic woes
Fuel to the fire - On and Off shore
Russian Roulette ?
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Cocktail of prospects and mixed
sentiments
Eternal thumb rules of investing
GP and LP ideals
Quintessential private equity
model ?
Unchartered territory..
MOVINGAHEAD
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Q & A