Citic Private Equity to help transform China SOEs

Wu Yibing, president of Citic Private Equity Management, explains the workings of the firmÆs newly closed Rmb9 billion fund.
Citic Private Equity to help transform China SOEs

Citic Securities made the headlines last January when it poached Liu Lefei from China Life as chairman of its new private equity arm -- one of a handful of PE funds to have received the State Council's backing. One year on, Citic Private Equity is China's biggest onshore PE shop with Rmb9 billion ($1.3 billion) under management. The firm has bought Wind Info, an information provider hailed as China's answer to Bloomberg, and it has closed its Mianyang Private Equity fund.

Citic PE president Wu Yibing, formerly head of Asia-Pacific M&A at consultancy McKinsey and chief strategy officer at Lenovo (he closed the deal with IBM), explains how his company wants to help China's state-owned enterprises develop. 

What should we know about Citic Private Equity Management?
Citic Private Equity is the strategic onshore private-equity platform owned by Citic Group and Citic Securities. Our shareholders provide us with strong institutional flavour. We have a totally market-based mechanism for our governance and incentive system that are typical of Western private-equity firms. We have a very professional team with both local talents and professionals who have worked at world-class PE firms, in banks or consultancies. Our chairman Liu Lefei, for example, was a CIO at China Life. The combination has attracted investors to our fund -- our fundraising effort is the most successful in RMB fund history.

Who are the investors behind the Rmb9 billion?
We have 36 limited partners [LPs] across the spectrum: large financial institutions, the [China] National Social Security Fund, the investment arms of two large state-owned enterprises and A-share listed companies. We have more than 20 high-net-worth individuals placing investments under the names of private enterprises and holding groups. The split between private and institutional money is about 50-50.

Do the shareholders play a role in the firm?
Citic Securities is one of the general partners of our firm. Citic Securities is also one of the LPs in our RMB fund -- it represents about 10% of the total LP commitment. Most importantly, our investment committee is composed of members of the management team. Citic Securities does not have influence over or participate in our investment decisions. Investment ideas are purely from the investment professionals.

How does your team plan to allocate its assets?  
We have four sectors of emphasis: financial institutions; consumers; natural resources and energy; and equipment manufacturing. The first two will blossom under China's policy to expand domestic consumption. The latter two represent a trend -- as China's economy transcends to the next stage, we see not only assembly work coming to China; resources and equipment will also see high demand.

We believe we have unique access into these four sectors as domestic investors. They have unspoken preferences for local investors. We are fully leveraging that advantage.

What's the most compelling theme?
One major staple of our investments is going to be work on the transformation of state-owned enterprises [SOEs]. We are doing that through minority positions. We don't believe China will see too many majority-control type of deals any time soon -- at least, not in the foreseeable future. Nonetheless, there is sizeable need for this to happen.

We are confident we will gain sufficient influence or control to restructure the productivity of SOEs by leveraging our close relationships with these companies and local governments, as well as our appeal to local management and entrepreneurs. About 60% of our capital will go towards that, although we will also participate in growth capital investments.

Can you explain what you mean by SOE transformation, given that activist PE is still not possible in China?
We'd do a few things that are very tangible for them. For example, we could change the incentive system, which traditionally is the biggest shortcoming. SOEs tend to be more inward-looking and therefore less motivated. We'd selectively help them strengthen their management teams. We don't believe in wholesale change, particularly at CEO or chairman level. But PE investors like us can introduce better market-based disciplines or introduce experts who have worked for world-class companies such as McKinsey, GE or Procter & Gamble to help them reposition their branding, product, pricing or channel presence.

With the majority shareholder still being local government, are these changes likely to stick?
Absolutely. We are not counting on the central government giving us any explicit power. We are not a government entity. We are a fully market-orientated private equity firm just like any other western private equity firm. What I want to emphasise is that the backing and institutional background give us credibility. You are right, the decision-makers and key stakeholders are the local governments. What we're saying is that with our background and the talented team we have, we are in position to introduce the changes.

One thing we believe and the world should know: the current wave of local mayors and party secretaries are very smart people. They know the market discipline. They are well educated before all else. There are things we cannot do because they are public officers. When they see an investor like us, it's not that they don't understand that the things I have described are good for the company. They want to make sure the investor is trustworthy and that they can trust them to work in the best interest of the majority shareholders -- that being the state. That's important.

What about private enterprises?
Private enterprises view us as a safety factor. We can provide them with institutional backing. Our connections can help them do a lot of tangible business. For example, we've recently completed our deal with Wind Info -- it's being hailed as China's Bloomberg. The company has almost 80% market share onshore, but it has not penetrated all the securities houses yet -- ironically, one example is Citic Securities.

So far you have deployed Rmb2.4 billion. How's the pipeline looking and when will Citic PE be fully invested?
We'll probably take two to three years to be fully invested. We have a strong pipeline, with around 70 projects in the business, legal and financial due-diligence stage. Less than 10 of these will be completed this year. The total investment we already have completed is about 30. After this year, we'll move onto larger deals.

How are your completed deals doing?
We just had an LP meeting. They are very pleased with our strong capability in deal execution, which is one of our key value propositions. We have invested in very good companies and are very happy with our investments -- they are performing very well. We've recently done two deals, for example. One is Wind Info and the other is Kuaijishen, China's oldest liquor maker.

Tell me about some of the notable ones.
We have a number of deals in the IPO process. Our policy before they are announced is not to disclose specific names. But to give you a flavour, we have invested in a leading city commercial bank; a coal bed/methane play; a glass manufacturer which is involved in architecture being put up in Beijing, Abu Dhabi and Singapore; and a transport company.

How many IPOs are you looking at this year?
Probably just one or two. Most of the others will go public in two to three years. We are a long-term investor and are not looking for short-term payouts. We have a team of deeply experienced operators, and we know when we can move onto IPO.

What do you make of foreign competition, given that the Carlyles of this world are starting to raise renminbi funds in Shanghai?
The battle is won or lost on the ground. We have a very local team -- guys who grew up in China with western training and CVs from world-class names ranging from China Life and Citic to multinationals such as McKinsey and GE. When they go to local companies or mayor's offices, they are on the same page. That's our appeal -- being readily able to be viewed as a local player. We obviously have the State Council's backing, which is a good thing. But it's about the team.

Eventually we want to be a world-class competitor. We are less concerned about restrictions on foreign exchange. We'll find a way to build connections with world-class investors. We have global ambition.

Global ambition -- what do you mean by that?
Our current focus is China. But we will move up along with our portfolio companies as they make overseas acquisitions. We have live deals going on -- some of our portfolio companies have tangible targets they plan to make in overseas markets, and they are in the process of evaluating those targets.

¬ Haymarket Media Limited. All rights reserved.