China’s most experienced private-equity and venture-capital investors remain bullish, almost euphoric, about the opportunities before them.
Undaunted by a wave of younger competitors, rising valuations or concerns about sustaining Chinese growth, they believe their industry is still so young, and the opportunities so vast, that their investors will make world-beating returns.
Assuming, of course, that you invest with them, they add. In a crowded market, experience, connections, size and vision will win out.
The names are well known in the industry. Deng Feng founded Northern Light Venture Capital in 2006 and now manages the equivalent of $500 million in both dollar and renminbi funds, focusing on early-stage investments in technology companies.
Wang Chaoyong founded ChinaEquity International in 1999, initially as a VC fund before expanding into PE in 2007. With $1.5 billion of assets under management, two-thirds is in US dollars and the rest in renminbi. It is known as the first ‘market independent fund’ in China, that is, unaffiliated with a bank, SOE, government or foreign financial group. (Wang is also leading the drive for a Chinese entry into the America’s Cup yacht race.)
Neil Shen is founder of Sequoia Capital China, a $3 billion venture with the partners of US-based Sequoia. Two-thirds is run offshore in dollars, the rest in renminbi funds.
Andrew Yan founded SAIF Partners to invest both in China, which accounts for 80% of his deals, and India, which involves the rest. SAIF has $4 billion in AUM plus an additional Rmb5 billion.
Ronnie Chan, founder of Hong Kong property concern Hang Lung and himself both an investor in some of these funds, and a former China PE hand, moderated the discussion at a luncheon organised by the Asia Society (of which Chan is co-chairman).
Chan notes that all of these experienced investors have a similar background: top universities in China, followed by working experience and master’s studies at major schools in America, sometimes including entrepreneurial activities. Then back to China, in order to pursue the opportunities there while using their US experience, both in investing and in Silicon Valley.
Over the past 10 years, says Chan, the average industry return in US venture capital was negative, -5%, although the top 10 best performing US VC firms netted an average 18% annualised. Warren Buffett’s Berkshire Hathaway has returned an annualised 20%. The top 10 Chinese VC companies over the past decade returned over 50%, and one of the panellists returned an annualised rate of 79% (Chan declined to identify who this was).
So the obvious question is: should LPs today expect the same type of returns from PE and VC in China?
Andy Yan argues that these industries are still at their infant stage, and have only attracted real international interest since the mid-2000s. For example, in 2008, a terrible year in the United States, VC still attracted $30 billion, and that doesn’t include buy-out deals. Last year China’s VC and PE total investment was $5.8 billion.
He says the average company in his PE fund in China is growing earnings at CAGR 30%. He invested when average P/E multiples were around 6x, and those have risen to 8-10x, but a comparable company in Silicon Valley would require paying 15-20x P/E.
“Everyone wants to get rich and we’re the capital providers,” he says. “We’re in the middle of the golden age for private equity in China.”
Shen says the market is going through a process of differentiation among GPs. The best ones are starting to institutionalise their investment processes, while many of the newcomers will fall by the wayside. With over 100 offshore GPs and over 1,000 new RMB GPs, consolidation is inevitable. Of course, this being illiquid investments, that process will take years.
Investment strategies are also differentiating. VC is mainly geared towards tech companies, while private equity tends to focus on other sectors where brand and scale are more important, says Wang Chaoyong.
Wang’s ChinaEquity was an early investor in Baidu, which he calls his best deal. He went in five years before the company listed and earned 120x his money back. But he says it’s a different kind of investment, because scale is very difficult to achieve in most tech stories.
In contrast, his investment in sports shoemaker Li Ning was all about building a brand and a distribution network that could take advantage of China’s enormous population. He says similar opportunities exist in services, noting an example in a hairdresser chain that has established a similar brand power across the country.
Although these PE veterans outlined a number of sectors they like (IT, clean tech such as solar equipment makers, fast-food chains, medical equipment), perhaps the most interesting view was Deng Feng’s, who says the best plays are those combining technology and services.
He predicts wireless internet companies will innovate to deliver services designed for local users. “This will be huge for VC over the next five to 10 years, even bigger than the internet was for the PC,” he says.