China Capital Markets - PE in China

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

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

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

Documents

China Capital Markets - PE in China