Prime Time For (Local) Private Equity

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Private equity and venture capital are hot subjects in China (politically and commercially), so it was very interesting to attend the Zero2IPO China Venture Capital and Private Equity Forum in London last week.

As the FT pointed our in a recent article, and as Liu Mingkang highlighted in his “Icebreaker Lecture” for The 48 Group Club* at the Westminster Hearings on 20 June, China needs more efficient bank financing and capital markets to help develop the private and high-tech sectors that will lead the ‘innovatisation’ of the economy. While private equity has a role in funding business, there has been a fear of foreign domination of the sector.

Using policy as a tool (and as the government itself becomes a private equity player), moves are being taken to promote and expand the role of local private equity, local Renminbi (RMB) fundraising, and exits via local (rather than foreign) IPOs. The FT reports:

    “[China] has established a legal framework that is expected to boost the development of China’s nascent domestic private equity players – with significant consequences for their foreign competitors…

    Private equity’s profile in China has risen in recent years. Investments in mainland companies in 2006 doubled to $7.3bn (€5.4bn, £3.7bn) from a year earlier, says the Centre for Asia Private Equity Research. Unfortunately – from Beijing’s perspective – the sector has been dominated by foreign giants such as Carlyle Group and Texas Pacific Group.”

Local private sector examples given by the FT (with offshore structures and foreign fundraising) include Legend Hony (sister company of Lenovo, which was previously also called Legend), and CHD Investments (which last year co-invested with Goldman Sachs to buy China’s largest food processor, Shuanghui Group). SUG partners, from Shanghai, is reported to be one of only a few firms to have already set up a local RMB fund.

These issues, and more, were covered in London last week, as the world of China private equity and venture capital came together for the Zero2IPO Forum. A lot of speakers covered a lot of ground, so just a quick take-away selection follows:

    • According to Andrew Yan of SAIF partners III, the keynote speaker at the Zero2IPO conference, “the private sector has reached critical mass in terms of size and number” in China and, together with the lack of bank funding and the restructuring of state enterprises, this has created a rich environment for private equity.

    • On innovation Yan pointed out that China is not a technology leader, and will not be any time soon. However there are great opportunities where Chinese companies – such as Shanda, Focus Media and Suntech – innovate in new business models in the service sector.

    • In relation to successful management, Yan noted that “fly-in” VC’s will not find long-term success, and that localization of decision-making and networks is essential (a message frequently reported on this blog).

    • Several speakers gave risk management a high profile, noting that due diligence (another favorite topic around here) is essential, corporate governance needs attention, and that the market rewards transparency.

Zero2IPO has reams of research on private equity and venture capital in China. I hope to report some of their figures here in due course. In the meantime, here is a selection of the top funds and deals from 2006.

Top Venture Capital Funds of the Year in 2006 (top 5 of 50):

    1. IDG Technology Venture Investment
    2. SAIF Partners
    3. Sequoia Capital China
    4. Legend Capital
    5. Granite Global Ventures

Top VC-backed Entrepreneurs of the Year in 2006 (top 5 of 10):

    1. David Sun of Home Inns & Hotels Management Inc. (backed by IDG Technology Venture Investment)
    2. Minhong Yu of New Oriental Education & Technology Group (backed by Tiger Fund)
    3. Hang Xu of Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (backed by Walden International)
    4. Vincent Mo of (backed by IDG Technology Venture Investment)
    5. Ping Wu of Spreadtrum Communications Corp. (backed by NEA, Legend Capital, ePlanet Ventures and others)

The next Zero2IPO forum is being held in Beijing on July 11th. See here for details.

See news source:

    Boost for Chinese private equity
    By Jamil Anderlini and Sundeep Tucker in Hong Kong
    Published: June 8 2007 01:04 | Last updated: June 8 2007 01:04
    FT (Subscription)

    Zero2IPO London Forum notice

* The author is Honorary Secretary, and a Committee Member, of the 48 Group Club

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