The Dbriefs China Issues series presents: Private Equity in China: The Trends Reshaping the Landscape Gary Chan, Partner, Deloitte Touche Tohmatsu CPA Ltd. Chris Cooper, National Leader, U.S. Chinese Services Group, Deloitte LLP Jennifer Qin, Partner, Deloitte Touche Tohmatsu CPA Ltd. October 13, 2011
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
The Dbriefs China Issues series presents:
Private Equity in China: The Trends Reshaping the Landscape
Gary Chan, Partner, Deloitte Touche Tohmatsu CPA Ltd. Chris Cooper, National Leader, U.S. Chinese Services Group, Deloitte LLP Jennifer Qin, Partner, Deloitte Touche Tohmatsu CPA Ltd. October 13, 2011
Release for answers to polling questions Understand that any data or information provided by you as part of participating in this Dbriefs webcast (“webcast”) may be used by Deloitte in connection with this webcast, other studies, or analyses performed by Deloitte, publications, or in connection with services provided by Deloitte or otherwise.
Understand that this webcast is the proprietary property of Deloitte.
Understand that any such data or information may be disclosed by Deloitte to related entities or other third parties, including, without limitation, in publications, in connection with this webcast or such studies, analyses, or services, provided that such data or information does not contain any information that identifies you or associates you with the data or information that you have provided or are providing.
Understand disclosure of such data or information could be required by law, in which case Deloitte will endeavor to notify you.
1999 and earlier: - CDNCA Plan No. 1; - Draft for Investment Fund Law; - Suggestions from Department of Technology on VC development
2000: - 9 pointers for China GEM; - Tentative guidance for foreign investment in domestic companies 2001:
- Tentative guidance for foreign PE/VC investment in Zhongguancun; - Internet bubble; - CSRC restricts direct investment of security firms
2002: - Guidance for foreign investments in telecommunication; - Disintegration of CICC direct investment arm and the set-up of CDH
2003: - SAFE issued Regulation No. 3
2004: - Catalogue for foreign investments in SMEs; - Governing hazard for foreign investments
2005: - SAFE tentative measures by Regulation No. 11, 29, 75 on VC investment management
2006: - Regulation No. 10 and the boom on domestic IPO; - First batch of approved Industrial Investment fund in December
2007: - Pilot run for direct investment of securities firm; State Council approves the expansion of RMB industrial investment funds
2008: - Draft listing rules for China GEM; - Updated regulations for China stock exchanges; - First LLP RMB fund in Tianjin Binhai District under a set of preferential policies; - SSF made direct investments in PE funds(CDH ,Hony,Mianyang Industrial Fund (managed by CITIC)
2009: - Oct 23rd-launch of GEM provides new exit routes for PE/VC
2010: - October - <Tentative Measures for equity investment by insurance companies>; - December – the set-up of RMB60bn FoF by CDB and Suzhou Venture Group
2011: - QFLP launched in Shanghai, Beijing and Chongqing; - CSRC released guidance for direct investments by securities firm allowing for 33 securities firms to invest in PE; - Over-the-counter market for growth enterprises
China PE/VC Industry Development
Linear chart represents total investment volume of PE/VCs
Unitary exit routes dominant by IPO and temporary closure of IPO channels
Exit routes in the U.S. and Europe for the years 2005-2010 were dominant by M&A. In Europe, IPO accounted for less than 10% of exits routes, U.S. 12% but China 85%.
The following figures represent:
1. Continuous increase of PE/VC-backed IPO and finance condition
2. 50% of which IPO are on Shenzhen SME board and GEM
3. The rising of the A-stocks‘ market value as a percentage of GDP indicates the narrowing routes of IPO
The Question of Variable Interest Entities What is a Variable Interest Entity (VIE)? • Investment structure that employs contractual agreements to enable foreign
investment in Chinese sectors where it would otherwise be restricted. • 1,000s now used in a wide range of sectors (Internet, business services etc.) • Two frequent users:
- Chinese companies listing abroad (40+% of U.S.-listed cos. as of mid-2011) - PE/VCs
What’s changed? • Sept. 1 - China’s new national security review system for vetting foreign
acquisitions went into effect. • Article 9 prohibits foreign investors from circumventing national security
reviews by “any means” including “… trusts, multi-level investments, leases, loans, contractual control [and] offshore transactions.”
• Specific regulations addressing VIEs are thought to be under development. Implications? Not yet clear, but some intriguing questions: • How would new restrictions affect the pace of VIE-dependent offshore IPOs? • How will this affect funding in sectors heavily reliant on PE/VC financing?
7
Source: PRC Ministry of Commerce Provisions on Implementation of Security Review Systems Regarding Mergers and Acquisitions of Domestic Enterprise by Foreign Investors),, media
Financing pressure from reduced liquidity of foreign capital and domestic monetary stringency
• Monetary stringency meant investors are likely to hold on cash resulting in slowing investment progress.
• The ability of funds to raise capital will be sabotaged given such situation.
• Statistics shows operating net cash flow of 268 listed companies dropped 47% from RMB38.8bn in 2009 to RMB20.6bn in 2010. Increased expenses, inventory stagnation and difficulty in capital turnover put strain on cash positions of these companies.
• The following charts indicate a decrease in foreign currency funds since 2009, a year where RMB funds for the first time surpassed US Funds in fund commitment.
Lack of professionals brings risks and challenges to the funds: • China Venture report indicates a vacancy of 10,000
positions in the PE/VC industry. However, the industry’s short history of 10 years does not provide nearly enough experienced individuals. A large number of PE/VC partners have less-than-five years experience.
PE fund boom brought forward large amounts of unstandardized operations, undermining market practice.
12
Source: China Venture
Investment prospects for China’s seven new strategic sectors
Emerging Strategic Industry Plan China has extensive plans to develop seven strategic emerging sectors, targeting 8% of GDP by 2015, up from 3% in 2010; and 15% by by 2020.
What do you see as the key strength of China relevant to the long-term growth of the private equity market?
• Strong domestic economy • Large consumer market • Government structure and support for PE • Infrastructure growth / urbanization • Relative attractiveness versus other emerging markets • Don’t know / not applicable
Future Opportunities – Fund of Funds Birth of Fund of Funds (FoF) puts forward institutional investors and a middle man • Currently in developed countries, equity investment funds are seen in line
with banks and insurance companies as the three major financial institutions. 20% of equity investment fund’s capital come from FoF.
• The implementation of following policies encourages the growth of FoF in China:
1. In 2006, 10 industrial investment funds are approved for set up by the State Council;
2. In 2008, China’s Social Security Fund was approved for equity investments
3. In Oct. 2010, insurance companies are permitted to make direct investments in equity
4. In July 2011, 33 securities firm are approved to invest in PE.
Future Opportunities – Industry Integration Industry integration provides more M&A opportunities • National Association of Merger and Reorganization indicates a new record of
4,300 M&A transactions in 2010 with total transaction amount of up to US$200bn, an increase of 16% in number and 27% in amount from 2009
• IT, bio-med and clean tech are amongst the top industries for M&A
• Recent M&A transactions:
- COFCO joined hand with Hopu Investments in acquiring 20% of Mengniu Diary for HK$17.6 per share totaling HK$6.1bn, largest M&A deal in the food industry.
- In 2007 and 2009, a large U.S. PE participant in the Chinese market
transferred its ownership in Shuanghui to CDH resulting to CDH indirectly owning 25.36% of equity in Shuanghui. Dec 2010, reorganization of Shuanghui increased CDH’s interest in the firm to a market value RMB31.3bn, profitability of over 10 times of the original price.
In which industry sector do you expect to see the most deal activity over the next 12 months? • Consumer/retail • Clean tech • Pharma / biotech / healthcare • Technology, media & telecommunications • Other • Don’t know / not applicable
Diversified development of industry leading to different types of funds • Weizhe’s Jiayu Fund specialized investments in second hand and incomplete
projects which lack proper management to realize IPO, offering reorganization strategies to companies that have yet to recover from the financial crisis.
• PPP and PIPE: - Strategy of “PPP” Funds are to privatize Chinese public companies listed offshore
through acquisition. After a round of restructuring, the aim is to list these companies on domestic stock exchange. On Jul 25th 2011, Taurus Investment, Pingan Securities and Grandall Law jointly set up a PPP fund, which targets a initial closing of US$200M
- J.Rothschild Creat Partners joined with Beijing Municipal government in establishing an offshore RMB Fund to help Chinese companies for outbound investment
• Increasing number of PIPE funds which specialize in investing in public entities • Statistics show that in 2010, the net operating cash flow from 268 companies
have amounted to RMB20.6bn, 47% down from 2009 at RMB38.8bn. Increased expenses, inventory stagnation and difficulty in capital turnover put strain on cash positions of these companies. Investments by means of PIPE in listed companies can help alleviate the cash pressure.
20 Source: Zero2IPO Group, Deloitte analysis
Question and answer
Join us November 10 at 11 AM ET as our China Issues series presents: China Tax and Regulatory Update: Indirect Tax Credits and Refunds
This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.
About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.