20160426 GC PE report Prez EN Final - Bain

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2HKG 20160426_GC PE report Prez_EN_Final

2015 was another blockbuster year for Greater China, with deal value and volume at record level- Market has evolved through four stages in the past 16 years- Surge of multibillion deals; Internet sector and buy-out (especially take-

private deals) as main growth drivers While market environment became more challenging,

investment multiples were up modestly- Decline in Greater China-focused fund-raising- Exits declined significantly in second half of 2015 given volatility in public

market- Increased participation from institutional investors

China is entering era of “new normal,” calling for differentiated strategy for investors- Unlikely for 2016 to reach similar level of activities as 2015- Wealth-&-health-driven consumption, selected subsectors in Internet,

“Made in China 2025,” and outbound M&A remain attractive- GPs need to enhance capabilities to create value through transformation

and performance improvement

Summary


INVESTMENTS FUND-RAISINGEXITS

2015 was another strong year for global buyouts

Sources: Dealogic; Preqin


Amid global turbulence, Asia-Pacific PE remained strong in 2015, especially deal making

Deal valueDeal count

Exit valueExit count

DEAL VALUE SOARED TO A NEW RECORD

EXIT VALUE REMAINED ROBUST

FUND-RAISING TRACKED THE HISTORICAL AVERAGE

Note: Real estate and infrastructure funds are excluded in the three graphsSources: AVCJ; Preqin


PE market in China has evolved through four stages in the past 16 years

*excludes real estate and infrastructureSource: AVCJ

Golden days for “growth capital” Financial crisis and RMB 4 trillion stimulus

Austerity campaigns

Surge of Internet


The PE market in Greater China had another blockbuster year in 2015, with 56% increase in deal value

56%154%



0

50

100

$150M

5-year average(2010-14)

10

72

11

82

12

94

13

59

14

115

15

142

Greater China averageinvestment deal size*

5-year average(2010-14)

68%

2015 vs.2010-14(average)

A surge of multibillion deals pushed average deal size significantly higher than historical average

INVESTMENT DEAL COUNT BY SIZE

0

20

40

60

80

100%

10

328

11

381

12

236

13

255

14

387

15

488

4 4 2 2 7 14Numberof deals>$1B

Greater China investment deal count by size*

268%92%

136%136%

101%

22%

28%

2015 vs.2010-14(average)


>$1B $500M-$1B $200-$499M $100-$199M$50-$99M $25-$49M $10-$24M

AVERAGE INVESTMENT DEAL SIZE


Buyout deals, especially take-private deals, are driving growth

DEAL VALUE BY TYPE

0

20

40

60

80

100%

10

24

11

31

12

22

13

15

14

44

15

69

Greater China investmentdeal value by type* ($B)

573%

60%

35%

651%

2015 vs.2010-14(average)

419%

-15%

20%

250%

CAGR(2014-

15)

*excludes real estate and infrastructure **growth deals include mezzanine, pre-IPO, growth and expansion deals; ***other includes bridge loans, start-up and turnaround dealsSource: AVCJ

Buyouts Growth** PIPE Other***

PUBLIC TO PRIVATE (P2P)


The Internet sector accounts for about 40% of deal value and about half of all deals in 2015

Notes: Excludes infrastructure and real estate deals; Internet deals include e-commerce, O2O, Fintech, online education, online media and entertainment, and online healthcareSource: AVCJ

0

20

40

60

80

100%

2011

381

2012

236

2013

255

2014

387

2015

Inter-net

Othersectors

488

-6%

37%

CAGR

69 40 74 142 242Internetdeal count

Number of Greater China deals (deals >$10M)

(2011-15)

0

20

40

60

80

100%

2011

$31B

2012

$22B

2013

$15B

2014

$44B

2015

Inter-net

Othersectors

$69B

12%

54%

Greater China deal value (deals >$10M)

(2011-15)CAGR


Within the Internet sector, e-commerce and O2O services were the most active subsectors

INTERNET DEAL COUNT INTERNET DEAL VALUE

0

100

200

300

2011

69

2012

40

2013

74

2014

142

2015

242

61%

125%

135%

116%4%

145%82%

(2013-15)CAGR

Greater China PE/VCInternet deal count bysector (deals >$10M only)

0

5

10

15

20

25

30

35

Internetdeal value by sector($B, deals >$10M only)

2011

5

2012

4

2013

2

2014

7

2015

28

144%

406%

288%353%85%1%

449%

(2013-15)CAGR

Note: Exits and investments with announced deal value >$10M onlySource: AVCJ

E-commerce O2O services Fintech Education HealthcareMedia/entertainment Other

Driven by ~$7B investment in

Qihoo 360


Greater China-focused fund-raising declined by 32% in 2015, especially for RMB funds

Number of funds

Average size ($US M)

*excludes real estate and infrastructureSource: Preqin


IPOs were still the preferred exit type, but public equity sell-offs in 2H15 caused the exit activities to decline

0

10

20

30

$40B

Q1

4

Q2

12

Q3

9

Q4

3

Q1

4

Q2

6

Q3

4

Q4

5

Q1

7

Q2

7

Q3

34

Q4

11

Q1

7

Q2

21

Q3

8

Q4

11

Greater China PE exit value by quarter*

2012

VALUE BY QUARTER VOLUME BY QUARTER

2013 2014 2015

0

20

40

60

80

Q1

50

Q2

48

Q3

57

Q4

25

Q1

34

Q2

32

Q3

23

Q4

39

Q1

61

Q2

44

Q3

55

Q4

59

Q1

58

Q2

72

Q3

26

Q4

39

Greater China PE exit volume by quarter*

2012 2013 2014 2015

*excludes real estate and infrastructure Source: AVCJ

IPO Trade Secondary

Includes $25B

Alibaba IPO


Valuations continued to increase in 2015 …

GREATER CHINA

Notes: Equity contribution includes contributed equity and rollover equity; based on pro forma trailing EBITDA; for the Asia-Pacific region, based on PE-backed M&A transactions where there is a transaction value; these M&A transactions exclude extreme multiples (<1 or >100)

Source: S&P Capital IQ

ASIA-PACIFIC REGION


… but valuations are perceived as being more attractive recently due to the sell-off in the public market

“WHAT IS YOUR PERSPECTIVE ON VALUATIONS OF POTENTIAL TARGETS IN THE ASIA-PACIFIC REGION?”

Jan-

15

Jan-

16

Jan-

15

Jan-

16

Jan-

15

Jan-

16

Jan-

15

Jan-

16

Jan-

15

Jan-

16

Jan-

15

Jan-

16

Sources: Asia-Pacific PE survey 2016 (n=125); Asia-Pacific PE survey 2015 (n=145)


Emergence of institutional investors has increased the number of active players

ACTIVE PLAYERS IN THE MARKET PLAYER TRENDS

*excludes real estate and infrastructure **an active player is someone who made an investment in the respective yearSource: AVCJ


Institutional investors are gaining importance, participating in more than half of the top 20 deals in 2015

Deal targetValue $US

millionsInstitutional investors

Qihoo 360 7,140

• Ping An

• Sunshine Insurance

• Taikang Life Insurance

China Internet Plus Holding 3,300

• Tencent

• China Development Bank

• CICC

WuXiPharmaTech 3,119

• Ping An

• Shanghai Pudong Development Bank

Momo 3,029 • Huatai Zijin (under Huatai Securities)

China Network Systems (Taiwan)

2,300 • Far EasTone Telecommunications

CITIC Securities 2,189

• Yunfeng Capital (under Alibaba)

• Harvest Fund Management

Didi Kuaidi 2,000

• Tencent

• Alibaba

• Ping An Ventures

CMC Holdings 1,582• Alibaba

• Tencent*excludes real estate and infrastructureNote: Deals with transaction value >=$400M includedSource: AVCJ

INSTITUTIONAL INVESTORS PARTICIPATED IN 14 OUT OF TOP 20 DEALS

SELECT INSTITUTIONAL INVESTORS IN THE TOP 8 DEALS

0

5

10

15

20

Number of deals

Participated in byinstitutional investors

Other

20

Greater China (number of dealsparticipated in by institutional investors)


Market expects GDP growth to further slow down afterward

Sources: National Bureau of Statistics of China; World Bank; OECD; IMF; The Economist; analyst reports

Market view

China GDP growth projection

(2015-16F) (2016 onward)

Market view 6.3-7.0% 5.3-6.9%

“Along with many other analysts, we believe the potential (or ‘trend’) growth of the Chinese economy is slowing … contributions from labor, capital and total factor productivity are likely to see slower growth in coming years.”

Goldman Sachs, China Report, August 2015

“The slowdown … reflects progress in addressing vulnerabilities, including slower total social financing growth, tighter oversight of shadow banking, correction in real estate and a new budget law … GDP growth should be permitted to slow to 6% to 6½% next year.”

IMF Country Report on China, August 2015

“Consumption to GDP will continue to increase, but there will be a gradual, more moderate growth trajectory.”

China Economic Update 2015,World Bank


Despite challenging macro outlook, Greater China is still viewed as the most attractive market

“WITHIN THE ASIA-PACIFIC REGION, WHAT COUNTRIES WILL BE THE MOST ATTRACTIVE MARKETS FOR NEW DEALS IN THE NEXT 12 MONTHS?”



0

20

40

60

80

100%

Greater China funds on change in deal activity

Significantincrease(>25%)

Slightincrease(10-25%)

No significantchange

Decline

GPs have softened their optimism, with concerns over economic downturn, competition, sourcing and valuations

Factors Greater China

Macroeconomic conditions 62% 73%

Regulation 15% 13%

Other sources of capital 8% 20%

Financing cost & interest rate 0% 20%

Difficulty fund-raising 8% 0%

Investment professionals 8% 7%

Deal opportunities 38% 20%

Valuation expectations 38% 40%

Competitive intensity 54% 53%

Promoter acceptance of PE funds 15% 7%

Exit environment 23% 13%

Asset bubbles 15% -

January2015

January2016

“DO YOU EXPECT A SIGNIFICANT PICKUP IN DEAL ACTIVITY IN YOUR MARKETS IN YEAR AHEAD COMPARED WITH PREVIOUS YEAR?”

“WHICH OF THE FOLLOWING DO YOU THINK WILL BE A CHALLENGE IN YOUR MARKET?”

Percentage of mentions of various key challenge factorsBold: Top factors that will drive changeBlack: Factors that will drive change (2016 survey)Blue: Factors that will drive change (2015 survey)



GPs are expecting fund-raising to be more challenging, as well as several key challenges for exit activities

“HOW DO YOU EXPECT THE FUND-RAISING ENVIRONMENT TO CHANGE IN YOUR

RESPECTIVE MARKETS IN 2016?”“WHICH OF THE FOLLOWING DO YOU THINK WILL BE A CHALLENGE IN YOUR MARKET?”

0

20

40

60

80

100%

Greater China PE funds on expected change infund-raising environment

Getsignificantlybetter

Get somewhatbetter

Remain as is

Get somewhatmorechallenging

Getsignificantlymorechallenging

January2015

January2016

Factors Greater China

Change in macroeconomic environment 73% 29%

Evolution in valuations 55% 29%

Modification of capital market/IPO environment 82% 21%

Change in secondary sales environment 18% 0%

Evolution in corporate cash reserves 18% 14%

Pressure to exit and return invested capital to LPs 27% 14%


Percentage of mentions of various key challenge factorsBold: Top factors that will drive changeBlack: Factors that will drive change (2016 survey)Blue: Factors that will drive change (2015 survey)


Information technology (IC chips, telecom equipment, industrial OS & software)

Several industries are expected to deliver strong growth under “new normal” EXAMPLE INDUSTRIES

Online/offline convergence

Wealth-&-health-driven consumption “Made in China 2025”

Green technology

Online retail/ platform/O2O

Internet financialservices

Internet-related logistics/ transportation, etc.

Healthcare(online & offline)

Wealth & asset management

Agribusiness (Healthy/premium food)

Robotics & CNC equipment

Electric vehicles (EV) & components

Pharmaceutical & medical devices

Tourism

Sources: Bain & Company


Surge in outbound PE deals is likely to continue

0.0

2.5

5.0

7.5

10.0

12.5

China PE outbound investmentsdeal size ($US billions)

2013

2

2014

7

2015

11

143%

(2013-15)CAGR

61 73 69Deal count

~30-50 ~80-100 ~150-170Averagedeal size($US M)

*Total deal size only includes deals with value announced**Technology includes computer hardware/software, electronics (e.g., semiconductors), etc.; other includes agriculture, ecology and services, etc.Sources: AVCJ; Bain analysis

0

20

40

60

80

100%

China PE outbound investmentsbreakdown by sector ($US billion)

2013

Technology

Internet

CPR

Healthcare

FSIndustrialOther

2

2014

Technology

Internet

Consumerproductsand retail

Travel andhospitality

Healthcare

FS

Industrial

Other7

2015

Technology

Internet

Healthcare

FS

IndustrialOther

11

CHINA PE OUTBOUND DEAL SIZE INCREASED*

WITH INVESTMENTS FOCUSED ON TECH AND INTERNET SECTORS**


High

LowLow High

Cos

t/ca

sh u

psi

de

• Value creation mainly from financial engineering- For example, de-leverage, debt

restructuring, gap between entry and exit valuation

- Future evolvement also dependent on exit environment and capital markets

• Topline and earning growth relied heavily on industry tailwinds and new geographies, products and capacity expansion, as well as buildup of new capabilities and assets

• Earning growth from operational improvement, execution excellence and organizational enablers

• The combination of strategic, operating, organizational and financial tactics will improve topline and earning growth

Differential growth upside

Growth capitalArbitrage plays

More transformation and performance improvement deals are expected…

TransformationPerformance improvement

Future trend of deal value %Sources: AVCJ; Bain analysis


…calling for different focus and capabilities

Sector focus

Portfolio

Diligence

Organization

BEFORE “NEW NORMAL” UNDER “NEW NORMAL”

• Opportunistic in sector selection, as attractive growth is a “given” in the underlying market

• Despite increasing awareness of value creation, GP’s impact on portfolio companies’ strategy,operations and organization still limited

• Deal thesis mainly focused on growth, or land grabbing;operational improvement a lower priority

• Many GPs have started to build portfolio team but their capabilities vary

• Many sectors will see much slower growth; therefore, critical to pick the winning sectors

• More sector expertise and relationships required

• Many portfolio companies require “re-diligence” to confirm or revise the original thesis

• When needed, more hands-on to steerstrategic and operational path

• Growth no longer the primary thesis• Thesis (hence diligence focus) should

pivot toward operational improvement or turnaround opportunities

• Stable, sector-focused investment team with in-depth expertise

• Invest disproportionately in portfolio management team and operational improvement capabilities

Sources: Bain & Company


Market definition

•Includes:-Investments and exits with announced value of more than $10 million-Investments and exits in Asia-Pacific region (Greater China=China, Taiwan, Hong Kong; India; Japan; South Korea; Australia and New Zealand; Southeast Asia=Singapore, Indonesia, Malaysia, Thailand, Vietnam, Philippines, Laos, Cambodia, Brunei, Myanmar; other Asia-Pacific)

-Investments with closed, agreement-in-principle or definitive agreement status

•Excludes:-Bridge loans, franchise funding, seed/R&D deals-All non-PE/VC deals (M&A, consolidation)-Real estate and infrastructure (airport, railroad, highway and street construction, heavy construction, ports and containers, and other transport infrastructure)

20160426 GC PE report Prez EN Final - Bain

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