Private Equity Trends in China - Deloitte

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

Copyright © 2011 Deloitte Development LLC. All rights reserved.

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• Recent PE/VC activity

• Investment prospects for China’s seven new strategic sectors

• Fund of funds and other future opportunities in China

• Question and answer

Agenda

Recent PE/VC activity

©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

1 Source: Zero2IPO Group, Deloitte analysis


Accelerated Growth in PE/VC Investments

1999-2010 geographical allocation for investee company

$580 $927

$528 $418

$992 $1,269

$1,173

$1,777

$3,247

$4,210

$2,701

$5,387

271

434

216

226

177

253 228

324

440

607

477

817

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

投资金额 (美元百万元)

投资案例 (家)

Investment volume (US$M)

Number of deals

Investment volume (million USD)

Eastern China

Southern China

Northern China

No. of deals

2

Source: Zero2IPO Group


PE/VC Fund Raise Indicates Sporadic Growth Pattern

$1,298 $639 $699

$4,067 $3,973

$5,485

$7,310 $5,855

$11,169

34 28

21 29

39

58

116

94

158

2002 2003 2004 2005 2006 2007 2008 2009 2010

新增资本量 (美元百万元)

新募基金数 (只)

Annual compounded growth rate：+ 29% in amount + 14.22% in no. of fund

Newly raised fund amount (US$M)

No. of new funds

3



Over the next 12 months, do you expect investment activity in the Chinese private equity market to increase, decrease or stay the same?

• Increase • Decrease • Stay the same • Don’t know / not applicable

Poll question #1


Current Challenges – Exit Routes

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

4

Source: Zero2IPO Group, Deloitte analysis


Increasing Number of PE/VC-backed IPOs

8

2 11

33 22

47

150

7 7

23

60

10

29

72

$1,269 $1,173 $1,777

$3,247 $4,210

$2,700

$5,386

-

20

40

60

80

100

120

140

160

-

20,000

40,000

60,000

80,000

100,000

120,000

2004 2005 2006 2007 2008 2009 2010

Total investment amount and capital raised through IPOs by VC/PE-backed companies

境内IPO筹资额(百万美元) 境外IPO筹资额(百万美元) 境内IPO数量境外IPO数量创投投资金额(百万美元) No. of offshore IPO

PE/VC investment amount (US$M)

No. of domestic IPO

Offshore IPO capital(US$M) Domestic IPO capital(US$M)

5 Source: Zero2IPO Group

IPOs Dominate Exit Deals Example of Q1 2011

5

1

1

1

4

5

6

7

7

8

9

12

13

16

23

0 5 10 15 20 25

Others

Entertainment & Media

Finance

Broadcasting & DTV

Constructing/Engineering

Electronic & Opto-electronics Equipment

Agr/Forestry /Fishing

Clean-tech

Energy & Mineral

Bio/Healthcare

IC

Chemical Raw Materials& Processing

IT

Internet

MachineryManuf acturing

Industry Breakdown of Exits (2011Q1)

118 (No. of Exits)

Option Breakdown of Exits (2011Q1)

118 (No. of Exits)

IPO, 110,93%

Others, 1,1%

SaleTrade, 3,

3%M&A, 4,3%

6




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

http://www.wilmerhale.com/files/Publication/8f2d5cf6-43fa-4756-b2ab-239a2d6426c6/Presentation/PublicationAttachment/fe04cadd-dde0-4f3c-973c-2d0cc0f75ab9/MOFCOM Regulations.pdf

http://www.wilmerhale.com/files/Publication/8f2d5cf6-43fa-4756-b2ab-239a2d6426c6/Presentation/PublicationAttachment/fe04cadd-dde0-4f3c-973c-2d0cc0f75ab9/MOFCOM Regulations.pdf


What do you expect to be the most common exit route for private equity deals over the next 12 months?

• Domestic listings • Overseas listings • Trade sales (M&A) • Don’t know / not applicable

Poll question #2


PE/VC-backed IPOs Stock Exchange Analysis (2000-2011)

FWB <1%

KOSDAQ <1% London AIM

<1%

NASDAQ 8% NYSE

8%

SSE 5%

Shenzhen GEM 22%

Shenzhen SME 34%

HK GEM <1%

HKSE 16%

Singapore Catalist

1%

SGX 4%

VC/PE-backed IPOs by Exchange 2000-2011

29.50%

48.50%

39.70% 31.90%

31.30%

23.20%

17.60%

42.20%

127.10%

40.40%

72%

66%

9.20%

16.20% 13.20%

10.40% 9.70%

7.30% 5.80%

11.80%

36.20%

15%

45%

58%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

A股市值/GDP

A股流通市值/GDP

Market value of A-stock/GDP

Circulated A-stock value /GDP

8



Current Challenges – Financing Pressure

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.

9



Capital Raised by RMB and Foreign Funds

7 6 9

17 23 22 21

10 12 18 21 12 12 14 32 87 84

146

0

1500

3000

4500

6000

7500

9000

10500

12000

13500

15000

16500

18000

2002 2003 2004 2005 2006 2007 2008 2009 2010

外资创投募资 (百万美元) 本土创投募资 (百万美元) 新设外资基金 (只) 新设本土基金 (只)

Capital raised by foreign fund (US$M) Capital raised by RMB fund (US$M) No. of new foreign fund No. of new RMB fund

10


Investment Distribution by Currency (2011 Q1) 232 (No. of Deals)

Investment Distribution by Currency (2011Q1) 1,928 (Investment Amt., US$M)

RMB vs. Foreign Funds

RMB, 143,62%

ForeignCurrency,68, 29%

Undisclosed, 21, 9%

RMB,917.28,

48%Foreign

Currency,1011.14,

52%

11

Led in Terms of No. of Investment Deals in 2011 Q1, but with Less Average Investment Amt.




Current Challenges – Rapid Growth

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.

Seven Strategic Emerging Industries Expected Investment

Energy Efficiency & Environmental Protection RMB 3 trillion by 2015

Next-generation IT RMB 1 trillion to be invested in IT by 2014

Pharma & Biotech 2009-2011, planned RMB 850 billion in investments for health care system reform

High-end manufacturing RMB 1.5 trillion target by 2015

New Energy

RMB 5 trillion in total by 2020: - RMB 3 trillion for hydropower, wind

power, nuclear power, solar energy; - RMB 1 trillion for smart grid; - RMB 1 trillion for new energy vehicles, clean

coal etc.) RMB 4.5 trillion for rail and subways by 2015

New Materials RMB 750 billion by 2015

New Energy Automotive Up to RMB 1 trillion by 2020

13 Source: PRC State Council

Source of funding?


Clean Tech – A Leading Sector of Interest

26

10

1

1

2

3

3

4

4

5

5

5

6

6

6

9

11

13

14

15

15

23

45

0 10 20 30 40 50

Undisclosed

Others

Food & Drinks

Logistics

Broadcasting & DTV

IC

Finance

Education & Training

Chain Retail

Textile & Clothing


Agr/Forestry/Fishing

Energy & Mineral

Automobiles


Bio/Healthcare


Telecom & Value-addedServices

Clean-tech

IT


Machinery Manufacturing

Internet

10843

4571017172326334041435961

8690

110117

142154

693

0 100 200 300 400 500 600 700 800

Undisclosed

Others

Logistics

Food & Drinks

IC

Broadcasting & DTV


Agr/Forestry/Fishing

Finance

Textile & Clothing

Telecom & Value-addedServices

Bio/Healthcare

Chain Retail

Education & Training



Machinery Manufacturing

IT

Clean-tech

Energy & Mineral


Automobiles

Internet

Industry Breakdown of PE/VC Investments (2011 Q1) 232 (No. of Deals)

Industry Breakdown of PE/VC Investments (2011 Q1) 1,928 (Investment Amt., US$M)

14 Source: Zero2IPO Group


PE/VC Activity by Clean Tech Sub-Sector

• Leading sub-sectors since 2007: solar (US$1.23 billion invested), transport (US$1.16 billion) and energy efficiency (US$1.10 billion).

• Largest China deal for 2011Q2 was a solar deal (US$36 million).

Disclosed China PE/VC investment value, by sub-sector (2007Q1-2011Q2)

Agriculture

Air and environment

Biofuels and biomaterials

Energy Efficiency

Energy Storage

Materials

Other

Recycling and Waste

Smart Grid

Solar

Transportation

Water and Wastewater

Wind

Source: Clean Tech Group

15


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

Poll question #3


Source: Media sources, Cleantech.com and Quarterly Cleantech Investment Monitor

Recently Announced Funds Focusing on China Clean Tech

Fund Date Size Mgmt Investment focus

China Clean Tech Partners

Sept. 2011 $200 million JV between UK and

Beijing-based PEs

Privately-held companies in the water, alternative energy, environmental remediation and energy storage & distribution sectors.

Suzhou ABC Venture Fund

Sept. 2011 RMB 1billion Shanghai-based PE Clean energy, advanced manufacture and

biotechnology.

Hudson (Yanghzou) Clean Energy Equity Investment Fund

Sept. 2011 RMB ?

NY-based clean tech PE and city of

Yangzhou

Solar, wind, and biomass projects in Yangzhou (Jiangsu province) ; US$20-50 million deals is its “sweet spot”

Blue Ridge Zijin Equity Investment Funds

June 2011 RMB 5 billion NY-based hedge fund Renewable energy, new materials and other

growth sectors.

AgBank (Wuxi) Private Equity Fund

June 2011 RMB 15 billion State-owned bank and

city of Wuxi High-growth sectors such as energy efficiency in Wuxi (Jiangsu Province)

SinoGreen Fund May 2011 $100 million Taiwan-based PE Clean technologies across China – 65% early

stage companies and 35% start-ups.

China Clean Energy Fund

May 2011

$500 million JV by German bank

and Tianjin Binhai High Tech Industrial Zone

Companies engaged in clean energy, environmental resource management, energy and material in Tianjin and other Chinese cities

16


China Drives the Global Clean Tech IPO Market

7

63

15

10

7

10

25

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2010

North America

Other

Europe

China

1.56

9.97

7.94

4.06 1.94

1.06 1.64 1.25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2010

North America

Other

Europe

China

63 IPOs with RMB 65 billion (US$10 billion) raised in 2010.

Source: Clean tech Group, Deloitte Analysis

Number of Clean Tech IPOs Amount Raised by Clean Tech IPOs

93 54 US$13B US$16B

17

Fund of funds and other future opportunities in China


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.

18



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.

19



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

Poll question #4


Future Opportunities – Industry Diversification

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

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• Gary Chan [email protected] + 86 (21) 6141 1318

• Chris Cooper [email protected] +1 408 704 2526

• Jennifer Qin [email protected] + 86 (10) 8520 7131

Contact info

mailto:[email protected]




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Private Equity Trends in China - Deloitte

Economy & Finance

Transcript of Private Equity Trends in China - Deloitte