Excerpts: Foreign Private Equity Investors in China

• That competition ranges from small PE firms and funds like Hopu, founded by Goldman Sachs China financial wizard Fang Fenglei, which just invested around US$800 million (of the US$2.5 billion it raised from overseas investors) in dairy giant Mengniu and is also planning to raise a domestic PE fund.
• For one thing, SOEs get access to preferential bank loans, obviating one of the major uses of a PE investment. Now, the pressure is on foreign PE investors to demonstrate to the SOEs’ numerous stakeholders – from government bodies to senior executives – that they have much more than money to put on the table.
• Arguably worse than that, he says, was that Carlyle’s executives believed the government would embrace the deal and what the firm’s brand name could bring to China. “When it comes down to it,” the expert says, “Carlyle was only providing money.”
• “A big problem with SOEs is that valuation is a struggle,” notes another PE investor. SOEs may use discounted cash flow (DCF) or price to earnings (P/E) as references, “but they often use an overstated book value instead of looking at earnings generation.”
• It was the first time that a foreigner ran a modern Chinese bank — namely John Langlois, formerly of Morgan Stanley, who sat on the boards of both Shanghai Bank and Nanjing City Commercial Bank. And while Newbridge didn’t succeed in all of its goals, the future still looks bright — Ping An Insurance Group is in talks to buy the bank, and there is speculation that Newbridge could make five times its initial investment.
• In 2007, KKR invested US$112 million in Tianrui Cement, one of China’s top cement manufacturers. Li Liufa, the entrepreneur who built up the company, fired top managers with whom KKR had forged goodwill, throwing off the relationship.

Source: University of Pennsylvania