Green Finance Leading the Future of the Industry

The business models of the five major super-size PEs, Jiuding, Goldstone, Citic, Pingan, Heaven-sent etc.

(A) Jiuding Investment 

 

1.  It started mainly as an opportunistic Pre-IPO, and has turned to focus on healthcare industry for investment since 2009.

 

Jiuding Investment was established in 2007.  The founders of the company were officials from SFC and middle management from security companies.  They were interested in the arbitrage opportunity in the primary and secondary markets.  They conducted many Pre-IPO projects and they were successful. During their business expansion, Jiuding set up over 50 offices throughout the country to seek business opportunities, but it didn’t segment business by industry. After 2009 when the whole nation entered the PE era, the competition for quality projects became intense.  Contribution from the 50+ offices around the country began to drop. Then Jiuding started to focus on specific industries.  Based on its experience in investments and judgement on development potentials, the company decided to focus on the healthcare industry by hiring professionals with experience and resources in medical industry to form a ‘supporting team for development’, mainly to supply project resources during developing and to provide expertise during negotiation. Every single fund under Jiuding is not large, with average funding size around RMB 260 million, on 2.3 investment projects.

 

2.  Five founding partners are in charge of different aspects of the PE

 

Partner Huang Xiaojie is in charge of fund-raising and PE Wealth centre;  Jiuding local teams (outside the HQ in Beijing) have both the function of local fund-raising and project development (i.e. seeking appropriate investment targets); due to the local teams lacking professional abilities, during the negotiation with the target company, the supporting development team will get involved - apart from a specialised medical team, a professional development supporting team, Jiuding doesn’t have other dedicated development supporting teams internally for other industries.  The investment team will step in to provide support when needed.  Cai Lei manages the investment teams with people under her who are dedicated to project research, due diligence, trading price and terms negotiation.  After agreement reached, the case would be submitted to investment decision making committee with Wu Gang responsible for risk control in person.  After a formal contract is signed, the company would be handed over to partner Tan Zhengyu and his post-investment management team.

 

3.  The ‘Jiuding + experts’ model of partnership requires further observation

 

In order to alleviate the impact of IPO standstill and the exodus of core team, Jiuding started to explore a new business model in 2014 – the ‘little giant’ plan. It allowed the company and resourceful professionals to jointly establish an investment management company to focus on the investment management of a certain segment. Under the prerequisite of Jiuding having controlling equity and conducting unified risk control, the investment team could contribute and hold 30-49% of equity. After the ‘little giant’ company reached a certain level of performance, the team could continue to increase the shareholding proportion. During the process of investment operation, Jiuding woud assist in fund raising and provide systematic support including project resources. In July, Jiuding set up three investment management companies with experts from different industries.  Jiuding contributed capital amounting RMB 3.25 million, 1.3 million and 3.5 million for 65%, 65% and 70% of registered capital respectively, focusing on early project investment of pharmaceutical and healthcare industry, pharmaceutical and healthcare M&A investment and energy industry M&A investment. However, experts commented that professionals collaborating with Jiuding tend to learn about the entire process of ‘fund-raising, investment, management and exit’ and choose to work on their own, therefore the effectiveness of such business model needs further observation.

 

(B) Goldstone Investment 

 

1. Management of two major funds of PE and M&A, with fund-raising targeting institutional investors

 

Goldstone Investment is a direct subsidiary under CITIC Security, and it was approved to start fund management business in 2012. Goldstone Investment adopts the ‘large fund’ model, i.e. only establishing one fund in one category of investment business. So far they launched two funds, CITIC Goldstone Investment Fund (2012) and CITIC M&A Investment Fund (2012). Goldstone Investment Fund mainly focus on five major strategic industries - equipment manufacturing, financial service, energy and mining, consumer goods, pharmaceutical and healthcare etc. to conduct private equity investment fund raising (mainly pre-IPO), with planned fundraising around RMB 8-10 billion (actual fund raised unknown). Target scale of CITIC M&A fund is RMB 10 billion, and by the end of 2013, they have received committed paid-in capital of RMB 3.6 billion already. Within Goldstone Investment, there is a dedicated fund raising department. Based on SFC requirements, Goldstone Investment can only target institutions for fund raising, and many investors are listed companies. As the direct subsidiary of CITIC Security, Goldstone Investment has strong fundraising ability with a good investment history, and is well recognised by institutional investors.

 

2.  Focusing on M&A business and participating in industrial integration by jointly acquiring targets with listed companies

 

Due to the increasing difficulty in exiting IPO projects, Goldstone Investment has turned to focus on M&A businesses. Its main business model is to let the Goldstone M&A team and the listed company jointly acquire the target, with Goldstone M&A Fund having shares no more than 50% on its own, as the largest or second largest shareholder, and controlling together with the listed company partner.  It exits by restructuring for going public or selling. In the M&A business, the listed company partner is mainly responsible for the target choosing and post-merger integration, while the role of Goldstone Investment is to provide equity and liability type of funding support for the listed company during different stages of M&A.

 

(C) CITIC Trust

 

1.  Dedicated department and platform company for PE investment business

 

CITIC Trust conducts its asset management business through two investment platforms, CITIC Kingview Capital Management Co., Ltd. (‘CITIC Kingview’) and CITIC Ju Xin Capital Management Co., Ltd. (‘CITIC Ju Xin’). CITIC Kingview was established in 2005 with registered capital RMB 50 million, and is the platform company for CITIC Trust to conduct its PE businesses which are mainly around Pre-IPO and listed companies. Businesses mainly include Pre-IPO, strategic placement of want-to-be listed companies and private placement of listed companies. CITIC Kingview business team is also a subsidiary trust department under CITIC Trust (i.e. the same team operates under two names), and the team leader used to work for top Chinese securities and IBs including CITIC Securities, Guosen Securities, China Merchant Securities etc.. Most projects come from the referral from CITIC Group and CITIC Securities. In terms of business models, CITIC Kingview adopts the ‘small fund’ model with one to two projects per fund, and invests through a limited partnership company with CITIC Kingview as GP.

 

2. Setting up a platform company, but no special department to conduct industrial investment business

 

CITIC Ju Xin was established in 2012 with registered capital of RMB 20 million, and is the platform company for CITIC Trust to conduct its industrial investment businesses.  Its main model is to form a fund management company jointly by CITIC Ju Xin and the industry party, and together as GP to set up industrial fund investment. The fund management company uses partnership format, with no single party having controlling power.  The industrial side provides project resources, operational experience and capital operation experience, while CITIC Trust provides financing. CITIC Trust has so far launched multiple industrial investment funds together with industrial organisations from real estate, coal resources, energy saving resources, coalbed methane, private railway, metallurgy, creative culture etc. In terms of business models, CITIC Trust did not set up a special department to focus on the development and management of industrial funds, but rather relying on individual trust business units to launch and management funds based on own resources.  CITIC Ju Xin is only a platform company for conducting businesses.

 

(D) Ping An Innovation Capital

 

1. PE business initially focused on Pre-IPO, now is focusing on FoF co-investment.

 

By November 2013, PE business of Ping An Trust had an existing size of over RMB 20 billion, covering mainly FOF, M&A and Pre-IPO businesses. The early PE business was largely Pre-IPO, while now FOF is the powerhouse of Ping An Innovation Capital with a dedicated team, but mainly focusing on follow-on funding with total investment of RMB 10 billion, about 50% of the entire PE business. Ping An Trust treats M&A with a focus on quality.  Major targets include SOE reform, acquisition of controlling stake, equity merger of industry leaders etc.. Since quantity is not the focus, only 1 new project is added every year.  At the moment, the existing projects are XJ Electric and Shanghai Jahwa. Unless there are special social resources, Pre-IPO business from major corporations are difficult to obtain.  Hence Ping An Trust has very few such projects, with single project investment between RMB 200-500 million.

 

2. The company has a specialised PE trader team with clear segmentation by industry and established assessment mechanism

 

Ping An Innovation Capital has around 100 people in total, a business unit at the same level as the trust department of Ping An Trust. The entire unit is made up of 11 specialised teams, to focus on industries such as consumer goods and chains, high-end manufacturing, modern services, healthcare, media, energy and mining, M&A, Mezzanine finance etc. Each industry line is relatively independent, with only project information referral across industry lines. No fixed job description for staff in the PE unit of Ping An Trust, therefore each position is able to look for and launch projects. The assessment of PE teams is based on ‘pay as you go system’, i.e. benefits are allocated according to the actual funding received by the company. The benefits include equity dividends, management fees, sales expenses etc. There are also favourable policies from the company (different from the ratio of performance ratio of the financing business), the assessing indicators of PE teams are largely on long-term results, including investment scale, return on capital etc..

 

(E) Heaven-sent

 

It invented the model of ‘PE + listed company’, one customised fund for one company.

 

Many senior executives in Heaven-sent have serious industrial background, and most of them have worked as senior executives in listed companies or industrial groups, with expertise in certain industrial areas. Therefore, Heaven-sent is different from traditional PEs.  When working with listed companies the traditional PEs only allow the listed companies to be LP.  Heaven-sent however has natural advantage in M&A enabled by its industrial background.  Its ‘PE + listed company’ model from the very beginning was targeting one single listed company to achieve industrial integration with upstream and downstream businesses.  There are two specific models:  one is to form an M&A fund together with the listed company (referred as ‘M&A model’); the other is to stake in the listed company (referred as ‘stake-in model’).

 

 

In M&A model, Heaven-sent and the listed company would normally both have certain proportion of investment, with the remaining funding raised by Heaven-sent, to form a partnership company for industrial M&A, and conduct acquisition of the target through this M&A fund.  Heaven-sent is responsible for choosing the target, conducting asset evaluation, transaction pricing, designing exit terms and control of the entire project; while the listed company is responsible for the operational management of the project. M&A target woud then be ‘installed’ into the collaborating listed company at an agreed time, and Heaven-sent completes the exit.

 

The Stake-in Model is an upgraded version of the M&A model, i.e. ‘M&A first and stake-in second’.  After selling the target to the listed company for a profit and use part of the profit to invest in the listed company through private offering of additional shares or buy-in, it becomes a minority shareholder of the listed company for sharing its future profits. It can also work as ‘stake-in first and M&A second’, to become a minority shareholder of the listed company first, in order to provide strategic development planning and M&A services to the listed company. Through this model, Heaven-sent can benefit in more diversified and visible ways.  Total benefits come from three sources: the financial consulting fee to assist the listed company to carry out the M&A, the integration of the target with the listed company and finally the equity shareholding of the listed company.  After M&A process value of shares would generally have a significant increase.