private equity trends in china - deloitte
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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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Copyright © 2011 Deloitte Development LLC. All rights reserved.
• 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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group
Copyright © 2011 Deloitte Development LLC. All rights reserved.
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group, Deloitte analysis
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group
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.
Source: Zero2IPO Group
Copyright © 2011 Deloitte Development LLC. All rights reserved.
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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?
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
Constructing/Engineering
Agr/Forestry/Fishing
Energy & Mineral
Automobiles
Entertainment & Media
Bio/Healthcare
Chemical Raw Materials& Processing
Telecom & Value-addedServices
Clean-tech
IT
Electronic & Opto-electronics Equipment
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
Entertainment & Media
Agr/Forestry/Fishing
Finance
Textile & Clothing
Telecom & Value-addedServices
Bio/Healthcare
Chain Retail
Education & Training
Constructing/Engineering
Chemical Raw Materials& Processing
Machinery Manufacturing
IT
Clean-tech
Energy & Mineral
Electronic & Opto-electronics Equipment
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
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
Copyright © 2011 Deloitte Development LLC. All rights reserved.
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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group, Deloitte analysis
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
Source: Zero2IPO Group, Deloitte analysis
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
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
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