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China Great Economy
Too Often a Disappointing Investment Destination
HBS Alumni Webcast, September 2017
Presented by: Peter Fuhrman, Chairman & CEO of China First Capital
Pervasive, shape-shifting and
enveloping regulatory
environment
Though its major goal isn’t to
prevent outsiders from
making money here, that is
often the ultimate outcome
www.chinafirstcapital.com
Challenges Currency
IPO & Capital Markets
M&A
“Guifan” What Are the Rules
& Who Follows Them?
¥
Many domestic companies are
doing great. Are the spoils
reserved for locals?
www.chinafirstcapital.com
Barbarians Climb the Wall
In a decade between 1995-2005, China moved
from capital-starved to capital-excess
Early on, global PE and VC firms cleaned up in
China. Stealing the baby’s candy. Many 5-10X
investment successes by US giants --
Blackstone, Carlyle, Goldman, Bain, TPG
Lulled into false sense of over-confidence. They
raised far more than they can now easily deploy
Today, the global giants are often sidelined. Like
deposed royalty? Rich, nostalgic, melancholy
and idle
The Bygone Golden Era
www.chinafirstcapital.com
RMB Funds Overwhelm Dollar Funds, Driving High Valuations and Herd Behavior
Is there a word in Chinese for “contrarian”?
“Value Add” Takes On New Meaning Bureaucratic fixers and bagmen. “Good or bad, our
portfolio companies will rise to the top of the long
China IPO queue. We print and keep the winning
lottery tickets”
Only One Way Out Pre-IPO investing in pursuit of valuation arbitrage
LPs unlike any others Often government-linked LPs, putting capital to
work not for IRR but in service to national goals
and civic one-upsmanship
Raise and spend local currency Avoid lengthy and uncertain process of regulatory
approval to invest and repatriate dollars
www.chinafirstcapital.com
Principle of fiduciary investing not
native to China, nor easily transplanted
Copied the form – partnership with
carry – but not the formula
Result:
• Portfolio of longshot bets
• Zombie Kingdom
• Unparalleled partner turnover
• LP frustration
Asset managers not investors –
gathering AUM rather than delivering
cash returns
“Principle” vs. Agent
Poor Performance in Cash DPI Terms for China PE & VC
www.chinafirstcapital.com
China’s “inevitable crash” indefinitely postponed A govt so rich, so sealed off from outside forces, with enough cash to paper over just about any problem .
Stock market: are these the 3000 worst companies in China? P/e multiples
generally at least 2-3X global comps. Applying Graham-Dodd to this cohort
is mad. HK and NY tend to be more pulled by fundamentals. But, still often
black box investing, VIE structure, Everyone is momentum investor
Economy still doing well, produce $1 trillion in new gdp this year
500 million newly-prosperous consumers, hugely optimistic about the future,
and spending like there's no tomorrow, even while maintaining high
savings. Every major consumer market booming, in play. No better place to
sell high-quality products, services, experiences, online and off
China Now
www.chinafirstcapital.com
Active beats passive most every time
Illiquid portfolio investing here, expecting terms
of a SPA to hold, often a fool’s errand
Only tried-and-true is to start or back a business
and outcompete local competitors
Not as hard as sounds – not only Starbucks and
Apple, but General Mills, Zara, Zhongan, global
hotel brands and many more coining it in China
Yes, local copycats will steal your idea, but stay
true to your game and your DNA. Consumer
market shifting strongly against the copycats
Almost every brand doing well in China is
foreign
Yes, But Is There Any Way to Make Money in China?
www.chinafirstcapital.com
Where The Money Will Be Made
The overarching imperative: Greater tech self-sufficiency. The
plan is to climb out of the global supply chain basement. Beg, borrow, buy, nurture or steal
China healthcare soon to be world’s single largest industry.
Top to bottom change and opportunity
Enormous household wealth driven by property values
underwrites Confucian Consumption Culture
“Man eat man”. China is the original education meritocracy, still paramount to out-test, out-
cram one’s peers
04 Engines
www.chinafirstcapital.com
Above all: Try not to get carried out by riptides
China First Capital works with group of larger
domestic and international companies to
together find defendable areas of high margin
opportunity in China. Sounds obvious, but rarely
is. Result is Chinese corporate margins are
generally atrocious, and sinking
Work everywhere in China and globally, but
based in Shenzhen, China’s richest city, tech
capital, two best companies here, Tencent and
Huawei. Beijing and Shanghai are more difficult
places to live and work. Shenzhen invented and
perfected China’s free market
China First Capital: What Do We Do?
www.chinafirstcapital.com
What’s Ahead for China
More haste less speed
– there is time and
opportunity still, one
more boom generation.
Then, China will grow
very old beginning in
2040, resemble closely
today’s Japan. Die is
cast. Even relaxing one
child policy won’t
change this. Kids an
expense not an asset.
New intergenerational
compact
Risks – major one is
blowup of relationship
with US. Would be
catastrophic for both
sides, but perhaps more
so for China. US has its
huge span of allies
powerful and capable
everywhere in the world,
and many of the world’s
best firms. China far
more isolated, weak
technologically
IRR is Job One, but keep in
mind you’re part of the most
important, positive economic
development story in human
history. Since I first came to
China as postgrad in 1981,
per capital GPD (PPP) risen
43X, from $352 to $15,417.
China achieved so much
more than anyone dare hope,
a billion people lifted out of
poverty, freed to pursue their
dreams, to make and spend a
bundle
www.chinafirstcapital.com
Questions
Feel free to write and share ideas. I’d be delighted
to figure out ways to collaborate or, at least, try to
ferret out together what’s going on in China: