Private Equity Trends in China - Deloitte
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Private Equity Trends in China - Deloitte Presentation Transcript

  • 1. The Dbriefs China Issues series presents:Private Equity in China: TheTrends Reshaping theLandscapeGary Chan, Partner, Deloitte Touche Tohmatsu CPA Ltd.Chris Cooper, National Leader, U.S. Chinese Services Group, Deloitte LLPJennifer Qin, Partner, Deloitte Touche Tohmatsu CPA Ltd.October 13, 2011
  • 2. Release for answers to polling questionsUnderstand that any data or information provided by you as part ofparticipating in this Dbriefs webcast (“webcast”) may be used by Deloitte inconnection with this webcast, other studies, or analyses performed byDeloitte, publications, or in connection with services provided by Deloitte orotherwise.Understand that this webcast is the proprietary property of Deloitte.Understand that any such data or information may be disclosed by Deloitte torelated entities or other third parties, including, without limitation, inpublications, in connection with this webcast or such studies, analyses, orservices, provided that such data or information does not contain anyinformation that identifies you or associates you with the data or informationthat you have provided or are providing.Understand disclosure of such data or information could be required by law,in which case Deloitte will endeavor to notify you. Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 3. Agenda• 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 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 4. Recent PE/VC activity
  • 5. China PE/VC Industry Development 2008: 2011: - Draft listing rules for China GEM; - QFLP launched in Shanghai, Beijing - Updated regulations for China stock and Chongqing; Linear chart represents total exchanges; - First LLP RMB fund in Tianjin Binhai - CSRC released guidance for direct investments by securities firm allowing investment volume of PE/VCs District under a set of preferential policies; for 33 securities firms to invest in PE; - SSF made direct investments in PE - Over-the-counter market for growth funds(CDH ,Hony,Mianyang Industrial enterprises Fund (managed by CITIC) 2007: 2000: - Pilot run for direct - 9 pointers for China GEM; investment of securities firm; 2010: - Tentative guidance for foreign State Council approves the investment in domestic expansion of RMB industrial - October - <Tentative companies 2001: investment funds Measures for equity - Tentative guidance for foreign 2009: investment by insurance PE/VC investment in Zhongguancun; 2005: companies>; - SAFE tentative - Oct 23rd-launch of - Internet bubble; GEM provides new - December – the set-up - CSRC restricts direct investment of measures by of RMB60bn FoF by CDB Regulation No. 11, 29, exit routes for PE/VC security firms and Suzhou Venture 2003: 75 on VC investment Group - SAFE issued management Regulation No. 3 2006:1999 and earlier: - Regulation No. 10 and the- CDNCA Plan No. 1; boom on domestic IPO;- Draft for Investment Fund 2002: 2004: - First batch of approvedLaw; - Guidance for foreign - Catalogue for foreign Industrial Investment fund in- Suggestions from investments in investments in SMEs; DecemberDepartment of Technology telecommunication; - Governing hazard foron VC development - Disintegration of CICC foreign investments direct investment arm and the set-up of CDH 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Zero2IPO Group, Deloitte analysis 1 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 6. Accelerated Growth in PE/VC Investments 817 Number of Investment volume deals (million USD) Investment volume 投资金额 (US$M) (美元百万元) Eastern 607 China 投资案例 No. of deals (家) $5,387 440 434 $4,210 477 Southern 324 China $3,247 $2,701 271 253 226 228 $1,777 216 177 $1,269 $927 $992 $1,173 Northern China $580 $528 $418 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1999-2010 geographical allocation for investee company Source: Zero2IPO Group2 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 7. PE/VC Fund Raise Indicates SporadicGrowth Pattern Annual compounded growth rate:+ 29% in amount + 14.22% in no. of fund 158 Newly raised 116 新增资本量 fund amount (美元百万元) (US$M) 94 新募基金数 No. of new funds $11,169 (只) 58 $7,310 39 34 $5,485 $5,855 28 29 21 $3,973 $4,067 $1,298 $639 $699 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Zero2IPO Group3 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 8. Poll question #1Over the next 12 months, do you expect investment activityin the Chinese private equity market to increase, decreaseor stay the same?• Increase• Decrease• Stay the same• Don’t know / not applicable ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 9. 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 Source: Zero2IPO Group, Deloitte analysis4 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 10. Increasing Number of PE/VC-backed IPOs Total investment amount and capital raised through IPOs by VC/PE-backed companies 120,000 160 150 140 100,000 120 80,000 100 60,000 80 72 60 40,000 47 $5,386 60 $4,210 40 23 $3,247 29 22 20,000 33 $1,269 $2,700 20 $1,173 $1,777 8 7 11 - 7 2 10 - 2004 2005 2006 2007 2008 2009 2010 境内IPO筹资额(百万美元) Domestic IPO capital(US$M) 境外IPO筹资额(百万美元) Offshore IPO capital(US$M) 境内IPO数量 IPO No. of domestic 境外IPO数量IPO No. of offshore PE/VC investment amount 创投投资金额(百万美元) (US$M) Source: Zero2IPO Group5 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 11. IPOs Dominate Exit Deals Example of Q1 2011 Industry Breakdown of Exits (2011Q1) Option Breakdown of Exits (2011Q1) 118 (No. of Exits) 118 (No. of Exits) Machinery 23 Manuf acturing Internet 16 Sale IT 13 Trade, 3, Others, 1,Chemical Raw Materials 3% 1% 12 M&A, 4, & Processing 3% IC 9 Bio/Healthcare 8 Energy & Mineral 7 Clean-tech 7 Agr/Forestry /Fishing 6 Electronic & Opto- 5 electronics EquipmentConstructing/Engineering 4 Broadcasting & DTV 1 Finance 1 Entertainment & Media 1 Others 5 IPO, 110, 0 5 10 15 20 25 93% Source: Zero2IPO Group 6 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 12. The Question of Variable Interest EntitiesWhat 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/VCsWhat’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?Source: PRC Ministry of Commerce Provisions on Implementation of Security Review Systems Regarding Mergers and Acquisitions of Domestic Enterpriseby Foreign Investors),, media7 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 13. Poll question #2What do you expect to be the most common exit route forprivate equity deals over the next 12 months?• Domestic listings• Overseas listings• Trade sales (M&A)• Don’t know / not applicable Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 14. PE/VC-backed IPOs Stock Exchange Analysis (2000-2011) VC/PE-backed IPOs by Exchange 140.00% 2000-2011 127.10% FWB KOSDAQ 120.00% Market value of A-stock/GDP A股市值/GDP SGX <1% <1% London AIM 4% <1%Singapore NASDAQ 100.00% Catalist 8% NYSE Circulated A-stock value /GDP A股流通市值/GDP 1% HKSE 8% 16% 80.00% 72%HK GEM SSE 66% <1% 5% 60.00% 58% 48.50% 42.20% 40.40% 45% 39.70% 40.00% 31.90% Shenzhen Shenzhen 31.30% GEM 29.50% 36.20% SME 23.20% 22% 34% 20.00% 16.20% 17.60% 15% 13.20% 9.70% 11.80% 9.20% 10.40% 7.30% 5.80% 0.00% Source: Zero2IPO Group 8 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 15. 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.Source: Zero2IPO Group, Deloitte analysis9 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 16. Capital Raised by RMB and Foreign Funds 18000 16500 Capital raised by foreign 外资创投募资 fund (US$M) (百万美元) 15000 本土创投募资 Capital raised by RMB fund (US$M) (百万美元) 13500 新设外资基金 No. of new foreign fund (只) 12000 新设本土基金 No. of new RMB fund (只) 10500 9000 7500 6000 4500 3000 23 22 21 17 1500 146 9 10 12 7 6 84 18 21 12 12 14 87 0 32 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Zero2IPO Group10 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 17. RMB vs. Foreign Funds Led in Terms of No. of Investment Deals in 2011 Q1, but with Less Average Investment Amt.Investment Distribution by Currency (2011 Q1) Investment Distribution by Currency (2011Q1) 232 (No. of Deals) 1,928 (Investment Amt., US$M) Undisclose d, 21, 9% Foreign RMB,Currency, 917.28, 68, 29% 48% Foreign Currency, RMB, 143, 1011.14, 62% 52% Source: Zero2IPO Group11 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 18. Current Challenges – Rapid GrowthLack of professionals brings risks and challengesto the funds: • China Venture report indicates a vacancy of 10,000 positions in the PE/VC industry. However, the industry’s short history of 10 years does not provide nearly enough experienced individuals. A large number of PE/VC partners have less-than-five years experience. PE fund boom brought forward large amounts of unstandardized operations, undermining market practice.Source: China Venture12 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 19. Investment prospects for China’s sevennew strategic sectors
  • 20. Emerging Strategic Industry PlanChina has extensive plans to develop seven strategic emerging sectors,targeting 8% of GDP by 2015, up from 3% in 2010; and 15% by by 2020. Seven Strategic Emerging Industries Expected InvestmentEnergy Efficiency & Environmental RMB 3 trillion by 2015ProtectionNext-generation IT RMB 1 trillion to be invested in IT by 2014 2009-2011, planned RMB 850 billion in investmentsPharma & Biotech for health care system reformHigh-end manufacturing RMB 1.5 trillion target by 2015 Source of RMB 5 trillion in total by 2020: funding? - RMB 3 trillion for hydropower, wind power, nuclear power, solar energy;New Energy - RMB 1 trillion for smart grid; - RMB 1 trillion for new energy vehicles, clean coal etc.) RMB 4.5 trillion for rail and subways by 2015New Materials RMB 750 billion by 2015New Energy Automotive Up to RMB 1 trillion by 2020 Source: PRC State Council13 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 21. Clean Tech – A Leading Sector of InterestIndustry Breakdown of PE/VC Investments (2011 Q1) Industry Breakdown of PE/VC Investments (2011 Q1) 232 (No. of Deals) 1,928 (Investment Amt., US$M) Internet 45 Internet 693Machinery Manufacturing 23 Automobiles 154 Electronic & Opto- Electronic & Opto- 15 142 electronics Equipment electronics Equipment IT 15 Energy & Mineral 117 Clean-tech 14 Clean-tech 110 Telecom & Value-added 13 IT 90 Services Chemical Raw Materials 11 Machinery Manufacturing 86 & Processing Chemical Raw Materials Bio/Healthcare 9 & Processing 61 Entertainment & Media 6 Constructing/Engineering 59 Automobiles 6 Education & Training 43 Energy & Mineral 6 Chain Retail 41 Agr/Forestry/Fishing 5 Bio/Healthcare 40 Telecom & Value-addedConstructing/Engineering 5 Services 33 Textile & Clothing 5 Textile & Clothing 26 Chain Retail 4 Finance 23 Education & Training 4 Agr/Forestry/Fishing 17 Finance 3 Entertainment & Media 17 IC 3 Broadcasting & DTV 10 Broadcasting & DTV 2 IC 7 Logistics 1 Food & Drinks 5 Food & Drinks 1 Logistics 4 Others 10 Others 43 Undisclosed 26 Undisclosed 108 0 10 20 30 40 50 0 100 200 300 400 500 600 700 800 14 Source: Zero2IPO Group Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 22. PE/VC Activity by Clean Tech Sub-Sector Disclosed China PE/VC investment value, by sub-sector (2007Q1-2011Q2) Wind Agriculture Water and Wastewater Air and environment Biofuels and biomaterials Transportation Energy Efficiency Energy Storage Materials Other Solar Recycling and Waste Smart Grid• 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).Source: Clean Tech Group15 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 23. Poll question #3What do you see as the key strength of China relevant tothe 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 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 24. Recently Announced Funds Focusing onChina Clean Tech Fund Date Size Mgmt Investment focus Privately-held companies in the water, China Clean Tech Sept. JV between UK and $200 million alternative energy, environmental remediation Partners 2011 Beijing-based PEs and energy storage & distribution sectors. Suzhou ABC Sept. Clean energy, advanced manufacture and RMB 1billion Shanghai-based PE Venture Fund 2011 biotechnology. Hudson NY-based clean tech Solar, wind, and biomass projects in Yangzhou (Yanghzou) Clean Sept. RMB ? PE and city of (Jiangsu province) ; US$20-50 million deals is Energy Equity 2011 Yangzhou its “sweet spot” Investment Fund Blue Ridge Zijin June Renewable energy, new materials and other Equity Investment RMB 5 billion NY-based hedge fund 2011 growth sectors. Funds AgBank (Wuxi) June State-owned bank and High-growth sectors such as energy efficiency Private Equity RMB 15 billion 2011 city of Wuxi in Wuxi (Jiangsu Province) Fund May Clean technologies across China – 65% early SinoGreen Fund $100 million Taiwan-based PE 2011 stage companies and 35% start-ups. JV by German bank Companies engaged in clean energy, China Clean May $500 million and Tianjin Binhai High environmental resource management, energy Energy Fund 2011 Tech Industrial Zone and material in Tianjin and other Chinese citiesSource: Media sources, Cleantech.com and Quarterly Cleantech Investment Monitor16 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 25. China Drives the Global Clean Tech IPOMarket 63 IPOs with RMB 65 billion (US$10 billion) raised in 2010. Number of Clean Tech IPOs Amount Raised by Clean Tech IPOs 54 93 US$13B US$16B100% 100% 10 1.25 1.64 90% 90% 1.06 10 80% 80% 1.94 25 10 4.06 70% 70% 60% 60% North America North America 50% Other 50% Other 7 Europe Europe 7.94 40% China 40% China 63 30% 30% 9.97 15 20% 20% 10% 10% 7 1.56 0% 0% 2007 2010 2007 2010 Source: Clean tech Group, Deloitte Analysis17 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 26. Fund of funds and other futureopportunities in China
  • 27. Future Opportunities – Fund of FundsBirth of Fund of Funds (FoF) puts forward institutionalinvestors 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.Source: Zero2IPO Group, Deloitte analysis18 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 28. Future Opportunities – Industry IntegrationIndustry 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.Source: Zero2IPO Group, Deloitte analysis19 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 29. Poll question #4In which industry sector do you expect to see the most dealactivity over the next 12 months?• Consumer/retail• Clean tech• Pharma / biotech / healthcare• Technology, media & telecommunications• Other• Don’t know / not applicable ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 30. 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. Source: Zero2IPO Group, Deloitte analysis 20 ©2011 Deloitte Touche Tohmatsu Limited. All rights reserved.
  • 31. Question and answer
  • 32. Join us November 10 at 11 AMET as our China Issues seriespresents:China Tax and RegulatoryUpdate: Indirect Tax Creditsand Refunds
  • 33. CPE certificates are now available for immediate download.Click the Request CPE link in the lower right hand corner of the screen. Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 34. Contact info• Gary Chan garychan@deloitte.com.cn + 86 (21) 6141 1318• Chris Cooper chriscooper@deloitte.com +1 408 704 2526• Jennifer Qin jqin@deloitte.com.cn + 86 (10) 8520 7131 Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 35. This presentation contains general information only and Deloitte is not, by means of thispresentation, rendering accounting, business, financial, investment, legal, tax, or otherprofessional advice or services. This presentation is not a substitute for such professional adviceor services, nor should it be used as a basis for any decision or action that may affect yourbusiness. Before making any decision or taking any action that may affect your business, youshould consult a qualified professional advisor. Deloitte shall not be responsible for any losssustained by any person who relies on this presentation. Copyright © 2011 Deloitte Development LLC. All rights reserved.
  • 36. About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited byguarantee, and its network of member firms, each of which is a legally separate and independent entity.Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte ToucheTohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed descriptionof the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attestclients under the rules and regulations of public accounting. Copyright © 2011 Deloitte Development LLC. All rights reserved.