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Private Equity
1) Private Equity firms seek out undervalued or underperforming companies. Unlock significant value by:
1) 2) 3) 4) Improving business strategy Injecting managerial expertise Advancing production technology Expanding distribution
Private Equity
1) Mostly consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. (i.e. pension funds, insurance companies, rich people, etc..) 1) Private Equity firms often conduct LBOs (Leveraged buyouts): Large amounts of debt are issued to fund a large purchase.
1) Will then improve company in hope of reselling it to another firm or cash out via an IPO.
2) Private Equity firms sometimes pool together funds to take public companies private.
2) Investments often demand long holding periods for a turnaround of a distressed company or a liquidity event (IPO or sale to a public company)
China
China has seen tremendous growth the past 2 decades stemming from economic reform to general ways of doing business (laws, practice, standards, etc.).
China: East Asian growth model. Export-led growth that exploits its labor cost advantage.
Have improved infrastructure, human capital, labor mobility & urbanization of the population since 1978.
Large labor pool, high savings (more than 45% of GDP) and rising FDI have led to rapid capital accumulation. Succeeded in all manufacturing segments with high labor and capital/infrastructure intensity and is in the process of building multibillion-dollar electronic and heavy industrial plants.
IDIOSYNCRATIC RISKS:
1) Making Investments 2) Government Restrictions 3) Inadequate Legal Environment
Chinese
In China, the seller has been the state (i.e. privatization) and in most cases the new controlling shareholder is a local, and not a P/E entity.
Leverage
In China, little or no debt is involved. But this might change over time as credit markets deepen and legal framework might adjust to permit more leverage.
Transaction Size
In the West, buyouts run into the hundreds of millions, maybe billions of dollars.
In China, very few companies exist of that size and P/E transactions are far smaller.
Political sensitivity to foreign investors gaining control of large, high visibility enterprises has begun political backlash in China.
Strategic Emerging Industries: China is shifting from The Worlds Factory to develop seven SEIs.
Biotechnology, New energy High- end equipment manufacturing Energy conservation and environmental protection Clean- energy vehicles New materials Next-generation IT.
Technology
Want to transition from Made in China to Designed in China.
Positives
The government will continue to focus on opening up Chinas service sectors.
Further developing its talent recruitment through education reform and strengthening the countrys IP regime.
2. 3. 4.
2.
3.
5.
An alignment of interests:
1. Company owner:
Wanted to reduce the governments financial burden and strengthen the private sectors role in the economy.
2. 3.
2.
3.
Hony Capital :
Believed in Jiangsu Glasss management team. The country was growing at a 10% annual rate.
Structuring and Closing the Deal Wanted to list on HKSE to demonstrate to international investors that the company satisfied the highest standards of financial reporting, transparency and corporate governance.
Stipulated there must be no material change in company ownership for at least one year prior to IPO.
Throughout that year, the accounting and financial reporting systems were revamped & a new Board of Directors was established.
Hony acquired Jiangsu Glass for 93 million RMB (13 million USD).
"China is going to set the tone for private equity because a large number of their sovereign wealth funds are going to be investing large amounts of money outside of China, and they're going to be setting the rules and the patterns for what some of those investments are going to be." - David Rubenstein, co-founder of Carlyle Group
Presentation Notes
Presentation and additional following points
Private Equity
Private Equity: Funds and/or investors that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital is raised to expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. Mostly consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. (i.e. pension funds, insurance companies, rich people, etc..)
Investments often demand long holding periods for a turnaround of a distressed company or a liquidity event (IPO or sale to a public company)
P/E firms sometimes pool together funds to take public companies private. P/E firms often conduct LBOs (Leveraged buyouts): Large amounts of debt are issued to fund a large purchase.
Will then improve company in hope of reselling it to another firm or cash out via an IPO.
P/E firms seek out undervalued or underperforming companies. Unlock significant value by:
Improving business strategy Injecting managerial expertise Advancing production technology Expanding distribution
Have improved infrastructure, human capital, labor mobility & urbanization of the population since 1978.
Large labor pool, high savings (more than 45% of GDP) and rising FDI have led to rapid capital accumulation. Succeeded in all manufacturing segments with high labor and capital/infrastructure intensity and is in the process of building multibillion-dollar electronic and heavy industrial plants.
Exiting Investments
New board of directors was established, revamped governance practices and acceptable accounting and financial reporting standards were also implemented.
This enhanced the companys credibility with investors. P/E and Company management must share the same vision for the company.
Daily Production Capacity 900 tons (2003) to 5,320 tons (9/2007) Revenues $44.5 mil (2003) to $250mil+ (2007) Exports 10% of sales to 30%
In June 2005, 7 months after the buyout, China Glass Holdings Ltf issued 90 million new shares on the HKSE, raising $25 million in capital.
Strategic Emerging Industries: Shifting from The Worlds Factory to develop seven SEIs. Doing this by including several preferential tax, fiscal and procurement policies in order to develop the SEIs. Planners hope these industries become the backbone of Chinas economy in the coming decades.
The seven industries are biotechnology, new energy, high- end equipment manufacturing, energy conservation and environmental protection, clean- energy vehicles, new materials, and next-generation IT.
The targets for the Twelfth Five-Year Guideline in 2011 were to grow of GDP by around 8%, 7% annual growth of per capita income, spend 2.2% of GDP on research and development by 2015. Among the other highlights of draft plan distributed to the media prior to the opening of the Fourth Session of the 11th NPC are:
Inviting of foreign investment in modern agriculture, high-tech, and environment protection industries Value-added output of emerging strategic industries accounting for 8% of GDP Moving coastal regions from being the "world's factory" to hubs of research and development, high-end manufacturing, and the service sector.
Technology
Want to transition from Made in China to Designed in China.
In order to achieve this goal, the government plans to heavily invest in science and technology education and R&D, further develop Chinas intellectual property rights system and support Next-Generation IT as an SEI. Chinas indigenous innovation drive will also continue to play a central role in this sector throughout the 12th FYP period. Next Generation IT: Next-generation IT has been selected as one of Chinas SEIs. China is particularly interested in accelerating the creation of next-generation information networks, mobile communication and the Internet. In addition, the government plans to invest in R&D of the "Internet of things" and cloud computing, and develop digital and virtual technologies.
When competing globally, for example, Chinese companies turn to private equity firms because they are inexperienced in managing intellectual property and brands. But this can be problematic because the firms themselves may be ill-equipped for the job, as many of their employees hail from finance backgrounds.
Its critical to be invested in sectors that have the strong support of the government and are in line with its goal of providing a better quality of life for its people.