On July 9, hundreds of Chinese investors and start-up entrepreneurs flocked to an annual conference held by Legend Holdings. They braved the oppressive heat of the Beijing summer not simply because they wanted to network or listen to the various speakers imparting nuggets of wisdom. They also came to pay their respects to the most important man in the room: Liu Chuanzhi, the 72-year-old chairman of the Chinese investment conglomerate.
Liu is widely regarded as an icon of entrepreneurial capitalism in modern China and the “godfather” of its information technology industry. He is best known as the founder of Lenovo, now the world’s biggest maker of personal computers.
That alone would have made those attending the conference pay attention to Liu’s every word. Lenovo, one of China’s few global brands, has long been a major force outside of its home market. The company stunned analysts in late 2004 when it paid $1.25 billion for IBM’s PC unit, taking on another $500 million of debt.
But Liu’s standing in China’s business community does not just rest on his history with Lenovo. His reputation is still growing, amid Legend Holdings’ eye-catching diversification strategy.
Legend has, in recent years, been expanding beyond its struggling PC business. By teaming up with its three part-owned investment funds — Hony Capital, Legend Capital and Legend Star — the group has already dipped its toes into a number of different sectors, from food production to car rentals, from dentistry to start-up incubation.
This strategy has already paid dividends. Lenovo is still far and away the biggest part of Legend’s business in revenue terms, but the majority of the company’s profits now come from elsewhere.
Legend’s profit breakdown shows how important the strategy has been for the company. But it has also raised questions about how exactly investors should value a firm that now combines an aging PC business with a series of vibrant — but much smaller — investment funds.
Pay it forward
Liu founded both Legend and Lenovo in 1984, long before a swathe of home-grown and foreign investors were competing to finance Chinese start-up companies. He relied instead on investment from the Chinese Academy of Sciences, a state-backed scientific think tank.
That early experience showed Liu the importance of early-stage support for Chinese companies — something that has formed the bedrock of his diversification strategy at Legend.
“The strength of a nation’s economy relies on its companies’ innovation capability and its young generation’s entrepreneurship,” he told the roughly 800 delegates attending the ‘Will Conference’, an annual gathering hosted by its angel investment fund Legend Star. “Therefore, innovation and entrepreneurship isn’t just a slogan to us, but the only high road to strengthen the country and enrich the people.”
He has put his money where his mouth is. Legend set up the venture capital fund Legend Capital in 2001, private equity player Hony Capital in 2003, and angel investor Legend Star in 2008. Legend Holdings owned partial stakes in Legend Capital and Hony Capital 100% of Legend Star when it issued an IPO prospectus last year, The company would not confirm more recent numbers.
The group itself also makes direct investments in private and listed firms to gain a controlling stake. Legend’s investment portfolio includes Hong Kong-listed car rental service provider China Auto Rental, also backed by US private equity firm Warburg Pincus; Bybo Dental Group, one of China’s biggest chains of private dentists; and Joyvio Group, its modern agricultural division.
This approach — mixing strategic investment by Legend and financial support from its angel investment, venture capital and private equity arms — is designed to make sure that Legend is involved in financing throughout the life-cycle of promising companies.
Perhaps fittingly for a Chinese executive who was going overseas long before many of his peers looked offshore for acquisitions, the strategy was inspired by a visit to a foreign corporation.
In 1998, Liu visited General Electric’s Colorado facility on a two-week fact-finding mission. He told Chinese state broadcaster China Central Television last September that the trip inspired him to build a top-notch conglomerate. The US company had, Liu said, developed a unique model that brought together seemingly unconnected subsidiaries, such as finance, engineering and biotechnology.
The idea is not simply to spread Legend’s capital far and wide in order to hit the most targets. According to Ji Chaofeng, managing director of Legend’s asset management department, the approach can instead stimulate synergies across platforms — and potentially generate higher returns for the group.
“It’s like we are in a gang fight,” Ji said. “Every fund could help each other to find different opportunities and lower the risk of fighting alone. We focus on similar sectors but with different stages. With each other’s help, we could have more comprehensive information to make fewer strategic mistakes.”
In part two: A Legend built at home now looks abroad