When two of China’s biggest technology start-ups, Meituan and Dianping, merged in early October to create the country’s largest online-to-offline (O2O) platform, few people will have been more pleased than Bao Fan, the founder and chief executive officer of Chinese boutique investment bank China Renaissance.
The deal, which values the combined group at more than $15 billion, is China’s largest internet company merger to date and highlights the growing stature of Bao and his young bankers.
“I had been convincing them to come together for over a year – talking to them many times,” Bao told FinanceAsia in an interview. “Our role is being a dealmaker. We make deals happen.” China Renaissance served as the sole financial advisor to both companies.
For him, the merger makes a lot of sense to both Meituan, a Groupon-like lifestyle platform partly owned by Chinese Internet giant Alibaba, and the Tencent-backed restaurant-review website Dianping.
“O2O companies have huge cash-burning [issues] … The law of capital will argue for consolidation,” he said. “The merger obviously creates huge synergies and [ends] the cutthroat competition on subsidies and everything else between them.”
The O2O business, a key component of China’s booming TMT scene, is witnessing intense competition as the country’s internet titans battle it out for bigger market share by aggressively providing subsidies to merchants and clients.
The marriage of former rivals Meituan and Dianping is not Bao’s first matchmaking success in China.
Earlier this year he and his M&A team successfully brought together two online taxi-hailing services backed separately by Alibaba and Tencent – Didi Dache and Kuaidi Dache – to create Didi Kuaidi and compete more effectively with the looming threat of Silicon Valley’s Uber. His boutique bank was the sole financial advisor to both firms.
While China Renaissance has yet to cultivate the same influence as Wall Street heavyweights like Goldman Sachs and Morgan Stanley, it is fast becoming a major player in China’s buoyant tech sector, providing advisory on finance and initial public offerings, as well as mergers and acquisitions.
For now investment bankers at top tier firms are sanguine about the competition.
“They are no threat to us,” said a senior China banker at a full-service US investment bank. “They serve their niche well, run a low-cost business model and I hear they have made money on their investments in tech firms, but they don’t have a significant distribution platform.”
A mixed martial arts and racing car enthusiast, Bao, 45, had long focused on China’s TMT industry during his tenure at Credit Suisse and Morgan Stanley where he landed with jobs after earning a master’s degree in economics in Norway in the mid 1990s.
He set up China Renaissance when he spotted a void between the growing hunger for capital among the country’s nascent technology firms and the investment desires of venture capitalists and private equity investors.
Starting with a two-person team in 2004 in Beijing, home to the country’s burgeoning class of technology entrepreneurs, the bank soon lured Kevin Xie, Bao’s former colleague at Credit Suisse. Together they helped a growing queue of Chinese technology firms to raise funds from investors and built up strong ties within the country’s start-up community.
In four years, China Renaissance successfully sealed about 40 private fundraising deals, raising a total of $1.05 billion and attracting a few big names to the domestic market, such as Qihoo 360, a Chinese internet security firm.
“Big [foreign and Chinese] investment banks don’t care about TMT start-ups of three to five people. But China Renaissance has been really rooted in China’s TMT sector and grown up with these firms,” Kevin Chen, a partner of Sequoia Capital China, told FinanceAsia.
“When these start-ups turn into big firms, China Renaissance can certainly reap the fruits of the seeds it planted in the past,” he said.
The bank’s relationship-focused strategy proved a smart move and soon China Renaissance was being tapped for guidance by local technology entrepreneurs seeking an overseas listing for their companies.
Last year the bank leapfrogged some Western rivals to become a lead adviser on the $2.05 billion IPO of Chinese online retailer JD.com, partially thanks to Bao’s long-time friendship with JD’s founder, Richard Liu. The deal was the largest US stock market floatation by a Chinese company until it was eclipsed by Alibaba’s record-breaking $25 billion IPO a few months later.
According to data from Dealogic, China Renaissance was the seventh-most active bookrunner of Chinese company IPOs in the US last year in terms of the deal value – ahead of UBS, Bank of America Merrill Lynch and Jefferies, but behind Credit Suisse, JP Morgan and Goldman Sachs.
Click on Page 2 for more on China Renaissance's hiring plans
China Renaissance continues to beef up its team. It employs 250 people, with offices in Beijing, Shanghai, Hong Kong, and New York. That number was just 100 last year.
In recent years, it has also snapped up senior bankers from its Western peers, such as Diao Yang and Jeremy Choy from JP Morgan and Jason Lam from Credit Suisse.
Even Bao himself is surprised by the bank’s recent pace of growth. “Colleagues told me we have 250 people now. I’m like what?” he said. “I barely knew half of them at the company’s last outing in Chiang Mai.”
Bao plans to beef up the bank’s A-share team to 15 people from around 10 currently by the end of the year and obtain an A-share brokerage license in the near future.
The team will advise Chinese companies delisting from overseas markets and relisting at a higher valuation in China.
“We expect the recent trend of ‘go private’ bids to gain momentum as more companies see the strategic merit in this move,” he said in a statement about the A-share hires.
He also aims to expand the bank’s footprint in the US by opening an office in San Francisco.
“A local presence [in the US] can offer me a lot of important intelligence and knowledge, which is valuable, because I can leverage that from my business in China,” he said.
Based on trust
The bank’s business expertise, Bao thinks, is not easy for its international peers to clone. “Their problem is they cannot localise in China,” Bao said.
Frank Wei, a managing director of Warburg Pincus and Bao’s former colleague at Morgan Stanley, echoes his point of view. “Bao has known and grown with these tech entrepreneurs for over ten years. He knows exactly what they need and they trust him very much,” Wei told FinanceAsia. “This kind of friendship and trust is very hard for other bankers to replicate.”
Part of the reason for that trust is that China Renaissance is often a minority shareholder in entrepreneurs' companies and as such their interests are aligned.
This year, for instance, the bank along with its long-time client Beijing Enlight Media, invested Rmb200 million ($31.6 million) in Shenzhen Inveno, a mobile internet content provider.
“It is a typical merchant banking model … We tie our interests with them,” Bao told FinanceAsia. “On both banking and investment sides, all we want is to pick the future winner.”
He reveals that China Renaissance’s fund size has reached $2 billion, with half in USD and half in renminbi. The bank’s new Rmb5 billion ($780 million) fund this year will focus on high-quality tech firms that exit the overseas boards to return to home stock market, with investments ranging from Rmb50 million to Rmb500 million ($7.8 million to $78 million).
China Renaissance also advises entrepreneurs on fund raising, helping bring in other investors. At a rough estimate, the firm helps around 60 to a 100 companies a year collect capital. Not all of them become unicorns but in China's fast-growing tech market, many of them are successful. However if this slows next year, other parts of its business are likely to get busier.
“If the financing market remains hot, obviously, we will make a lot of money in fundraising,” Jeremy Choy, co-head of China Renaissance’s M&A practice, told FinanceAsia. “If the market cools down, it will be increasingly difficult for some companies to get financing and force them to think about other traditional alternatives, including M&A.”
By becoming synonymous with technology-related deals in China, China Renaissance has benefited from a strong following wind, some industry insiders say.
“It has definitely ridden on the boom in the [technology] sector,” said one Beijing-based private equity executive who’s familiar with the bank and invested in its projects. “Tech entrepreneurs really need capital to develop [their companies] and investors are keen to invest in good projects. This could make deals easier.”
Bao is also setting his eyes on healthcare, where he sees huge potential, not least “because the industry in China is starting from a very low base.” His healthcare team, which is set to expand from a team of 10 currently to 30 in the next two years, aims to replicate the success of the China Renaissance’s TMT practice.
“It does take a while for small [medical] firms to develop but we will be familiar with their staff and strategy at the very beginning,” Kevin Xie, one of the co-founders of China Renaissance and now the head of the bank’s healthcare team, told FinanceAsia.
“And it’s very unrealistic for international investment banks to follow small clients so closely.”
The Chinese government has long been facing thorny issues across the country’s healthcare spectrum, such as overpriced but low-quality medical care products, and overcrowded city hospitals. The demand for high-quality healthcare services is also growing due to China’s aging population, rising middle class and rapid urbanization.
China has been stepping up efforts to overhaul the sector nationwide, with spending set to hit $1 trillion in 2020, up from $357 billion in 2011 – making it the second largest market globally after the US, according to McKinsey.
Like many other Chinese private entrepreneurs Bao is also betting on the continued opening of China’s capital markets and banking on corporate China’s “go-out” campaign to boost his bank’s growth.
“How can we grow into a global firm mainly relies on Chinese companies’ globalisation,” he said. “China’s capital markets will certainly be connected with the international ones. Once you open the door, you can’t just let people [and capital] in [and] not out.”
“China Renaissance’s ambition is definitely not to remain a boutique operation,” he said.
Additional reporting by Alison Tudor-Ackroyd