Mark Qiu, former investment banker and latterly CFO of CNOOC, talks about his new private equity venture focused on China.
How did the idea for China Renaissance Capital Investment come about?
Qiu: The whole thing came out of discussions I had with various businessmen in China after my announced departure from CNOOC. Through these discussions I identified a theme: which is that China's fast growth has created the perfect conditions to create the blue chips of tomorrow. China has driven, smart people and they are running successful businesses. And by virtue of its stage of development, China has more opportunities.
Today the economy has depth and likewise growth momentum continues to be strong. But China lacks big market-leading companies - with the exception of a handful of state-controlled companies. In spite of the size of the Chinese economy you don't have many companies with a market capitalization of more than $5 billion.
It is important that China develops these local companies. It's a sign of maturity and stability. Such corporations are also more likely to invest for the long term, and invest in people. They are also more stable employers and will invest in education.
The question is: how does this transformation happen. There is a need for a bridge. China Renaissance Capital Investment is such a bridge. We're looking to work with tomorrow's leaders.
How?
By marrying insights about how to improve operating fundamentals, with capital. That offers a very compelling and value-creating proposition for a lot of businesses. So the missing piece is private equity married to industry expertise - that gives access to global best practice. Plus as these businesses begin to grow they will have diverse needs in accessing different financial instruments and updated industry processes.
So among all the financial institutions that approached me, I felt that CSFB was a compelling partner. It has one of the strongest private equity franchises, with an interesting twist, since it has no Asia-Pacific presence. But it is motivated to improve its presence in China.
I come out of an operating background, and am more sensitive to operating performance and viable solutions. I'm known to the market and this makes it easier to foster trust in China with business executives and entrepreneurs. So all the ingredients came together. Hence the CRCI (China Renaissance Capital Investment) was born.
This is a private equity investment company and is a joint venture with CSFB, and Chinese founding partners. We have ex-bankers and ex-executives with local companies. There are currently three managing partners.
You will notice that I am not talking about funds. Contrary to what many think, private equity has been very active in China - but in different forms. The whole of China's growth has been funded by direct investment smart money. We have identified a need for a new type of private equity structure. This focuses on improving operating fundamentals and we expect to launch a series of funds that help businesses solve problems as they grow. Today we can identify the improvement of operating fundamentals as a priority and a major source of value creation. Tomorrow, these corporations may have a need for different types of financial instruments - perhaps through a mezzanine financing fund. The next day we see a big opportunity in a particular industry sector where industry insights is the source of value-creation.
Since Mengniu Dairy's successful IPO and the value it created for its private equity shareholders, there has been a rush of private equity firms into China. Is that going to make it a problem to find investments?
If you only focus on copying visible successes, then yes. But private equity is a generic name for smart money going direct. There was early smart money from overseas Chinese investing in China.
What I am saying is the market is evolving and investors do need to find areas where their money can add value - above and beyond, merely because of financial resources.
I want to give you an estimate. Today, North America has 250 companies with a market cap above $10 billion. Japan has around 80. China has essentially none. But in the next 10-20 years - if the economic growth projections hold - China can conceivably have 200 corporations of this size.
So is this a Warren Buffett investment-style - you are looking at a very long term investment in companies that offer value and also giving operation advice where you have expertise?
Yes, we represent patient money and an operational focus. You may compare us to Buffett and there are similarities. But direct comparisons in markets so different as the US and China are bound to have shortcomings.
Will your first investment be in the energy sector, which you obviously know very well?
Not necessarily. We will look at investments where we can see we can improve operating fundamentals. The business must be successful and capable of being a leader of tomorrow. So it could be a retailer, for example - one that could benefit from further operating improvements.
I believe that eventually there will be lots of blue chips on the A share market, some of which we will have invested in and helped. I feel the market is very big and the potential is enormous.
Do you think one day that the US will have fewer blue chip companies than China?
Maybe not in 20 years, but eventually it could happen as the size of the Chinese economy grows and develops.
A lot of private equity firms insist on having controlling stakes. Will this be your policy?
No. Majority control doesn't always achieve the intended end, especially in a relationship-driven culture like China. Plus if you insist on taking majority control it limits your business scope. The key is our ability to exert influence to make changes. The biggest source of change-effectiveness is the willingness of the entrepreneurs and management to implement. If you can identify those people and recognize their willingness then the percentage of ownership is not so important. But as an investor we will obviously be more motivated when we have material stakes in a company - so that our investors can share the upside of the positive changes.
