Q&A: Fosun Group's Xinjun Liang

Q: How has private equity become another engine driving the Fosun Group's business?

A: Rewind to several years ago. We were still a multi-sector company that focused a lot on pharmaceuticals, real estate, steel and mining. The developments in these sectors helped substantially with the company's profit growth. Later in 2009, we started to do investments, but our private equity business only happened in 2011, when we discovered an increasing number of investment opportunities.

In the old days, we only invested RMB1 billion every year, but the current environment requires far more capital from us, say RMB5 billion to RMB7 billion for each year. To accommodate such demand, we cannot solely rely on our existing balance sheet or leverage. As such, private equity is good way for us to explore more opportunities and capital from the outside world without adding too much pressure to the company's financial conditions.

Q: Why did Fosun partner with Carlyle? How did the two companies get together?

A: We started our internationalization strategy in 2008 when we hired John Snow, former US Secretary of the Treasury, as our adviser. Since then, Snow has connected us to many international PE professionals include Daniel A. D'Aniello and David Rubenstein, chairman and CEO of Carlyle. We then agreed on launching a co-GP private equity fund. Fosun has been very open to share its local expertise and networks with the buyout firm. In some cases, we also help them screen the growth prospects of Chinese investments. In return, the buyout firm tells us the suitable valuation we should pay for offshore investments.

We each invested $50 million into the fund and will consider launching other renminbi-denominated or US dollar funds together after our first vehicle matures and gets fully invested. At this stage, we still want to test the water by using our own capital without raising outside money.

Q: Who are the LPs in Fosun's private equity funds?

A: We have famous international partners such as Carlyle and Prudential Financial as our investment partners. For LPs, they are mostly well-known Chinese enterprises. Star Capital Fund - a real estate private equity fund that raised RMB3.7 billion within half a year - has received commitments from Dalian Wanda Group and Suning Appliance. Entrepreneurs are important to our LP base because they can bring value to our investments on top of the capital they leave with us.

We also want to expand our LP base to include Chinese institutional investors, state-owned enterprises and insurance companies. For overseas LPs, we may reach out to pension funds and sovereign wealth funds, for example,. for long-term capital.

Q: What about the GP contribution?

A: While other GPs contribute as little as 1% in their fund, Fosun commits 5-30%. Last year, we secured RMB13.3 billion of committed capital across six funds, of which RMB2.7 billion was drawn from Fosun's balance sheet. We have already put all our available capital on the table. I certainly feel comfortable on how much we have committed, while our LPs are happy as well, largely due to the fact that the huge contribution from us means that they are putting their money with someone who is constantly sharing their risks.

Q: How does Fosun survive the competitiveness of the fundraising environment?

A: There are too many GPs in China now. The problem is not whether you can raise enough capital, but the right way to source long-term and good quality money. We partnered with Noah Holdings for fundraising our Star Capital Fund, given that was our first fund in the real estate market. The total amount, however, is relatively small. Noah helped us to raise one-fourth of the corpus from high-net-worth individuals. However, for commitments of RMB1-2 billion, you still need to approach institutional investors.

While Hony Capital, CITIC PE and CDH Investments are the top private equity players in China, and provide impressive returns, emerging private equity funds like Fosun need to understand their own edges over others in order to survive. During fundraising, Fosun always emphasizes its value-adding abilities as we have already established operational experience and we don't need to pay extra for it. LPs also want to partner with someone with good track record. Among the 171 private equity-backed IPOs in China last year, we listed eight of them.

As of 31 December 2011, our pre-IPO projects that had been listed successfully achieved an average IRR of 58.8%. However, the use of Fosun's brand is still weak in terms of fundraising, as we just started our private equity business last year.

Q: Are overseas GPs raising too much RMB capital?

A: Fund size always depends on the size of management team. For international players, including the likes of Carlyle, Blackstone and TPG, their global capability can support their size. However, they need to prove to their Chinese LPs that they are able to get the same kind of returns as they get in other parts of the world. For Fosun, we don't want to blindly scale up our vehicles because I don't think we can deploy large amounts so rapidly. We always need to act within our ability.

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• Topics
• Greater China
• Fundraising
• Fosun Group
• China