AVCJ Awards: AVCJ Special Achievement: First Eastern's Victor Chu

"My first three projects were not terribly successful - in fact they were disasters - and I remember my father telling me it was the best thing that could have happened," says Victor Chu, chairman of First Eastern Investment Group. "Had they been home runs I would have thought it was so easy and made much bigger mistakes."

This was the late 1980s and the China private equity model as it stands today did not exist. Chu was among the pioneers who learned through getting their fingers burnt. It involved appreciating that the risk factors were substantially different from US and European buyouts - minority investors by definition have less influence, and in China they were offered minimal legal protection.

One of First Eastern's early investments was in a manufacturer of latex gloves. They approached the deal in methodological fashion, taking time to find the right people and put proper processes in place. But the market was soon flooded by copycat manufacturers taking shortcuts.

"We learned that you have to be very quick in China, send in your own people, and have direct access to management and financial information," says Chu. "We would insist that, even as a minority investor, we had the right to appoint the deputy CEO and CFO, received all the financial information, and had the ability to put things right if they didn't go well. We became buy-in specialists as opposed to buyout specialists."

Long-standing ties

First Eastern got into China early through a combination of Chu's professional and personal backgrounds. Through his legal practice, Chu worked on a host of corporate finance and M&A transactions for foreign investors entering the country. He was also becoming more involved in the family business, a leading Hong Kong brokerage established by his father in 1960.

This brokerage was the first to bring in a mainland Chinese investor when the Guangdong government took a 20% stake in 1986. Chu's father wanted to train financial professionals in anticipation of the development of the country's capital markets. Each year 10 people went through the program and some of them still hold senior positions in the securities industry.

Chu continued the promotion of financial services cooperation between the mainland and Hong Kong. As a member of the Hong Kong Stock Exchange's governing council, he championed the initiative that allowed mainland-incorporated companies to list on the bourse as H-shares.

First Eastern has made 150 investments in China across almost every sector. Working with local government was essential and unavoidable in the early days. Chu adds it was also preferable to dealing with private companies that, though less bureaucratic than government, could be unreliable.

"With the private sector, if they took the money and ran, we couldn't even find them. With the state, if an investment failed because of fraud we could always find our partner because it was part of the government," he says.

Among the firm's most successful deals was Chenming Paper, a township and village enterprise with annual production of 30,000 tons. Chenming wanted foreign capital and expertise, and First Eastern made an introduction to Japan's Marubeni Corporation, resulting in a partnership through which the company took its sourcing and sales activities overseas. Crucially, the Marubeni arrangement also turned around Chenming's cash flow position as it could get wood chips on credit.

Chenming is now the second-largest paper company in China and in the top 20 globally. Annual production stands at five million tons. It became the first company to list on the A-share, B-share and H-share markets.

An evolving strategy

When First Eastern started investing in China it used family money. The firm launched its first fund in 1992 and has raised 10 altogether, starting with evergreen vehicles and then moving to fixed-term GP-LP structures. High net worth individuals - usually personal or professional acquaintances - featured prominently in the LP base.

First Eastern's approach has now almost gone full circle, with 75% of capital deployed in the last few years being principal investment. Chu says this a good fit for the firm's strategy as it allows longer participation in projects, which is helpful for investments in areas such as renewable energy. The strategy has also become more international, a logical shift given China's increasing focus on outbound investment.

"We need to look at where we can best add value and one of the natural things was the international market," Chu says. "We have been investing internationally for a long time and China was looking for technology, branding and management to bring to the domestic market. Companies want to go overseas but you need good partners in foreign markets."

First Eastern successfully expanded into Southeast Asia, the Middle East and Europe. Chu sees Japan and North America as the geographical holes in First Eastern's investment map and steps are being taken to fill them.

"In our particular area we have little competition because we focus on the middle market, which is too big for the VC firms and too small for the big buyout firms," he adds. "In addition, we don't use debt and then because most of our money is principal capital we can commit for the long term."

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• Topics
• Greater China
• Investments
• Expansion
• First Eastern Investment Group
• Victor L.L. Chu
• China
• AVCJ Awards