Q&A: CDIB Capital's Lionel de Saint-Exupery

Q: What has been the impact of Paul Yang agreeing to move to KKR?

A: Paul was president and CEO of China Development Financial (CDF) and chairman of CDIB Capital, the PE business we established together in 2006. It's a friendly transition; he will remain involved as a board member of both CDF and CDIB as well as an advisor to the fund. There is no change in our day-to-day operations. Our team is highly stable and cohesive.

Q: How significant a part of CDIB is CDF?

A: We are historically the core business of the group. Although the group has evolved to include securities and banking, half of the balance sheet is still allocated to principal investments. We are leveraging our legacy of success in Taiwan, regionalizing our efforts, and shifting away from proprietary investment to an asset management business. Over the past two-and-a-half years we have gone from an entirely proprietary business to raising six funds and in excess of $1 billion in third-party capital.

Q: What is the thinking behind the range of funds?

A: We have the flagship US dollar-denominated PE fund, two renminbi VC funds, a biotech fund and a lifestyle fund in Taiwan, and a recent mandate from Alibaba Group to manage an innovation fund. It's a family of funds that are aligned with our capabilities and where we see opportunities. In private equity, we are very focused on consumption, advanced manufacturing and new services. We pursue China growth by investing in and around China, targeting companies that are proxies to the country. This allows us to mitigate the investment risks we still face. First, valuations are high. Plenty of capital is available and so investors tend to overpay for lesser quality businesses than in more mature markets. Second, there is a relative lack of management talent. Mid-market companies are driven by talented entrepreneurs, but they don't have a strong bench of executives with functional expertise. Third, we are reliant on IPOs for liquidity and the China market has a huge bottleneck and is close to being shut down. By targeting China proxies we have more exit alternatives.

Q: How does the investment in Best Logistics, which is part-owned by Alibaba Group, fit into the strategy?

A: Eighty percent of what we do fits into the following strategy: we lead growth investments of $25-75 million in mid-sized companies with $150-200 million in sales, EBITDA margins of 20% or more, top line and bottom line growth in excess of 30% or more, no debt, cash rich. And we make growth investments of $25-75 million. However, we can invest earlier or later in a compelling business such as Best Logistics. It fits into our new services investment theme, which includes e-commerce and outsourcing non-core functions.

Q: You also recently invested in Tutwo Outdoor, a domestic outdoor sporting goods retailer...

A: It is still early days for outdoor as a category, but there is a clear trend towards wellness and healthier lifestyles. We have been looking at outdoor for a while and Tutwo happens to be the leading player with more than 1,000 stores nationwide. A shift is taking place from just buying products to buying experiences. People go to a Tutwo store and have a salesperson educate them as to what they need. There are now clubs and travel agencies in the stores - you can sign up for a three-day trek in Inner Mongolia or a local camping trip. There are already in excess of 350,000 members in this network.

Q: Is there a cross-border angle?

A: We've had meetings in Europe and the US with international brands that are unable to access China on their own. Tutwo is a critical channel for them and the company needs these international brands and technologies. We are pursuing potential acquisitions as well as commercial agreements. For example, Tutwo recently signed up Salewa, a German brand with a strong following in the trekking community. They have tried and failed to enter China twice in the last 20 years. In just two months, Tutwo has opened 35 stand-alone Salewa stores in China.

Q: To what extent do you see themes in other markets that then play out in China?

A: With The Coffee Bean & Tea Leaf, we observed the premium coffee culture changing across our network. We couldn't find a suitable target within China so we bought a global brand in the US and are bringing it into China. We have a local franchisee partner and are rolling out stores. We have seen similar trends in the adoption of outdoor activities - Korea is the biggest per capita market globally for outdoor apparel and equipment.

Q: How do you leverage the China-Taiwan channel?

A: Management talent is the biggest thing we can source in Taiwan and that expertise is effective in China. Taiwan can also contribute a lot in terms of advanced manufacturing, although China is catching up quickly. We recently invested in a business called Jiangyin Tongli Optoelectronic Technology, which makes optical protective films for smart phone screens. We brought in Compal Group, one of the world's largest contract manufacturers, to help us evaluate the technology. They were so impressed they decided to become a customer and to co-invest alongside us. That is a good example of a Taiwanese group embracing technology developed in China.

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• Topics
• Greater China
• GPs
• China
• CDIB Capital