China’s Jiuding committed to pre-IPO strategy

"The IPO hiatus won't last forever - the Chinese IPO market has been shut at least eight times over past few years. It hints some new measures will launch soon," Zhongyi Zhao, founding partner at Jiuding, told the Hong Kong Private Equity & Venture Capital Association's (HKVCA) China summit.

Jiuding's approach focused on getting a company to IPO quickly and leveraging exit multiples available on domestic bourses; and then repeating the process several dozen times over. The model was highlighted in a Harvard Business School case study, but by the market was already struggling by the time it was published in December 2011.

Zhao maintained that public lisitings remain the most developed way for direct financing in China. He noted that the proportion of indirect financing - which is dangerously overreliant on bank loans - is excessively high compared to direct financing. "Financing structures will change in the future and direct financing will play a more important role in order to reduce risk," said Zhao.

"Investment return for IPOs exit is the highest among the options," he added. "We will take M&A as a random option, since Chinese market is not yet developed for M&A."

Chinese PE firms that built their investment reputations on renminbi-denominated funds continue to target US dollar vehicles with a view to attracting more long-term investors and eliminating portfolio volatility. This comes despite an increasingly difficult fundraising environment for China funds in both currencies.

Jiuding raised its first US dollar fund in 2009 and counts Temasek Holdings among its backers. "To launch US dollar funds can help us attract professional institutional investors as well as increase our global exposure," said Zhao.

Margaret Shao, a partner at Fortune Venture Capital, added that managers with renminbi fund experience will be able to stand out from the crowd when they launch US dollar vehicles because they have a different kind of expertise.

"Foreign fund managers would mainly focus on sourcing deals in the first tier cities. But the likes of us - Fortune and Jiuding - have capability to source deals from second- or third-tier cities. We can invest in agricultural industry but foreign funds are limited to technology start-ups," Shao said.

Although renminbi fundraising sunk from $31.2 billion in 2011 to $18.6 billion last year and only $4.2 billion in the first five months of 2013, those that are able to attract capital are seeing a change in their investor bases. While high net worth inviduals are bailing out, institutions are willing to be more patient.

"About 80% of our fund commitments are from professional investors," Shao said. "Those include the National Council for Social Security Fund (NSSF), insurers, state-owned enterprises and government-related funds, which are looking for stable returns."

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• Topics
• Greater China
• Renminbi fund
• Venture
• LPs
• Fundraising
• Exits
• China
• Renminbi
• Venture
• Shenzhen Fortune Venture Capital
• LPs
• NSSF
• IPO
• M&A
• Fundraising
• Exit