Hony still committed to China SOE restructuring, more focused on value creation

"Many private equity firms might consider investing in other markets to capitalize on their presence once they achieve the same scale of business as us," said John Zhao, Hony's CEO. "But we will still focus on China and support Chinese companies as they expand in global markets."

Hony Capital has more than $7 billion in assets under management, which makes it only one tenth the size of leading private equity players in the US. On this basis, Zhao argued, Chinese PE firms still have much room to grow. "We want to be the big fish in the pool," he added, in reference to Hony's domestic ambitions.

Zhao is confident that the investment environment will improve as China's capital markets gradually open up and become more sophisticated, while the government relies on social stability and rule of law as its guiding principles.

However, the private equity environment of today is very different from that of 10 years ago. The downturn experienced by many domestic practitioners is an inevitable consequence of a market moving towards consolidation, with only the strongest players able to survive, Zhao said.

"In 2003, not many people knew about private equity. It changed dramatically in 2009 - almost everyone claimed to be a PE fund manager in China, but it wasn't real and many of them were unqualified. Private equity investment requires high-level professional skill sets," Zhao explained, stressing that Hony refused to turn itself into a PE "factory" driven by get company listed quickly.

"The pre-IPO investment strategy was high risk because it heavily relied on secondary market conditions. What you can see now is many companies are scaling down their business because the government has stopped IPO approvals. China's secondary market is immature, so we never adopted a pre-IPO approach, even though it could generate higher multiple returns in the past."

Hony has instead devoted considerable resources to value creation, setting up a post-investment management (PIM) team of 25 advisory committee members who work with portfolio companies.

Zhao cited Shanghai Chengtou Holdings, a domestically-listed construction and waste management SOE, as a recent example of portfolio company value-add. In April, Hony bought a 10% stake in firm and plans to support its expansion through the acquisition of overseas technology that can be brought back to China.

Of the private equity firm's 70 portfolio companies, more than half fall into the SOE restructuring segment. Zhao noted that there are plenty of companies in China looking to diversify their holdings and develop governance in order to become more market-oriented. "SOEs will never run out of the pipeline to be invested in the next 20 to 30 years," he said.

Early last year, Hony announced reached a final close of $2.35 billion on its fifth US dollar-denominated fund, while collecting RMB10 billion ($1.6 billion) for its second renminbi vehicle. The two funds are 30% deployed and 65% deployed, respectively.

As for sectors of interest, Hony sees increasing opportunities in pharmaceuticals, healthcare, renewable energy, waste management, consumer, and financial services. Cross-border deals are also expected to be on the rise as the private equity firm invests in foreign companies looking to build a platform in China, while supporting local companies that want to expand overseas.

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• Topics
• Greater China
• Buyouts
• Expansion
• Exits
• Hony Capital
• China
• buyout
• Growth capital
• Exit
• IPO
• Outbound investment