Q&A: CDH Investments' Shangzhi Wu

Q: What is your sense of the investment environment in China?

A: It's not as easy as when we started 10-15 years ago, but relatively speaking, there is still a very healthy dynamic and a growing private equity and venture capital market. An overall growth rate of 6% is not unattractive on a global comparative basis; some sectors are expanding slower than that, while others - such as TMT [technology, media and telecom], healthcare and logistics - are still growing rapidly. At the same time, we see a lot of encouraging investment opportunities because of the cross-border angle. There are two drivers: the sheer size of the Chinese consumer market and the willingness of domestic companies, some of which are now of global size, to pursue outbound M&A. Domestic capital markets valuations and a strong renminbi are helpful in this respect. Looking at our pipeline, many of the deals relate to cross-border, where we can add value providing access to China's domestic market, either coming into China or going out.

Q: CDH launched a mid-market growth fund last year to operate alongside the main fund. Why?

Ultimately, private equity is a people business and the human capital challenge will always be there

A: There were two factors. The first is our own mandate. We have a $2.6 billion US dollar fund and a $1.2 billion renminbi fund - that's $3.7 billion to put to work over 4-5 years, which works out at about $800 million per year. Based on that mandate, we can't do $20-30 million deals; we have to do $100 million deals. On the other hand, people put forward attractive smaller deals to the investment committee and it is hard to reject them just because of size. We wanted to take advantage of these opportunities and the only way to do it was to have a separate team. Another consideration is sector expertise. Global firms have teams for every sector, but it is hard to do that if you don't have scale - we only have 40 people in our PE business. The mid-market fund focuses on TMT healthcare and other fast growing sectors, so we have been able to build on that, identifying synergies between the two teams. They are separate strategies but under one roof, so information-sharing and co-investment is effective.

Q: To what extent do these companies differ from the mid-cap businesses CDH backed 10 years ago?

A: The sectors are different but company profiles - the sizes and growth rates - are similar to what we were looking at 15 years ago. What we have found is that some of the companies we invested in 15 years ago are now huge. We put $17 million into Nanfu Battery for one third of the company in 1999 and then put in another $30 million to take control. We sold it to Gillette, making a 2.5x return, and two years ago we bought it from Procter & Gamble at an enterprise valuation of around $700 million.

Q: WH Group is another company that has become very large - and CDH remains an investor after nearly 10 years. What did you expect of the company when you first backed it?

A: Every time you make an investment you hope the company will grow to the size of WH Group, and maybe you put in more money and hold it for the long term. But each case is different. Sometimes companies grow to a certain size and then plateau, and you have to make a judgment call on whether to hold or get out. With WH Group, it was always the largest pork producer in China. Then the Chinese pork market grew to five times that of the US, so the company became global in size and also developed global ambitions, which led to the acquisition of Smithfield Foods. We didn't foresee that on day one.

Q: How has CDH's approach to operational value creation evolved?

A: We are still learning in terms of post-investment input. Most of our investments are for minority stakes so it's very hard to implement a 100-day plan, but even when we do have control, China presents a lot of operational challenges. Our strategy has been to team up with Chinese strategic players to address these issues. Baroque Japan is a good example. It had about 30 stores in China when a controlling stake became available, but we didn't think CDH alone could support growth. So we invited Belle International to invest with us, and they actually took over Baroque's China operation and there are now 160 stores. We leverage the resources of our investee companies, our partners, and outside experts in order to add value rather than have a limited number of our investment staff play that role.

Q: CDH is one of few multi-strategy firms in China. Why is this of benefit?

A: I think having a presence in different asset classes is good for CDH and for our LPs. It enables us to get more integrated into the Chinese financial system: we are learning a lot more about domestic capital markets, about our competitors, and about domestic LPs. This knowledge and capacity means we can react at different times to changing policies and market cycles. In each situation, we assess the business opportunity and ask if we can be meaningful, be competitive and form a strong management team. This must happen without diluting the resources for our existing businesses.

Q: With the addition of new strategies, do you feel your role has changed over time from CIO to more like a corporate CEO?

A: I am still very much involved in investment decision-making for the private equity, mid-market growth, real estate, and credit businesses. I am not running around on the frontline doing deals, but our investment committees tend to be quite small - three to five people - so you need to be aware of the risks and challenges. In terms of managing different businesses, our operational structure is very flat: we have partners who are responsible for particular strategies and we help them build teams, develop their strategy and coordinate fundraising. Ultimately, private equity is a people business and the human capital challenges will always be there. You must ensure team members are happy in terms of compensation, promotion and career development. The job may be about making good investments, but to do that well on a broader level, you have to worry about the organization as a whole and think about building different businesses so they can deliver.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• GPs
• Buyouts
• Expansion
• China
• CDH Investments Management
• Shangzhi Wu