AVCJ Awards 2016: Private Equity Professional of the Year: Frank Tang

Q: Liquidity has historically been one of LPs' primary concerns about private equity in China. Is the situation improving?

A: I think the exits situation has definitely improved. We see more trade sales, backdoor listings, IPOs and dividend recaps, so there are all kinds of different ways of returning capital. The China IPO market is slowly opening up and it will probably accelerate going forward. The Hong Kong IPO path is also more proven, although it does blow hot and cold. In my investment career there have been quite a few Hong Kong listings but at FountainVest it has not been the dominant way to exit so far as many of our exits were through onshore listings and trade sales as well.

Q: Focus Media was originally intended to be a Hong Kong IPO but it ended up being an onshore reverse merger. Why the change in plan?

A: Towards the end of 2014 and the beginning of 2015 the China market became more welcoming to well-known Chinese companies that were listed overseas and wanted to come back. That is not the situation right now, but during 2015 the regulators were open to it, so we met with them and decided to take that path. It was about a one-year process, from meeting the regulator to completing the reverse merger in December 2015. One of the difficulties was finding a suitable company to reverse into - there is always a reason why these companies are willing to be sold, maybe their core business has hit a bump or there are other issues. But it ended up a win-win: the founder of the shell company got a great outcome, the regulators no longer had to worry about unhappy shareholders in the shell company, and Focus Media got listed.

Q: Subsequent to the reverse merger, there was a spike in privatizations of US-listed Chinese companies as other investors looked to take advantage of similar opportunities. Are you still interested in these deals?

A: We never looked at Focus Media as a valuation arbitrage play between NASDAQ and China, but others took the cue and have tried to do that. As private equity investors we always have to come back to the fundamentals and decide whether a target is an investable business. Just relying on the possibility of flipping a company is dangerous. It is no different from looking at pre-IPO investments and saying, ‘I don't care what the business is, just that it will go public.' That could end in tears if the business itself is not investable.

Q: There have been two notable exits from Fund II - Focus Media and Key Safety Systems, a US-based business that was sold to a Chinese strategic. How are you capitalizing on the outbound M&A trend?

A: There is clearly a lot of appetite from Chinese strategic investors for good assets, whether domestic or overseas. There are several types of cross-border deals we target. First, joint ventures with overseas partners that want to focus on the China market - IMAX China, which went on to list in Hong Kong last year, is an example of this. Second, outright acquisitions of companies that are relevant to China but domiciled overseas, such as Key Safety Systems. Third, we work with portfolio companies on acquisitions. For example, KHB, our medical diagnostics business based in Shanghai, acquired an Italian in vitro diagnostics company at the end of last year. We were instrumental in helping them to source and execute the transaction.

Q: What has been the impact of the restrictions on capital outflows?

A: it is good news for US dollar-denominated funds that have the currency to do these deals.

Q: The sector focus for Fund III is consumer, healthcare and industrials. Consumer includes media and sport, and FountainVest recently formed a joint venture with Focus Media to focus on sport. Will this partnership approach become more common?

A: I would expect there to be more of these mutual arrangements going forward as strategic investors find that private equity is a good partner and they can leverage one another's experience, capital and networks. With Focus Media, we are looking at select opportunities to see where we can add value jointly.

Q: Do these efforts replace or complement in-house operational efforts?

A: We are committing more resources to the post-investment side. We leverage existing portfolio companies, use retired CEOs, hire consultants, all of that. But we are also spending more time and effort developing our in-house portfolio management team, and thinking about how we can further build up our operational capabilities. You could say that if you have airbags you don't need safety belts, but we would like to have both.

Pictured: Frank Tang (right) of FountainVest Partners receives the award from Steven Tran of Hogan Lovells

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

• Topics
• Greater China
• Buyouts
• IPO
• Fundraising
• China
• Fountainvest Partners
• AVCJ Awards