Q&A: JD Capital's Lei Cai

Q: How did JD Capital (previously known as Jiuding Capital) establish a foothold in the renminbi fund space?

A: PE in China has gone through three stages of development. The first was in 2000-2008, built on high-growth investments as the economy grew rapidly. This was followed by the so-called pre-IPO era in the wake of global financial crisis, which was supported by regulatory changes that gave birth to a domestic PE industry. JD Capital was formed in 2007 and established itself in the renminbi space with a 2x2 investment model: we backed companies that could double their earnings and double their valuations upon IPO within a 3-5 year timeframe We conducted due diligence on more than 3,000 companies and invested in about 300 of them. While JD has been successful in terms of exits - we have made 52 full exits and seen 97 companies list on the A-share market or the New Third Board - competition in the renminbi space intensified. Due to China's slowing economy in recent years, returns from fast-growing industries are falling. The pre-IPO era has ended and the industry has entered the third stage (the "new normal" era) where decreasing returns from intrinsic growth and lower valuations have to be supported by additional returns from M&A.

Q: In mid-2014, JD Capital's parent company - Jiuding Group - listed on the New Third Board. A year later, the PE business was spun out and listed on Shanghai's main board via a reverse merger. What was the thinking?

A: Jiuding Group and JD Capital share the same vision for going public. Firstly, becoming a public company allows us to expand our funding channels, strengthen the capital base for our current business and support investment in larger transactions. In addition to that, it will also further improve our brand credibility as we must adhere to regulatory and governance requirements. In developed economies, assets managers usually have more than $100 billion under management, whereas in China only a few groups - maybe just a dozen - have $1 billion in assets. As the Chinese financial sector continues to develop, we believe that a diversified pool of capital is key to long-term success. In the meantime, Jiuding Group has also broadened its product offerings, providing mutual funds, securities services and insurance through the acquisition of Ageas Hong Kong. All of these subsidiaries are independently operated. Jiuding as a whole not only wants to be a pure PE manager, but also a multi-asset manager.

Q: Where are the best PE investment opportunities in China right now?

A: In the new normal era, we have diversified our strategy from predominately pre-IPO deals to include PIPE deals and M&A transactions such as buyouts. We see significant opportunities in industry consolidation. We have rolled out a dedicated program to identify and execute those deals. First, we plan to back about 100 industry leaders, including some existing portfolio companies. There are more than 3,000 companies listed on the A-share market, but very few have a market capitalization above $10 billion, which we consider a benchmark for our strategy. We help these companies enhance their competitiveness by conducting horizontal and vertical M&A to consolidate their respective industries, and strengthen their position from a capital markets perspective so they can become the real regional, national or global leaders.

Q: Domestic IPOs have been difficult since 2012 and the regulators continue to tighten capital market controls. What does this mean for PE exits?

A: China's stock market is recovering slowly from the shock in June 2015. We have seen an increase in new listings over the last year, and the IPO approvals process has begun to speed up. However, we expect valuations to gradually come down, eroding the premium of public markets over private markets. We now pursue a multi-route exit strategy, including IPOs, trade sales and buybacks. The New Third Board can also serve as a transitional channel to go public. Companies can use these listings to become more familiar with capital markets and strengthen their financial performance until they are of sufficient size to move to the main board.

Q: JD raised its first US dollar fund in 2010. What were the major challenges in doing this?

A: We raised $120 million for our debut fund and a second fund closed in 2013 at $200 million. The majority of our LPs are institutional investors such as sovereign wealth funds - Temasek Holdings-owned Vertex Ventures is an anchor LP in both funds - insurance companies including Allianz and Allstate, fund-of-funds like Partners Group and HQ Capital, and family offices. It has been a challenge working with international LPs, we have to educate them on the nature of the Chinese PE industry. For our LPs, investing in JD's growth funds was similar to an American buying tickets to watch a football match while on holiday in Europe: They were excited to be part of something new but kept asking themselves if they were supporting the right team. With an overall IRR of 28% over the past nine years, we think we are the right team. We are now working with existing and prospective LPs on a new strategy for the era of industry consolidation and M&A.

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• Topics
• Greater China
• GPs
• JD Capital
• China