Profile: SMC Capital's Hamilton Tang

China's emerging middle class is creating a huge new audience for the entertainment industry. The country built an average of 27 new cinema screens per day last year, the highest rate ever, and surpassed the US with 40,475 screens in total. China is expected to overtake the US in box office revenue, becoming the world's largest film market, by 2019, according to research firm IHS Technology.

Just 20 years ago, however, the industry was in a funk, dominated by propaganda releases and dogged by poor equipment. But Hamilton Tang recognized the potential for a US-style movie experience in China and set himself a goal of creating a group of world-class cinemas for the local market.

Born and raised in the US, Tang moved to Hong Kong with Morgan Stanley in 1993. Three years later he quit investment banking and became an executive at Lark International Entertainment, the Hong Kong-based owner of UA Cinemas. He teamed up with James Kralik - a Harvard Business School classmate who joined Lark from McKinsey & Company - to launch the group's mainland media business in 1996.

A door opens

Foreign involvement in China's entertainment industry was highly regulated, but policymakers had started to experiment with allowing overseas capital into the film exhibition space. Investors, including Hong Kong operators, could own up to 75% of cinema joint ventures in seven pilot cities: Beijing, Shanghai, Guangzhou, Chengdu, Nanjing, Xi'an and Wuhan. Tang and Kralik opened the first Studio City Cinema branded multiplex in Wuhan in 1997 and then another in Chongqing.

"I certainly had a dream to be an entrepreneur, doing something on my own. The movie and film industry had a very promising future in China, and I think I was right," says Tang. "But my timing was a bit off, maybe 10-15 years too early. Today, China has the second-largest box office revenues in the world after the US. I was part of the early generation in the industry, which was quite exciting."

Studio City Wuhan accounted for 20% of the city's total box office, and this success led to expansion in Shanghai. By 2000, when Tang left the business, Studio City was the biggest foreign operator of movie theatres in China with six screens and more than 1,500 seats.

To Tang, running a cinema chain is all about achieving scale: the more screens an operator has, the lower its rent for prime shopping mall locations and the better the terms it can negotiate with producers. This need for additional capital prompted Lark to sell a majority stake in the JV to external investors, with Tang and Kralik together owning 20% of the entity.

"I put a lot of money, I even borrowed money from the banks to buy shares. It was the same for my partner. We worked very hard and took risks," Tang recalls.

However, after Lark's founder passed away in 1999, the two decided to sell their interests in the cinema business and online ticketing platform to different strategic investors. Tang's career then took its next turn following a meeting with Simon Murray, former managing director at Hong Kong's Hutchison Whampoa and founder of Simon Murray Group (SMG), at the Olympic Games in Sydney.

"I wasn't planning to interview for a job. I was enjoying myself and I bumped into Simon, so we had a nice chat. A few months later I joined SMG, and it has been part of my life for the last 16 years," Tang says.

As head of the group's private equity business, SMC Capital China, he is responsible for investments in middle-market businesses, primarily in the consumer sector. A debut fund was launched in 2004 with Milestone Capital, but the parties subsequently agreed to go separate ways. SMC followed up with the RMB600 million ($86 million) SMC Capital China Fund I in 2010, which has generated a gross multiple of 2.3x. Last year Tang led a management buyout of the business.

Next generation

With the launch of a second China fund targeting $200 million, Tang wants to diversify the LP base, adding more institutional investors to the existing collection of family office backers, most of them from Europe. The consumer focus remains largely unchanged. SMC looks for niche segments, perhaps best exemplified by a previous investment in Shenzhen horse-trading company Rider Horse. It has supported expansion of the business into breeding, training and racing.

Tang sees technology and overseas expansion as the lynchpins of China's next generation of consumer investments as companies adapt to better serve a fast-evolving market. SMC's recent deals include Ecmoho, a cross-border health supplements platform through which consumers can access high-quality products, and Huishoubao, a secondhand mobile phone recycling business that uses technology to evaluate handset quality and generate standardized selling prices.

There are plans to help Huishoubao export refurbished phones to developing markets in Southeast Asia and Africa, and Tang sees this value-add as integral not only to making Chinese companies more differentiated and exposing them to international best practices, but also in reinforcing SMC's relevance to entrepreneurs as a minority investor. Furthermore, he notes that founders appreciate backers who speak their language and understand their needs.

"Operating a media business before gave me a lot of experience at the coal face, dealing with Chinese consumers, because every day customers were coming in to watch movies," Tang says. "It also gave me a very practical sense of the opportunities and challenges of being an entrepreneur in China."

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• Topics
• Greater China
• Growth
• GPs
• China
• SMC Capital China