Q&A: CITIC Private Equity's Feng Zhai

Q: How has CITIC PE’s control-focused strategy evolved?

A: We have been operating in the private equity industry for nearly 10 years, we’re still a young firm. But we have benefited from the rapid growth of the Chinese economy and our assets of under management (AUM) have expanded quickly. By the end of 2016, we had over RMB100 billion ($14 billion) across US dollar-denominated funds, renminbi funds, fund-of-funds, mandates, and dedicated public market funds. We have invested in more than 100 companies and of these 40 have been buyouts, i.e. we hold at least 50% of the investee company. We have seen 30 portfolio companies go public domestically or offshore. We focus on six areas: industrials and energy; financial and business services; consumer and leisure; medical and health; technology and the internet; and real estate. Most of the buyouts have come in the first four categories. 

Q: What is your process for identifying and executing investments?

A: Every year we review trends and market dynamics in each sector we cover and understand who the key players are. Through further research we identify some candidates and then we establish a dialogue with the management teams. Oftentimes, we follow a company for more than two years before deciding to invest. In terms of deal execution, we have an investment team of nearly 100 and a strong operating team to provide post-investment support and value-add services. Chinese entrepreneurs appreciate our deep involvement in their business, which means they are more likely to sell a controlling stake to us. And that’s how we win buyout deals, even in competitive processes.  

Q: How developed is the Chinese buyout market?

A: There have been opportunities for buyouts over the last four or five years, but we haven’t seen many completed in China. This is partly because there aren’t many private equity firms with the capabilities needed to do buyouts – in-depth deal sourcing, developing complicated deal structures, and putting in place professional management post-acquisition. To do this effectively, a firm must have focus and a  deep understanding of certain industries. In some cases, it has proved difficult for some Chinese GPs to identify high quality management teams and establish a new corporate culture in the companies they acquire. When we do buyouts, we see ourselves as being in the driver seat, not just a passenger. If a private equity firm isn’t ready to take that approach, it will go for minority investments. 

Q: What is the make-up of CITIC PE’s operating team? 

A: Our team focuses on eight core corporate functions: corporate governance, business strategy, supply chain management, human resources, corporate finance, IT systems, branding and marketing, and capital market advisory. All of our team members have previously worked for international or large domestic corporations such as Procter & Gamble, IBM and McKinsey. We also hire external professionals to provide value-added services. Our approach to post-investment management has gone through three phrases of development over the past nine years. In the early days, our focus was to add value to a company when we were a minority investor. Once we started targeting buyouts, we were active in different areas and trying to add value on an individual company basis – we didn’t have the scale within our portfolio to exploit synergies between companies. Now we have that scale we think about portfolio companies and the CITIC PE platform in a different way. For example, we can adopt a centralized procurement policies in order to reduce operating costs for our companies, and we can apply standardized operating procedures for routine functions, irrespective of the sector. As a result, we are better positioned to improve operational efficiency and financial profitability. You can’t just rely on hiring a lot of operating professionals; that’s not the model in international markets. 

Q: To what extent are existing management teams important in driving value creation? 

A: While we seek to play an active role over the course of the investment – with decision power at the board level – we rely on existing management to oversee day-to-day operations. The CITIC PE operating team can provide assistance role, but we can’t replace company management. We will try to retain key management team members who share our vision and strategy, and who demonstrate a capability to lead the organization. We introduce stock incentive plans to make sure the interests of management and the company are aligned.

Q: Has CITIC PE exited any of its buyout investments? 

A: We are still a young firm, so not yet. Our previous exits have been from minority investments. With buyouts, because we want to exert a lot of influence on a company’s strategy and operations, we don’t expect to see results overnight. Having said that, we do assess the enterprise valuation of each portfolio company once a year as part of efforts to track financial performance. Beauty Farm, a premium spa chain operator in China, is a good example of how we try to generate returns through post-investment management. The company provided traditional facial and spa beauty services, but we repositioned it as a medical beauty brand – supporting bolt-on acquisitions intended to expand market share and broadening product offerings, as well as helping to improve internal financial management systems and digital marketing. We went through two CEOs as the objectives for the business changed over time. In 2016, Beauty Farm recorded a 20% year-on-year increase in revenue and a 40% increase in net profit.  

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• Topics
• Greater China
• Buyouts
• Buyout
• China
• Citic Private Equity