AVCJ Awards 2017: PE Professional of the Year: Yichen Zhang

Q: CITIC Capital hit the hard cap on the US dollar portion of its latest China fund after less than a year in the market. What does this say about LP demand for China private equity?

A: It’s different from before because demand is only strong for well-established firms with track records. For first-time funds, or for other large funds that have hit a rough patch in terms of performance, it’s more difficult.

Q: Are the renminbi and US dollar-denominated portions one fund or two separate funds?

A: With our previous fund, by and large we managed to have the dollar and renminbi portions as parallel funds, investing in the same deals. The complication arose this year that quite a few of the deals we’ve done have been structured offshore. It is difficult for the renminbi fund to keep pace with the dollar fund because it cannot commit with the same degree of certainty given regulatory approval is involved. Overseas investors care about conflicts and we bend over backwards to try to appease them, and to a large extent we were able to do that in the last fund cycle. For the new fund, the dollar fund is close to 55% invested and the renminbi fund is 36% invested. Basically, it’s no longer tenable to have them as parallel vehicles. Even if we have the intention of making them parallel down the road, we can’t because the fund cycles are different.

Q: For this fund you also combined the China and international teams. Why?

A: As China becomes more integrated in the global economy, many China deals have an international angle and many international companies have a China angle. To fully utilize our sector expertise and international expertise it made sense to combine the teams. The international team works in an environment with very different dynamics – almost every deal is an auction. They have close relationships with all the mid-market financial advisors in the US and Europe, and with many mid-market GPs. Combining that with the sector expertise of our China team has delivered some amazing results. When we bought CIBTvisas, a visa processing company, it didn’t have any business in China. If our international team looked at it alone, it might have passed on it. But our China team includes a group that focuses on tourism, they liked the outbound business travel theme, and when they saw CIBTvisas, they immediately knew two Chinese companies that were perfect acquisition targets. The two teams are now working with it on those acquisitions.

Q: Has your approach to working with partners on outbound deals changed?

A: We are partnering with Chinese companies more on outbound deals – that is the case for Ansell Sexual Wellness and Axilone. For areas we are not familiar with, we work with other private equity firms. For example, Formel D was our first investment in Germany, so we decided to team up with 3i.

Q: You worked with your parent company, CITIC Group, as well as The Carlyle Group on the McDonald’s China and Hong Kong deal. Has this happened before?

A: We hadn’t worked with CITIC Group on a deal before, but we worked with Carlyle on Focus Media. McDonald’s made it very clear from the beginning that it didn’t want PE players – we had to bring in CITIC Group or there was no deal. One issue was that CITIC Group is such a large SOE [state-owned enterprise] and the McDonald’s people wanted to know who they would be dealing with, so CITIC Group designated me to lead the deal.

Q: What does the company need from new investors?

A: The most fundamental issue is that decisions need to be made by people who are on the ground, not by someone who is sitting 10,000 miles away. Opening stores wasn’t a bottom-up process – you would report your profit back to headquarters, a portion of global was allocated for capex, and then you would fight with the other countries over that capex pool. In many countries they probably didn’t need to open new stores, but in China you need to open a lot. However, under that system, the capex can’t all go to China. 

Q: What does this mean for specific business development initiatives?

A: The biggest growth driver right now is delivery – it increased by 81% in the first half of this year and the growth in major cities like Beijing and Shanghai is phenomenal. McDonald’s headquarters in Chicago was very impressed. You tell that to a guy in Chicago and he won’t believe it. The next step is fostering a stronger partnership with those delivery companies, Meituan-Dianping and Ele.me. Then there is digital marketing. McDonald’s initially planned to create a single global app but I explained to the global CEO that the dynamics of the China market is very different from the rest of the world, it needs its own app and we need it faster. Close to 45% of McDonald’s purchases are made using electronic payment – the biggest is WeChat Pay, then Alipay. With our relationship with Tencent, I hooked up the two teams and within six weeks, we had a customer loyalty program up and running. Now it serves four million users. We were in Chicago three weeks ago and McDonald’s management said we were leading the world in this – and in digital marketing China does lead the world.

Q: Are there similarities with Wall Street English?

A: Yes. After Pearson took over the business it added another layer of management. If Wall Street English team in China wanted to launch an app they would have to coordinate with seven vice-presidents at Pearson.

Q: Why are we seeing more China divestments by foreign companies?

A: The multinationals might say one reason is that the business environment has become unfriendly to foreign capital. I don’t believe it. For a while, instead of national treatment, the multinationals were getting super-national treatment. Anywhere they went they would enjoy lower taxes than local companies and they negotiated good deals on land – local governments just wanted them there. A lot of those advantages have now gone, and they must compete on a level playing field. At the end of the day, multinationals believe they bring in best practice, which might be true, but you still need to adapt to local conditions and they often find this difficult. Domestic competition is also getting a lot stronger. In addition, multinationals used to get a China premium for their business on the public markets, but since 2014 it has become a discount. If that is the case and there are Chinese players willing to pay a good price, why not sell and book a gain?

Q: What is the biggest advantage of being a multi-strategy firm in China?

A: You can say there are synergies and all that, but ultimately the biggest advantage is that Chinese investors care about the brand of the firm more than the individual team. If you are multi-strategy you have a larger footprint, so they tend to hold you in higher regard.

Q: There is a growing interest in credit strategies…

A: We have a mezzanine business but it’s not a fund – a fund structure isn’t necessarily the right way to do it in China. First, it’s mostly US dollar funding and the collateral is in China so from a secure lending perspective it’s difficult. Second, you need to fundraise every couple of years, which is cumbersome. What we do is raise renminbi capital and syndicate the products out, so it’s partially our own money, partially fund money, and a lot of co-investment.

Q: Would you consider introducing other strategies?

A: In addition to buyouts, we have real estate, mezzanine, and public markets. We had a venture capital division, but as a multi-strategy platform, the value of a strategy to the platform is its contribution to assets under management. Venture capital funds are never going to be that big – they are never going to get rich collecting fees – and so we might not be the platform to attract the best teams. We use our balance sheet money to take LP positions with a number of VC funds and build close working relationships with then, which means we can look at some of these companies early on. We have a team that focuses on One Belt One Road – we are onto our second fund for that – and there has been talk for many years about infrastructure plays in China. But it never works because local governments have cheap sources of funding and they are good at doing infrastructure.

Pictured: Yichen Zhang of CITIC Capital receives the Private Equity Professional of the Year award from Hogan Lovells' Tom Whelan 

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• Topics
• Greater China
• Fundraising
• Buyouts
• Trade sale
• GPs
• China
• CITIC Capital
• Yichen Zhang
• AVCJ Awards