Q&A: CICC Capital’s Mengyang Yang
Mengyang Yang, an executive director and head of private equity in Hong Kong at CICC Capital, on China’s post-pandemic revival, plans for a flagship US dollar fund, and managing guidance funds
Q: Will the recent loosening of COVID-19-related controls in China contribute to an economic rebound next year?
A: Consumption may fluctuate in the short term, but recovery is the general trend. In the long run, a rebound will be driven by three key factors: improving economic growth will increase household incomes; demand for goods and services will be reinvigorated by reduced uncertainty; and excess savings that have accumulated in the past three years with the decline of consumption elasticity will be released. In addition, policies around promoting consumption and stabilising real estate will boost consumer confidence.
Q: Is the policy uncertainty that has made many investors wary of China over the past 18 months likely to abate?
A: The government’s top priority is economic growth; the target is concrete. Investors unfamiliar with the China market often dip a toe, withdraw, and then try again. Those with a better understanding of China show a continued interest in opportunities. I think all the talk about a retreat from China is driven more by sentiment than by fundamentals. Once the policy changes, institutional investors may quickly adjust their portfolio allocations. Based on China’s economic scale, many are already under-allocated to the country.
Q: How should international investors think about Chinese policy?
A: From a macro perspective, China has reached a new stage of development where social impact is a bigger consideration than before. If an investment doesn’t correspond to ESG [environment, social, and governance] principles, it could be a problem.
Q: CICC Capital has about CNY 400bn (USD 57.3bn) in assets under management, most of which is in renminbi. What is your strategy in terms of US dollar fundraising?
A: We have US dollar funds that follow specific themes like healthcare or focus on specific regions. We are closely tracking US dollar LP investors and we will launch a flagship US dollar fund when market conditions permit. We concentrate on growth investment opportunities in deep technology, high-end manufacturing, healthcare, and consumer. We are also interested in the domestic substitution theme as well as the new energy theme, including energy storage and hydrogen energy.
Q: Some managers have suggested that the range of investable targets for US dollar funds in China is narrowing. Do you agree?
A: I do not. If a start-up founder prefers to raise capital in renminbi instead of US dollars, that’s market-oriented behaviour. We can’t force them to accept US dollars. But there are advantages to having US dollar funds. Generally, they represent more patient capital. And with longer investment cycles, you have the flexibility to deploy in a counter-cyclical manner.
Q: As a Hong Kong-based investor, what do you make of the business-friendly measures announced in the chief executive’s recent policy address, including the plan to establish a HKD 30bn (USD 3.8bn) fund to co-invest in companies that set up local operations?
A: Hong Kong is irreplaceable as a bridge connecting China to global investors. That’s why CICC Capital’s international business is based in Hong Kong – so we can meet international fund managers, investors, and other players face-to-face every day, which is very helpful in terms of building mutual trust and understanding. However, Hong Kong also has great potential as a technology and innovation hub, as well as a financial centre. Just look at its cluster of world-leading universities. The government’s new fund can play a role in that. CICC Capital wants to play a role as well by contributing to the establishment of a strong local entrepreneurial and venture capital ecosystem. We want to encourage GPs from the mainland and overseas to back Hong Kong-based technology enterprises. We will help local universities and research centres to commercialize their work and support mainland companies to establish R&D centres in Hong Kong as a step to going global.
Q: How can a fund-of-funds contribute to this?
A: In China, we have previously helped connect research centres and universities with investors and strategic players, exploring the commercialisation potential of different projects and seeing how these are aligned with market demand. We can do this because we have a very large network that extends upstream and downstream in multiple areas. We would like to bring this model to Hong Kong. About one-quarter of CICC Capital’s AUM is in fund-of-funds. We not only create returns for investors but also help build industry value chains by bringing capital to critical nodes in these value chains. For example, we manage CICC Genesis Fund, which is sponsored by the National Development & Reform Commission and the Ministry of Finance and has many reputable institutional investors. We also manage Beijing Science & Technology Innovation Fund. More than 50 component funds have been established in cooperation with colleges and universities, leading science and technology enterprises, and start-ups. These feeder funds have invested in more than 700 projects, covering a wide range of hard science and technology.
Q: How does the operation of these fund-of-funds differ from your other products?
A: We are market-oriented and pursue returns. On this basis, our number one principle is that we play a guiding role. There are certain requirements in terms of the size, stage, and sector of underlying investments. Transparency of information is essential to making it all work. We have access to the capital accounts of underlying funds, so we know what they have invested in. We also have an integrated system that allows every team member to track the projects we have invested in and how these fit into different value chains. Each portfolio company is tagged according to the function it serves within these value chains. To play this kind of guiding role, you need broad coverage and a deep understanding of multiple industries. In addition to managing approximately 300 GPs, we have made about 1,000 direct investments. This network is very helpful.
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