Q&A: CDIB Capital's Paul Yang

Q: A captive unit of China Development Financial (CDF) since 2006, CDIB Capital closed its first fund with third-party capital this year. What was the thinking?

A: We were first allowed to make direct investments in mainland China in 2008. Over the past seven years, all our transactions were funded by our listed parent in order to build a track record. However, it is expensive for a listed company to invest from its balance sheet. If we raise money from third-party investors, the parent no longer has to contribute risk capital. CDF anchored CDIB Capital Asia Partners, putting in $100 million, or about 25% of the total, to show commitment to the team. The contribution will be smaller for our next fund, allowing us to become a pure fund manager. In that sense, when a customer comes to CDF, the group can offer a full-service solution, including insurance, securities, fixed income, and alternative investments.

Q: How is CDIB Capital's strategy differentiated?

Our fund is looking at Korean, Southeast Asian and US companies that drive growth through deeper penetration in China. This doesn't prevent us from investing in a Chinese company, but cross-border is an angle through which we can add value

A: China is a large market where many strategies can work, such as state-owned enterprise (SOE) privatization, consumer, or technology, media and telecom (TMT), which is now so hot. We have been doing cross-border investments for many years, whereas many China-focused GPs haven't really needed to look at these deals because they live happily within the large domestic market. But if you look at Taiwan and Hong Kong, there is already so much cross-border activity. From ASEAN to Australia, their growth to certain extent is also driven by China. Investors can benefit from Chinese growth without necessarily investing in a Chinese company. Our fund is looking at Korean, Southeast Asian and US companies that drive growth through deeper penetration in China. This doesn't prevent us from investing in a Chinese company, but cross-border is an angle through which we can add value. We can help international companies operate in China and also help Chinese companies go overseas. We're a partner on both sides.

Q: How do you source deals in these different markets?

A: CDF has been in Korea since 1999, and we have some of the best returns among investors in that country. CDIB Capital doesn't have a physical presence in ASEAN, but we cover the region from our Hong Kong office and we're going to open an office in Singapore. If you look at the group as a whole, KGI Securities - which has 350 investment bankers in Singapore - is one of the top five brokerage firms in Thailand, with 400 people in Bangkok. We can leverage the group's investment banking team to generate deal flow. In addition, we have a four-strong team in our San Francisco office, where we are part of a large community of mid-size PE firms. These counterparts aren't like global firms that can set up a team in Hong Kong or Beijing. Sometimes they look at acquisition targets that have interests in China, and they need a local partner. We are constantly in discussions with around 20 US GPs about co-investing in their deals. We worked with Advent International on the acquisition of Coffee Bean & Tea Leaf and with Blue Point Capital Partners on Smith-Cooper International.

Q: Which sectors are best-suited to your cross-border strategy?

A: We're looking at three buckets of opportunities. The first is consumer, ranging from consumer products and services to specialty retail. Coffee Bean is one example, helping a global brand expand in China. We're also looking to invest in a fresh produce specialty retail business in China, which imports a lot of fruit from Taiwan, and we are about to acquire an Italian baby products retailer and bring it into China. The second bucket is high-end processing and manufacturing. We see no competition in this space and we have two deals in the pipeline. The third bucket is new services, which will account for 5-20% of the fund. These are new business models such as online-to-offline (O2O) services and peer-to-peer online lending. We invested in Chinese online furniture retailer Meilele.com, and we think this type of business can go cross-border. The internet is mainly for venture investors, but we think these areas will have tremendous growth. As a PE fund, we typically only get involved in the later stages, although it depends on whether we can get in at a valuation that suits us.

Q: CDIB Capital has also launched a cross-strait fund. How does it differ from the main fund?

A: When we raised CDIB Capital Asia Partners, some Asian LPs said they thought we should focus on Taiwan-China. I responded, ‘Yes, that fund will come.' CDIB Capital Taiwan Partners is a smaller fund - about $170 million - and it focuses on a cross-strait strategy. While Asia Partners is a middle-market growth fund that typically deploys $25-50 million in each deal, Taiwan Partners is going to commit $5-10 million to each investment. It was almost oversubscribed from day one due to enormous interest from Taiwanese investors, but we want 20-25% from foreign investors in order to be more institutionalized. Taiwan Partners is a later-stage VC fund, targeting precision manufacturing. Portfolio companies should be smart and green. So anything concerning robotics, drones, cloud computing and recycling will fit into it. We want to support Taiwanese companies as they set up manufacturing sites in mainland China.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• People
• GPs
• CDIB Capital
• Taiwan (China)
• China
• GPs