Profile: Black Soil's Chang Sun

The seeds of Chang Sun's China agriculture business were planted several years ago when a friend shared some research that showed how far a small amount of investment could go. To take just one example, farmers use four times as much fertilizer as their US counterparts, have double the unit production costs for corn and one third the yield. If crop nutrients could be used in a more sensible way, these statistics could be turned on their head.

"The more I looked at it, the more excited I became. Then I decided to jump in with both feet, and invested in land transfer deals using my own money," Sun says. "My friend Fang Fenglei [founder of private equity firm Hopu Investment] heard about it and told me I was being idealistic. That may be true, but I want to make an impact."

Sun set up his new firm, Black Soil, last year after 20 years with Warburg Pincus. The transfer of land use rights is key to his productivity-oriented investment thesis: by contracting out these rights from multiple farmers, Black Soil can bring consolidation to a fragmented sector, introduce more automation, professionalize management, and pursue economies of scale.

My life has changed; it is difficult for me to get used to, but I have to accept it. Many successful entrepreneurs have gone on to become fund managers. I am going in the other direction, which is rare

These goals are ambitious as well as idealistic, and not all financial investors are convinced by the pitch. It represents a role reversal for Sun, who having helped Warburg Pincus become one of the first US-based private equity firms to gain a foothold in China, used to sit on the other side of the desk and decide whether entrepreneurs' ideas were worth backing.

"One should learn how to let go. People often have too much of a vested interest in what they are doing, and this makes them reluctant to leave their comfort zone," he observes. "My life has changed; it is difficult for me to get used to, but I have to accept it. Many successful entrepreneurs have gone on to become fund managers. I am going in the other direction, which is rare."

Unorthodox education

Sun was not born into a life of comfort. Born in the western province of Gansu, his father worked for a Zhejiang-based electric power company until falling victim to China's Cultural Revolution. Sun, still in primary school, moved to the countryside to stay with his nanny. Education was typical of the spirit of the times: children received lessons in crop cultivation and machine maintenance rather than academic subjects.

Sun became self-taught in unusual circumstances. After high school he signed up for a four-year term in the air force and during this time a friend bought him an English grammar book. Sun stayed up at night studying and listening to Voice of America while his fellow recruits slept.

When China resumed university entrance examinations in 1977, Sun was the only student from Zhejiang to win a place at Beijing Foreign Studies University. As a sophomore, he was accepted on to a United Nations program for Chinese-English translators, which involved a two-year postgraduate placement. By 1984 he was working at the UN headquarters in New York.

However, life as a translator was unfulfilling. Sun resumed his private studies, focusing on mathematics and the sciences, and received a scholarship to enter a joint MA and MBA degree program at the Joseph Lauder Institute of International Management and the University of Pennsylvania's Wharton School of Business. On graduation, he was hired by Lepercq De Neuflize, a boutique asset management firm.

In the early 1990s, with several investment banks looking to expand in Greater China, Sun moved to Hong Kong to work for Goldman Sachs. He rose quickly to executive director in the investment banking division, carried by a wave of state-owned enterprises seeking offshore listings. A year after working on the first H-share offering, by Tsingtao Brewery in 1993, he was put in touch with Charles R. Kaye by a head hunter.

Now co-CEO of Warburg Pincus, back then Kaye was a young managing partner tasked with opening the Hong Kong office. He invited Sun to establish the firm's China and North Asia operation, but Sun was reluctant. "Goldman at that time was almost a household name and had a great reputation. Nobody knew about Warburg Pincus; you had to build from the ground up. I had to explain to people that Warburg Pincus was nothing to do with UBS Warburg, because the names were similar," he recalls.

Seeing potential

Nevertheless, he saw potential for Warburg Pincus' minority investment style in China and accepted a job that paid half his Goldman Sachs salary. An early step was to come up with a Chinese name for the private equity firm - he settled on "Hua Ping," which bears some phonetic similarity to the English name. Local entrepreneurs' lack of familiarity with private equity, and the absence of any intermediaries to assist with deal sourcing, posed more serious obstacles. As a result, Sun spent most of his time on the road.

"Today it only takes about 20 minutes on the high-speed train from Shanghai to Nanjing. That's very different from 20 years ago. Back then, tractors, trucks and donkey carts filled the roads and there was no street lighting," he says. "It was so dangerous to travel in China that I actually asked the firm for extra life and disability insurance."

Warburg Pincus' Asian operation focused only on China and India, and Sun started with three fund managers - one from each country and another from the US. During the first seven years, he built up the team and developed the investment strategy, committing about $250 million, to start with in increments of $5-10 million. In the 13 years after that, a total of $5 billion was invested and check sizes now routinely enter the $100-$150 million range. Warburg Pincus' Asian portfolio has grown to about 40% of total assets.

Skilled at Chinese calligraphy and chess, four years ago Sun added Tai Chi to his leisure pursuits and practices the ancient marital art every morning. He believes these activities help him relate to company founders. "Everyone at Warburg Pincus is taught to respect entrepreneurs, who are successful in their own right. When they come to us for financing, they aren't begging for money so it's important to put ourselves in their shoes to think about what they need from us," Sun says.

Alongside this respect came keen-eyed scrutiny. He wanted entrepreneurs to display a long-term vision and passions for their business; it is then the fund manager's duty to temper this optimism with realism and ensure substantive execution plans were in place. These characteristics underpinned successful investments Sun led in the likes of AsiaInfo Technologies, Harbin Pharmaceutical Group and Gome Electrical Appliances.

However, despite receiving industry recognition for these deals, he began to grow weary of the asset class, largely because the limited time horizon on private equity investments means there is little opportunity to guide a company through multiple stages of growth. "Many fund managers take themselves too seriously and feel too self-important. In reality most of the time we are just pushing paper and not creating anything concrete for society," he says.

A lasting impression

By contrast, Black Soil's agriculture investments could involve protracted holding periods and deliver meaningful societal change. The firm targets the northern province of Heilongjiang, one of the world's three major soil zones with favorable organics for farming. Taking advantage of reforms introduced in 2014 that allow farmers to lease out their land use rights, it wants to piece together small family-owned plots into large operations.

"As long as you have scale and accumulate enough land, you should be able to increase yield and reduce cost, which will lead to profitability. This is my thesis, and we will see in the next few years if it's correct or not, but I am putting my money where my mouth is," Sun says.

These efforts are supported by a specially-assembled team of agriculture experts. Among them are David Liu, previously China country manager for DuPont Pioneer where he focused on hybrid seeds that improve crop yields, and Xin Li, a former executive from Chinese agribusiness conglomerate COFCO. The initial plan was to raise a $1 billion private equity fund, but with LPs wary of backing a first-time fund in a relatively untapped area, Black Soil has decided to work on a deal-by-deal basis for the time being.

"I have done two deals instead of spending all my time raising a fund. Besides, even if I had $1 billion to deploy, could I find enough profitable opportunities in Chinese agriculture? Investors wanted me to show them "proof of concept". ‘Have you done agriculture investing before? If not, how can you demonstrate that you will be successful in it?'" Sun says. "So I rolled up my sleeves and got my hands dirty - literally."

The first investment was for a majority stake in North 44, a rice company that has acquired the rights to cultivate 100,000 mu (66.7 million square meters) of land. In the second, Black Soil led a consortium that took a substantial interest - and assumed operational control - in a state-owned potato processor and distributor. These two projects are expected to generate about RMB1 billion ($152 million) in revenue by the end of 2016, with net profit reaching RMB150 million.

Sun wants to list them on the National Equities Exchange and Quotation (NEEQ), a local over-the-counter exchange also known as the New Third Board. Progress is being marshaled by a 20-strong operating team plus more than 100 staff working in the fields, while Sun flies up to Heilongjiang twice per quarter.

"To me, failure isn't an option - we have to succeed," he says. "If I can successfully guide these two companies to profitability, and take them public in China, then we can raise money from the public markets."

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• Topics
• Greater China
• GPs
• China
• Black Soil Capital Partners
• Chang Sun
• Agriculture