Q&A: Hony Capital's John Zhao

Q: Some investors question whether Hony can efficiently deploy so much capital. What do you say to this?

A: Of course we can effectively deploy it - we planned it very carefully and the fund is exactly the right size. We normally look at three factors: general market conditions, team readiness and bandwidth, and deal pipeline.

Q: What additions have you made to Hony's staff to manage these larger funds?

A: For this fund, the team was recruited and trained before we started fundraising. In the last 12 months, we have brought in nearly 50 new people. They weren't recruited for the funds just raised, but for the next fund because it takes 2-3 years to train people to become investment managers. At least 20 of the new recruits are investment professionals, and the rest are consulting professionals and back-office staff.

Q: What will be the average transaction size for the new funds and how many do you expect to do each year?

A: We don't think in terms of how many deals we need to do each year - that depends on market conditions - but we have the bandwidth to handle up to 20-25. We have a broad range of deal sizes, anything from $20 million to $500 million. We aren't planning to do too many $20 million deals now. Our sweet spot is $80-200 million.

Q: How prominently will state-owned enterprise (SOE) restructuring deals figure in the new funds?

A: SOE restructuring is the major opportunity in the market and our core competence. There are a lot of SOEs in China looking to diversify their holdings and develop better governance in order to become more market-oriented. It can be a challenging process, but Hony is good at it. First we become shareholders to ensure companies have good governance and the right management infrastructure. Then we have a whole range of strategies to help companies become stronger.

Q: Do you have different investment strategies for renminbi and dollar funds?

A: The two funds have identical strategies executed by the same team under single leadership and roughly the same pace of deployment. When you have two funds with LPs that don't necessarily overlap there are potential conflicts of interest. We are upfront with our LPs and make sure they understand how and why we are making investment decisions.

Q: How has the LP base changed between the previous and current US dollar funds? Did you turn investors away?

A: Hony's core LP base has been very stable as they all invest in subsequent funds. We don't turn away LPs because we don't do open fundraising: it is by invitation only and we only invite those we want to include. Unfortunately we don't have space for everyone.

Q: How do you select which LPs to invite?

A: We believe in a partnership philosophy, and just as LPs look at us carefully, we look at them carefully. First, we prefer to have a few deep relationships, so we tend to select LPs that are large enough to deal with us as we grow. Second, we like to select LPs based on geographical distribution: roughly one-third from North America, one third from Asia, and one-third from Europe and the rest of the world. Third, we like to have a good mix of family offices, pension funds, university endowments, and latterly sovereign wealth funds and insurance companies. Fourth, we look for LPs who can contribute value-added regional and industrial resources.

Q: How has the domestic LP base changed since you raised your previous renminbi fund?

A: There aren't many qualified LPs in China, so we mainly focused on our existing institutional investors. We enlarged our base a little bit. Beyond the likes of Legend holdings, the National Social Security Fund and China Development Bank, there aren't many institutional investors. The majority of investors in renminbi funds are high net worth individuals (HNWIs) as well as some companies. We don't really deal with these people because Hony has focused on institutional investors from the start. We open a few spaces for HNWIs on a select basis. I think more institutional investors will enter the market, notably insurance companies because the government clearly approves of their participation.

Q: What are the principal challenges facing the Chinese PE industry in coming years?

A: The industry is active, healthy and attracting a lot of attention. Many people have jumped into the market, but we don't have many qualified investment professionals so some deals are poorly executed and this brings reputational risk for the industry. However, the industry is still in its early stages and we will overcome the problems in time.

Q: What does Hony's fundraise say about the wider capital-raising environment in China?

A: 2011 was a very tough year for fundraising globally. We are lucky that we have a strong LP base to support us, so fundraising has been very simple and fast - we only had one close and the fund was already oversubscribed. I think it will remain a challenging environment due to global uncertainty. It will also be tough in China because there aren't enough qualified LPs who are ready to invest.

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• Topics
• Fundraising
• Greater China
• Renminbi
• Fundraising
• China
• Hony Capital