PE firms target China services sector liberalization - AVCJ Forum

Speaking at the AVCJ Forum in Hong Kong, Tun Lin, chief economist and executive vice president at Hony Capital, noted that China has only seen two other opening up events of this scale in the past 30 years: in the early 1980s when foreign direct investment first arrived; and in the early 2000s when WTO accession prompted a surge in export manufacturing as China became the factory to the world.

The services opportunity spans finance, education, logistics healthcare and food and beverage. "There is demand but we need more quality supply," said Lin. "If private equity can assist foreign companies to be quality suppliers of these services it can be a win-win situation."

Jason Hu, managing partner at Cathay Capital Private Equity, added that there has never been a better time to invest in China's consumer sector. People are more willing to spend, particularly those born in the 1980s and 1990s, while companies are placing greater emphasis on branding. PE can participate in a variety of ways, including helping these companies improve marketing and access new markets overseas.

Cathay, which operates funds targeting Sino-French and Sino-US opportunities, has worked with portfolio companies to bring in new product lines and concepts. For example, it set up a joint venture between Chinese custom-made kitchen furnishings manufacturer Zbom and a French company in order to broaden the product offering.

Cathay and Sailing Capital are both active in cross-border investments in healthcare, primarily focusing on pharmaceuticals and medical equipment where they can connect overseas products with local distributors.

"If you can figure out distribution in China for any of these things - such as working with a partner who invests with you - that is the key to the kingdom," said Michael Weiss, a partner at Sailing. "Often it is not the best product that is the most successful in China, it is the one that gets to the most people."

However, he was cautious about healthcare services as an investment opportunity, questioning whether business models that have worked overseas can be applied in China. Hony's Lin agreed that the challenge is coming up with a strategy that can effectively address growing consumer demand for improved hospital and primary care services.

"The opportunity is very clear," he said. "Doctors are not properly compensated, they rely too much on drug sales, they provide too many diagnostic tests. But as a financial investor how do you help address this and make a return?"

He identified governance, professionalism and consolidation as the key factors. The first two - taking wholly or partially state-owned hospitals and converting them to private enterprises, and replacing doctors on hospital management teams with appropriately trained professionals - require considerable resources and planning.

Hony acquired Shanghai Yangsi Hospital last year with a view to creating a platform of healthcare facilities. Lin noted that a hospital management group and deal sourcing teams were set up two years before the Yangsi purchase closed.

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