AVCJ China Awards: PE Professional of the Year – David Liu

Q: In the past 12 months, KKR has invested in United Envirotech, Rundong Auto, China Outfitter, Sino Prosperity, China Cord Blood and Novo Retail. How does the deal flow compare with other years?

A: Our investment activity has been picking up as we enlarge our team in China. We are also taking advantage of the market downturn to identify more attractive investment opportunities. Today, banks are not lending aggressively, IPO markets are difficult, and valuations for public companies have come down significantly. This means it's a good time for long-term, operationally-focused investors. I much prefer to be more aggressive today than a few years ago when the Chinese stock market was at an all-time high.

Q: Sino Prosperity was a real estate JV while China Cord Blood was a PIPE deal. Do you feel transaction types are becoming more varied?

A: The form of these transactions was different, but in essence, the principles for the investment are not. From our perspective, the key is to find good businesses run by good management teams whose interests are aligned with us. If it's a private company, then we can do a standard growth capital deal; if it's a public company and they are open to us doing a PIPE, that's what happens; if the company is in an industry where a joint venture is most appropriate, we do that. With public deals such as China Cord Blood, it's not like we bought some stocks and hoped the market would recover and the price would go up. The kind of due diligence we did and the type of partnership with management and governance we have is no different to any private company we invest in.

Q: But on a general level, is the deal landscape broadening in China?

A: Yes. Part of that is driven by the current market downturn - we see a larger number of PIPE deals than normal because public market valuations have fallen significantly. Then on a general level, as PE in China develops, you see more types of transactions, which is good for the industry overall.

Q: Do you envisage doing more control deals?

A: Most of our deals in China to date have been minority transactions and we expect this will be the case in the foreseeable future. As previously discussed, ownership percentage is secondary to us. We would much rather partner with a strong management team with an alignment of interest as a minority, value-added shareholder in a good business than be a controlling shareholder in a mediocre business with a mediocre management team.

Q: Who do you see as the major competitors for deals?

A: To be a market-leading private equity team in China, you have to be able to source deals on a proprietary basis. It comes from developing long-term relationships with management teams and entrepreneurs who want to work with you as partners because of who you are and the value you can bring in addition to capital. We see competition from time to time. Capital is a commodity today and there are always investors who can pay a higher price or close deals quicker. Good investors need to differentiate themselves by their experience, track record and the value they can bring.

Q: So has the proliferation of renminbi-denominated funds had much impact on your business?

A: I know that many LPs are worried about the increasing competition, but I don't spend much time worrying about that at all. Yes, as the China PE industry develops, the supply of private equity capital in China has gone up a lot. But so has the demand for private equity capital. If you look the market-leading teams, everyone is deploying more capital every five years than before despite the increasing competition. And I still the think the competitive situation in China is significantly less than that of the US. Most of the good deals done in China by leading firms are proprietary or semi-proprietary transactions as opposed to the full auction deals we typically see in mature markets.

Q: What are you expectations for the deal-making environment over the coming 12 months?

A: Everyone is worried about China slowing down from 9-10% GDP growth to 7-8%. But at the same time, public market valuations for Chinese companies have come down from 30x earnings to 10x. I do not know when the market will exactly bottom, but as investors with a 5-7 year investment horizon, we see value today. Human beings are sometimes too pro-cyclical. Investing in a 9-10% GDP growth economy at 30x earnings versus a 7-8% GDP growth economy at 10x earnings, I would prefer the second scenario all-day long.

Q: The heady market also contributed to team volatility, with various PE executives spinning out to raise their own funds. How do you achieve stability?

A: Our team has been investing in China for nearly 20 years, first at Morgan Stanley and now at KKR. We focus on bringing in young people and spend a lot of time training them. Many of the team members started here not long after graduating from college. We train them from ground zero so they fit the culture and understand our investment approach. KKR as a firm is focusing on building the most localized global investment platform in China. We believe our team is as local as any of the best in class domestic firms. And we are empowered to build our business in a way that makes sense for China.

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