You are on page 1of 36

Executive summary (1/2)

!
Chinas private equity industry offers attractive fundamentals but is not without its challenges for GPs China is expected to continue to offer strong macroeconomic fundamentals for the next five years, with real GDP growing at 9-10%, driven by increasing consumption, urbanization and development of lower tier cities The Chinese private equity market, while sizeable (RMB 60 billion) and growing at ~40% CAGR (2003-08), still has plenty of room to expand, as it only accounts for 0.2% of the countrys GDP (vs. 0.8% in the US) However, 5 key challenges persist: 1) Deal sourcing is mostly about guanxi, not auctions; 2) Regulatory environment is complex and constantly evolving; 3) Majority stakes are difficult to obtain; 4) Conducting due diligence is challenging due to highly asymmetric information environment; 5) Management and execution capabilities are still developing Company, is well positioned to meet these challenges and capitalize on Chinas private equity opportunities, thanks to the solid foundations on which it is built Strong institutional affiliation: its relationship with Parent provides us with strong regulatory relationships, broad and deep industry networks Well-rounded investment team with strong track record: Led by Person A and Person B, the investment team offers a unique blend of domestic Chinese talent and international experience; local insiders know the team members for their strong track record, i.e., Investment Committee members have made nearly RMB X billion investments in the past Market-oriented organization: we have put in place an independent corporate governance structure, a comprehensive investment and risk management process and an aligned incentive system that attracts and retains top talent

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

McKinsey & Company | 1

Executive summary (2/2)


!
Our first fund, Fund A, is at X billion RMB; it is well on its way to being invested, with X % of its capital already deployed Find A was the first to complete its fund raising, eventually closing at RMB X billion The team has already deployed ~ X% of its capital, through X investments sourced through our proprietary network; these investments have been made in SOEs and private companies from the financial services, energy, manufacturing and consumer sectors The portfolio currently includes companies such as A, B, C, D, E Our second fund, Fund B, now offers overseas investors the opportunity to tap the Chinese private equity market and Companys expertise. The fund relies on a pragmatic strategy that is built around a balanced portfolio, an explicit four-sector focus and a differentiated partnership approach Balanced portfolio allocation: The core strategic focus is on SOE restructuring opportunities with selective participation in growth capital Sector focus: 1) A; 2) B; 3) C; 4) D; these sectors typically offer attractive fundamentals, high barriers to entry, and significant SOE opportunities Partnership approach: Companys unique and proven partnership model enables transformation through minority participations; past success demonstrated importance on building consensus and support with local governments and aligning management interests

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

McKinsey & Company | 2

Contents

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

1. Overview of Chinas private equity industry 2. Introduction to Company 3. Our first fund, Fund A 4. Our second fund, Fund B Appendix: Awards for Company

McKinsey & Company | 3

Contents

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

1. Overview of Chinas private equity industry

A. Current prospects for the Chinese economy B. Size and growth of the Chinese PE industry C. Challenges faced by PE firms in China
2. Introduction to Company 3. Our first fund, Fund A 4. Our second fund, Fund B Appendix: Awards for Company

McKinsey & Company | 4

Chinas economy is expected to grow robustly over the next five years

China nominal GDP USD trillions


+13% p.a.
6.9 5.9 5.1 4.6 8.1

Major macro trends


n Consumption expected to grow to 35% of total GDP by 2015 n Middle class(1) expected to grow to 60% of total population as vs. 35% in 2008 n Inflation expected to stabilize at 3-4% n Rapid urbanization results in 26% of population concentrated in high density urban areas(2) n Sustainable development efforts by the Chinese government to develop lower tier cities in China

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

+24% p.a.
3.5 2.7 1.8 2.2

4.3

2004

05

06

07

08

09E

10E

11E

12E

2013E

1 Annual household income: RMB40,000-100,000 2 Areas with population density >1,500 people per sqr. km SOURCE: Global Insight 2009 McKinsey & Company | 5

Growth of Chinas PE market has outpaced that of more developed Asian counterparts
Value of PE investments(1) (USD billions)
Mainland China 39%
1.6 3.1 8.9 9.4 9.5 8.6

Japan
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

7.2

0% 13.6 16.9 11.7 17.0 05 06

7.3

2003 04 India

05

06

07 2008

2003 04 Korea

07 2008

59%
0.9 1.5 2.1 6.8

14.4

4%
9.0

2.9 1.6 2.8 2.0 4.6 3.5

2003 04

05

06

07 2008

2003 04 Australasia(3)

05

06

07 2008

Southeast Asia(2) 36%


7.4 9.0 7.3 1.6 2.5 6.5

22%
2.9 2.6 3.1 19.4 17.4 7.9

2003 04

05

06

07 2008

2003 04

05

06

07 2008

1 Includes buyouts, growth capital/Pre-IPO, PIPE 2 Southeast Asia consists of Malaysia, Singapore, Philippines, Indonesia, Thailand, Laos and Vietnam 3 Australasia consists of Australia and NZ SOURCE: AVCJ; Marr McKinsey & Company | 6

Penetration of PE in China remains relatively low and thus the potential for growth is significant
2008 PE investment(1) penetration as % of GDP Average deal size(1) USD millions Buyout as %of total investment in value(1) Typically less than 10%, high share in 08 due to USD2 billion Honiton buyout deal

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

China US UK Japan India Australasia(2) SE Asia

0.2 0.8 1.9 0.2 0.7 0.7 0.5

38 174 271 46 39 81 93
9

34 52 83

~100

65 56

1 Includes buyouts, growth capital/Pre-IPO, PIPE 2 Includes Australia and New Zealand SOURCE: AVCJ McKinsey & Company | 7

The Chinese market is still in its early days and posts a series of challenges for PE firms
Challenges
n

PE firms need!
n n

Deal sourcing

Deal sourcing is mostly about guanxi (relationships), with auctions generally held for the largest transactions only For most industries, regulatory environment is complex and constantly evolving

Proprietary deal sourcing capability Ability to build local networks in key geographic locations Deep understanding of industries regulatory developments Strong working relationships with regulatory bodies Ability to enact change in minority context, i.e., access to Board seat Ability to identify and influence high quality management teams is critical Deep sector knowledge Extensive local networks to conduct proper due-diligence Sector and functional expertise Collaborative partnership approach

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

n n

Regulatory complexities

Lack of majority stakes

Majority stakes are typically not available or very difficult to obtain

n n

Asymmetric information

Financial & business info are oftentimes inaccurate; support infrastructure (e.g., expert networks) still a work in progress, making due diligence challenging Many companies still lack the management and execution capabilities to successfully grow and compete with the best-in-class organizations

n n

Management capabilities

n n

McKinsey & Company | 8

Contents

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

1. Overview of Chinas private equity industry 2. Introduction to Company

A. Our vision and strategy B. Strong institutional backing C. Well-rounded investment team with proven track record D. Market-oriented organization
3. Our first fund, Fund A 4. Our second fund, Fund B Appendix: Awards for Company

McKinsey & Company | 9

Our vision is to become a world-class PE firm based in China, enabled by a balanced strategy and strong culture

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Vision
To become a worldclass private equity firm based in China

Missions &Strategy

To generate attractive returns for investors as well as achieve win-win results through in-depth analysis, solid execution capabilities, accurate investment decisions, efficient operation management and professional value-added services provided to portfolio companies

Culture

Dedication

Excellence Proactive

Prudent

Innovative

Cooperation & Win-win

McKinsey & Company | 10

We have built our firm on strong foundations

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Strong institutional backing

Well-rounded investment team with proven track record of execution

Market-oriented organization

n n n

Parent reputation Unrivaled industry access and network Proprietary deal sourcing SOEs Private enterprises

Local on the ground expertise and international experience Transformation and capital markets experience Established investment track record

n n

Independent investment decision making World class corporate governance, risk management Comprehensive investment process Effective incentive system

n n

n n

Expedited government approval

McKinsey & Company | 11

Strong institutional backing: A shareholder base with unrivaled access

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

McKinsey & Company | 12

Strong institutional backing: Extensive business and industry network

Parent
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Energy & Resources

Financial services

Manufacturing

McKinsey & Company | 13

Well-rounded investment team: Investment leadership profiles

Work Experience

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

"

Chairman of Investment Committee X years of investment Xrelatedof investment years experience related experience Education
n

"

Track Record

McKinsey & Company | 14

Well-rounded investment team: Investment leadership profiles (Contd)

Work Experience

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

"

President Member of Investment Committee Chairman of Portfolio Management Committee

Education "

X years of investment related experience

Track Record

McKinsey & Company | 15

Well-rounded investment team: Professional and experienced

Origin of investment team

Investment team highlights


Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Significant experience working together" X years of investment related experience " RMB X billion " X years of investment / portfolio management experience

X 25% X Key investment professionals 21% X


n

X 54%

1 As of January 2010 McKinsey & Company | 16

Well-rounded investment team: Track record before joining Company


Investment Investment Investment Investment Investment IRR

Company Name

Net Profit

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

1 In RMB unless otherwise specified McKinsey & Company | 17

Market-oriented organization: Independent investment decision making

Shareholders Meetings
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Board of Directors

Board

Investment Committee Independent decision-making

LP Advisory Committee

Committee

Manufacturing

Services

Mgmt Dept.

Research Dept.

Relations Dept.

Dept.

Resources

Retail

Compliance Dept.

Accounting Dept.

HR Dept.

McKinsey & Company | 18

Market-oriented organization: Rigorous risk management

Appoint directors and supervisory board members to exert effective risk control

Company

Risk Control Systems


Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Board of Directors
n

system Legal & compliance Senior Management Investment Committee


n

Investment policies policies Portfolio management


n

External Audit Investment departments Portfolio Management department

Committee Policies for Investment management system Finance and accounting


n

Legal & Compliance Dept.

Internal Audit

confidentiality Information management management Company seal


n

Other support departments 1st control level: The business and other departments control daily operational risks 2nd control level: Investment Committee and Legal Dept exercise control on key issues

3rd: control level: Independent audit

management system Documents management system

McKinsey & Company | 19

Market-oriented organization: Comprehensive investment process

Stage

Stage I

Stage II
Commercial due diligence

Stage III

Stage IV

Process

Deal sourcing

Prepare legal documents

Portfolio management
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

No

Preliminary evaluation Yes Add to the project pipeline

No

Assessment of commercial due Assessment of Yes Financial, legal, and other due diligence Documentation execution Value-added service

Document Filing

Preliminary due diligence Negotiations on investment terms Deal qualification memo Approval by the custodian bank

Exit management

No

Deal investment memo Apply for deal qualification Yes Establish a formal deal team Investment application No

Distribution of investment returns

Yes Fund remittance Completion

Decisionmaking

Investment Committee

McKinsey & Company | 20

Compensation structure
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Basic salary

Bonus

Carried interest

Our aligned incentive Co-investment scheme Portion of key personnel bonus Carried interest distribution IRR over hurdle rate system ensures team cohesiveness and top talent retention

Fund

Fund mgmt team Receiving % of carried interest

McKinsey & Company | 21

Contents

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

1. Overview of Chinas private equity industry 2. Introduction to Company 3. Our first fund, Fund A

C. D. Current portfolio C. Current portfolio D. Case study


4. Our second fund, Fund B Appendix: Awards for Company

McKinsey & Company | 22

Fund A
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Approval Fund Management Company

Establishment Registered Address Fund Size Tenor Geography

".

" " " "

McKinsey & Company | 23

Fund A: Current portfolio

Company name

Investment date

Investment amount RMB mn

Sector

Private/SOE

Deal sourcing

IRR (Expected)
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Nearly X% of deals by value are SOEs

Note: In RMB unless otherwise stated McKinsey & Company | 24

Investment A (1/2)
Investment Date Exit Date Investment Instrument Equity Stake Board seat Co-investor (and co-investment amount) Industry Headquarters Business Profile Deal Sourcing Deal Team Investment Structure
McKinsey & Company | 25

Amount Realized Value Unrealized Value (as of June 2009) Investment Status Total Return (multiple of capital) IRR
Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Investment A (2/2)

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Investment Highlights

Value-added Services

Recent Development Exit Strategy

McKinsey & Company | 26

Contents

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

1. Overview of Chinas private equity industry 2. Introduction to Company 3. Our first fund, Fund A 4. Our second fund, Fund B

Fund overview B. Investment strategy C. Key terms


Appendix: Awards for Company

McKinsey & Company | 27

Fund overview
Fund B

allocation 4-sector focus

opportunities with selective participation in growth capital


Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

"

Partnership approach

Unique and proven model on transformation with only a minority stake

Company

n n n

Strong institutional affiliation Well-rounded investment team with strong track record, led by Chairman Person A and President Person B Market-oriented organization: independent corporate governance structure and aligned incentive system that attracts/retains top talent

McKinsey & Company | 28

92

We will target a balanced portfolio allocation with a focus on SOEs and

Focus on SOEs
n

Selective in growth
n

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

Under-penetrated with
n

Pragmatic approach in
n

significant opportunities Under-penetrated with

Pragmatic approach in investments selective private enterprise

opportunity is uniquely positioned to capture this Company

growth stage expansion stage withFocus on investments an allocation to high

generate attractive returns Investments expected to

Investments expected to generate relatively higher

McKinsey & Company | 29

We will focus on 4 sectors and respective sub sectors with high growth,

Market size and growth Market size and growth n " Key drivers of growth n " Sub-sector focus n

Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus 4 sectors focus Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus

Working Draft - Last Modified 06/20/2011 11:25:22 AM Printed

C Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus

McKinsey & Company | 30