Executive Summary (1/2) : Mckinsey & Company 1

Executive summary (1/2)
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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)

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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
Contents
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
Contents
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
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
+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
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
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
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
Contents
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
Our vision is to become a world-class PE firm based in China, enabled by a balanced strategy and strong culture
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
We have built our firm on strong foundations
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
Strong institutional backing: A shareholder base with unrivaled access
Strong institutional backing: Extensive business and industry network
Parent
Energy & Resources
Financial services
Manufacturing
Well-rounded investment team: Investment leadership profiles
Work Experience
"
Chairman of Investment Committee X years of investment Xrelatedof investment years experience related experience Education
n
"
Track Record
Well-rounded investment team: Investment leadership profiles (Contd)
Work Experience
"
President Member of Investment Committee Chairman of Portfolio Management Committee
Education "
X years of investment related experience
Track Record
Well-rounded investment team: Professional and experienced
Origin of investment team
Investment team highlights

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
1 In RMB unless otherwise specified McKinsey & Company | 17
Market-oriented organization: Independent investment decision making
Shareholders Meetings
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.
Market-oriented organization: Rigorous risk management
Appoint directors and supervisory board members to exert effective risk control
Company
Risk Control Systems

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
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
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
Compensation structure
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
Contents
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
Fund A
Approval Fund Management Company
Establishment Registered Address Fund Size Tenor Geography
".
" " " "
Fund A: Current portfolio
Company name
Investment date
Investment amount RMB mn
Sector
Private/SOE
Deal sourcing
IRR (Expected)
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
Amount Realized Value Unrealized Value (as of June 2009) Investment Status Total Return (multiple of capital) IRR
Investment A (2/2)
Investment Highlights
Value-added Services
Recent Development Exit Strategy
Contents
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
Fund overview
Fund B
allocation 4-sector focus
opportunities with selective participation in growth capital

"
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
92
We will target a balanced portfolio allocation with a focus on SOEs and
Focus on SOEs
n
Selective in growth
n
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
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
C Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus

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Executive summary (1/2)

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

McKinsey & Company | 1

Executive summary (2/2)

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

McKinsey & Company | 2

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

McKinsey & Company | 3

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

1. Overview of Chinas private equity industry

McKinsey & Company | 4

China nominal GDP USD trillions

Major macro trends

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

0% 13.6 16.9 11.7 17.0 05 06

2.9 1.6 2.8 2.0 4.6 3.5

Southeast Asia(2) 36%

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

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Lack of majority stakes

Majority stakes are typically not available or very difficult to obtain

McKinsey & Company | 8

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

McKinsey & Company | 9

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Cooperation & Win-win

McKinsey & Company | 10

We have built our firm on strong foundations

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Strong institutional backing

Well-rounded investment team with proven track record of execution

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

Energy & Resources

McKinsey & Company | 13

Well-rounded investment team: Investment leadership profiles

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

McKinsey & Company | 14

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

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

President Member of Investment Committee Chairman of Portfolio Management Committee

X years of investment related experience

McKinsey & Company | 15

Well-rounded investment team: Professional and experienced

Origin of investment team

Investment team highlights

X 25% X Key investment professionals 21% X

1 As of January 2010 McKinsey & Company | 16

Well-rounded investment team: Track record before joining Company

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

Investment Committee Independent decision-making

McKinsey & Company | 18

Market-oriented organization: Rigorous risk management

Risk Control Systems