How toMake Successful Private Equity Investments in toMake Successful Private Equity Investments in China and in Europe? ... Jade Bird IT training, ... Value-add from the Edmond de Rothschild Group

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  • How to Make Successful Private Equity Investments in China and in Europe?

    SHANGHAI / PARIS EUROPLACE Financial Forum1 December 2010

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 2

    Agenda

    1. The Private Equity industry in China and in Europe

    2. How to create value in a time that Everybody is PEing

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 3

    Edmond de Rothschild Group: A major player in Private Equity

    A 20-year old strong franchise in growth-capital in Europe

    2 billion in Private Equity under management (Paris office)

    An experienced team that has already been through several cycles with a strong track-record:

    more than 80 investments in Europe since 1990;

    55 exits with an average multiple of 2.3x (I.R.R. 24 %);

    30 % of the exits through IPOs.

    An active sponsor with years of experience in China

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 4

    Challenges for the company

    Use of funds

    Venture Capital fundsVenture Capital fundsLBO funds / trade

    salesLBO funds / trade

    salesGrowth-Capital fundsGrowth-Capital funds

    Roll-out the business model

    Enhance profitability

    Finance growth (both organic and acquisitions)

    Align shareholding structure with business projects

    Find the right business model

    Survive

    Intensify R&D

    Finance losses

    Optimize

    Manage the sale of the company

    Finance the acquisition of the sellers shares

    Timeline

    Start up< 10 million

    Growth10 200 million

    Maturity> 200 M

    Our job: Accelerate growth

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 5

    Chinese fast-growing SMEs have 3 main needs:

    They seek capital to allow them to:

    expand along with the steady growth of the Chinese economy;

    face the difficulty of accessing bank loans and financial markets.

    They seek expertise in adopting international management standards (governance, risk management, accounting, etc.)

    They seek the recognition associated with the entry of a premier international investor

    Edmond de Rothschild Private Equity China: A response to the companies needs

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 6

    European Private Equity industry vs. Chinese PE industry (1/4)

    European PE investments

    Source: EVCA Analytics for 2007 - 2009, Thomson Reuters Analytics for 2000 - 2007

    Chinese PE investments

    During the 2005 2007 PE surge, the size of deals grew significantly as the number of investments strongly decreased The PE industry proved very sensitive to the crisis and the economic splashdown in Europe, yet starting a slight recovery in H1 2010

    Source: China Venture

    Chinese PE industry has appeared to be more resilient to the crisis than the European industry (-42% in amounts in 2009 vs -57% in Europe) After the lacklustre 2009, especially in the first half of the year, the PE market is showing ongoing signs of recovery in terms of number of investments and invested amounts

    Number of investments and invested amounts (EUR in billions)

    Number of investments and invested amounts (USD in billions)

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 7

    European Private Equity industry vs. Chinese PE industry (2/4)The fast-growing private equity market in China

    Source: AVCJ; Global Insight, December 2009* 2009 figures not available

    U.S

    . *

    Eu

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    Sin

    gap

    ore

    Au

    stra

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    So

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    Ko

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    Ind

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    Ch

    ina

    PE investment as a % of GDP Cumulative PE funds raised as % of GDP (2007 2009)

    Despite rapid growth, the Chinese PE market, as several Asian countries, remains under-penetrated

    Cumulative PE investments and funds raised in China are significantly lower than those in Europe and the U.S.

    The Chinese PE market still holds a strong potential for future growth and should expand at a more rapid pace

    Source: AVCJ; Global Insight, December 2009

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 8

    European Private Equity industry vs. Chinese PE industry (3/4)China private equity Transaction structures

    Source: Bain & Company; EVCA; AFIC

    $7.3 bn $5.9 bn

    Chinese PE deals are predominantly minority investments (growth capital/ PIPEs)

    Very few control investments

    Chinese entrepreneurs are reluctant to sell-out or transfer control of their companies

    As PE investments gained general acceptance in Asia, average deal sizes have been steadily growing

    The average deal size in China amounts to $56 m (excluding Venture Capital)

    Deals over $100 m are very scarce

    No mega deal over $1 bn

    The ability of PE funds to deploy significant capital in a single deal is limited due to few majority investments

    PE transaction structures in 2009

    $21 bn

    Minority Investments (Growth Capital / PIPEs, including Mezzanine)

    Buy-outs

    Venture Capital

    Turnaround / Restructuring

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 9

    In 2008, $5 billion were raised in the Growth Funds segment, i.e. 34.7% of the total amount of funds raised ($14.4 billion in 16 new funds)

    European Private Equity industry vs. Chinese PE industry (4/4)The fast-growing private equity market in China

    Source: Emerging Markets Private Equity Association Fundraising and investment review 2008

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 10

    A structurally buoyant market:

    China is the fastest growing major economy in the world, with a promising domestic consumption potential

    A highly entrepreneurial culture

    China: A very attractive market for Growth Capital funds (1/2)

    Fragmented industries with strongconsolidation opportunities, compared tothe Western markets

    Examples in selected consumer sectors:

    Leverage levels extremely low, access tocapital particularly problematic for the privatesector for both debt and equity

    Short-term loans by commercial banks as of 2008:

    Source: Euromonitor, Datamonitor as of December 2008 Source: The Peoples Bank of China

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 11

    Entrepreneurs and funds clearly privilege IPO exits due to higher valuations in the public markets

    China: A very attractive market for Growth Capital funds (2/2)

    0

    2

    4

    6

    2005 2006 2007 2008 2009 2010YTD

    Average Time (Years) Between First Round Fund Raising and IPO of PE/VC

    Backed Chinese Companies

    Local Exchange HK Exchange US Exchange

    Exit opportunities in local market are becoming more and more attractive

    # of 3 years needed for PE and for VC to realize return on investment

    73 PE- / VC-backed Chinese companies went public in 2009 and raised $14 billion

    Source: China Venture, September 2010

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 12

    Recent trends for Private Equity exits

    Exit strategies vary according to regions:

    IPOs exits in Asia have been standing up to the crisis (mainly in the Shanghai, Hong Kong and Australian stock markets), showing strong progression in 2009

    Strategic sales are more common in America and secondary sales in Europe

    Secondary sales: 41,2% Strategic sales:

    55,1 %

    IPOs:40,7%

    PE exit trends since 2006:

    Source: Ernst & Young Global IPO Trends 2010

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 13

    What a (public) company may learn from Private Equity

    During the crisis, PE posted limited gains in terms of (i) enterprise value, (ii) profits and (iii) productivity

    Between 2004 and 2009, Thomson Reuters Private Equity Index gained 6%, when the S&P Index dropped by around 1.5%

    Corporate experience shows PE constitutes an enriching step for a company:

    An active, efficiency-oriented ownership that

    optimizes the organization through cost cutting, business plan challenging, etc

    and offers attractive, performance-based incentives to management.

    Source: Ernst & Young How do private equity investors create value? A global study of 2007 exits

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 14

    Agenda

    1. The Private Equity industry in China and in Europe

    2. How to create value in a time that Everybody is PEing

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 15

    Edmond de Rothschild in China

    15

    In 1993, Edmond de Rothschild began to invest in the secondary market of Greater China

    In 2006, obtained the QFII license

    In 2008 and 2010 respectively, equity participation in CNOOC Fund Management

    In 2008, became the strategic partner of Bank of China in Private Banking

    In 2008, affiliate company MSH Insurance acquired the largest international healthcare management company in China

    Invested in Pacific Insurance, Belle, Jade Bird IT training, etc.

    Invested in the secondary market including Min Sheng Bank, Alibaba, New Hope, Ling Rui, Shen Changcheng, Zhong Liang Tunhe etc.

    LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 16

    How can we create return for investors in a time that Everybody is PEing in China?

  • LA COMPAGNIE FINANCIRE EDMOND DE ROTHSCHILD 17

    Investment Philosophy

    17

    Focus on people

    Value-added: to provide effective value-add services to portfolio companies for them to grow in a faster and healthier way, thus creating sustainably higher return to the investors, for example:

    Consumer & Service - Edmond de Rothschild itself represents a high-end image

    Financial Service - re