The new vehicle, called NPE China Fund II, will seek to raise $250m (€181m) to buy minority stakes in growth capital mid-sized companies across a diverse range of industries and guide them towards an Initial Public Offering on a domestic stock exchange.
NPE Asia, which manages €116m in 32 active investments in China, South Korea and Taiwan from its offices in Shanghai and Hong Kong, will invest between $10m and $30m in each targeted Chinese company.
Since entering the Chinese private equity market in 2003, the firm has invested $50m of Natixis’ own balance sheet money in seven Chinese companies. These include LDK, which makes silicon solar wafers; Suntech, a maker of solar cells for use in solar energy; Austar, a drug manufacturer; Techfaith, a design agency; and Talent, a systems integration company working for the banking industry. Four of the seven have been listed, including the flotation of Suntech and LDK on the New York Stock Exchange (NYSE) in December 2005 and June 2007 respectively.
Gael de Barmon, founder and president of NPE Asia said he targets companies that are making annual profits of $5-10m and growing by 30 - 40 per cent per annum. “Our benchmark is to double or triple the money invested upon listing, taking reasonable valuation for listing. After listing, sometimes we will sell our stake or if we think the company potential is very strong and we think the listing price is not very attractive, we will keep our holding.”
There was plenty of money to be made, he said: “The year before we invested in Suntech, it made $20m profit. The year we invested, it made close to $40m profit. In two years, we reaped a return of 11 times our original investment.”
Unlike in Europe and the US, Mr de Barmon said that “early stage” companies in China were those with growing sales and on the verge of turning a profit. “By investing in mature companies in China, you can make the sort of returns you would get by investing in early stage companies in Europe and the US. So there is no need to go for start-ups because you take a huge risk and the amount of money you invest is not going to be significant. In terms of multiples you might reap a return of 30 times your original investment if you are lucky. On the other hand, you can deploy large amounts of money and make five times in a short period of time by investing in a quite mature business.”
Before the boom in the mainland Chinese stock market began in 2006, it was difficult for private companies to get local listings. Mr de Barmon said the backlog of local government companies seeking listings was given priority because they could raise a lot of money, so private companies sought out listings abroad, in Hong Kong, Singapore or on Nasdaq or the NYSE.
In a bid to encourage quality companies to list in a booming stock market, last year the Chinese government introduced a regulation that made the approval process for creating the offshore structures used to list overseas more complicated. “So now you are seeing a re-routing of all these listings into mainland China. Also the valuations are high in China so it is very attractive for Chinese companies. For the companies we look at, we are going to be listing on the Shanghai or Shenzhen stock markets.”
Mr de Barmon said that private Chinese companies viewed private equity investment as a label of quality. “They believe private equity investors can improve corporate governance and transparency. When you are growing at 30 per cent to 40 per cent every year, you have money. It is not the issue. The management of the balance sheet is not a priority. A private equity investor can help them become more respectful of the law because many Chinese companies try to avoid taxation so the accounts are not meaningful. It is a learning process for these companies because when we first meet them we find they are financing these companies out of their own pockets.”
The minimum investment in the new fund is $5m and the annual management fee will be between 2 to 2.5 per cent.
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