Local RMB funds such as Shenzhen Capital Group (“SCG”) and Jiuding operating nationwide coverage strategies with hundreds of investment professionals, and portfolio exits in the past few years have shown this strategy has paid off. This has made some foreign PE/VCs rethink its operating style of having a small office with small team”; today, “Government resources + Local partners + Local team” appears to be the key principle to operating RMB denominated funds.
SMC Capital China (“SMC3”) recently announced its ‘Vision 8|8’ plan. The plan is to become the most ‘Chinese’ of the international growth capital firms in China, focusing on world-class best practices with full localization via both USD and RMB funds. By 2015, we aim to manage over RMB8 billion with local offices, teams and strategic partners in at least 8 Chinese cities.
In depth localization
The development of the investment industry in China is uneven. In the east region, the large number of start-ups has attracted the attention of many VC/PE firms. However, entrepreneurship is unpopular in western China, making it difficult for young companies to find funding. Also, VC/PE firms also establish their headquarters in eastern cities such as Beijing, Shanghai and Shenzhen. This phenomenon has resulted in large quantities of capital remaining in eastern China, and less capital flowing to central and western regions.
Leaving tier 1 cities to explore tier 2/3 cities is unconventional. From Simon Murray Group (“SMG”) chairman Mr. Simon Murray’s perspective, the likelihood of 500 people chasing after one deal will hardly happen in tier 2/3 cities, leaving more opportunities for the ones who venture out to these cities.
SCG has cooperated with over 30 local governments to set up a joint venture fund. These local governments provide SCG with deals and other incentives, not only solving deal sourcing problems, but also establishing certain barriers for other funds to enter the local market.
SMC3 partner Mr. San Eng told our reporter, “SMC3 has a similar plan as SCG’s. For example, before finishing the fundraising of SMC3’s Dalian Huayuankou fund, SMC3 already established the Dalian office and had another SMC3 partner Mr. Waisum Fan, to overlook Dalian’s operations. According to Mr. Fan, there are four SMC3 professionals based in Dalian. He intends to sets Dalian as SMC3’s center of operation for northeast China, gradually opening the market there.
“We have visited 20-30 cities to discuss cooperation with local government when we wanted to establish RMB denominated funds. During the process, we recognized the importance of local resources and network. These two are critical for our fund’s localization.” says Mr.Eng.
In past eight months, it has secured investments in six deals totalling over RMB350 million in total commitments (including expected follow on investment rounds). The key to being able to do so many deals in such a short time is the fund’s local resources.
SMC3 partner Alexandre Xing was referred a deal a while ago. The company only gave him two weeks to complete the due diligence process, which normally takes at least two months to complete. Mr. Xing and the team worked under very tight time pressure on this project, eventually completing due diligence in two weeks and holding three IC meetings in two days to approve the investment.
Using the analogy of a hunter, besides accuracy, speed is also an important characteristic of a good hunter, because there are always other hunters eyeing the same targets. When the capital market changes from a buyers’ market to a sellers’ market, how to obtain targets’ interests becomes essential for many foreign VC/PEs. In their mind, localization is more advantageous.
Mr. Eng gave an example of a car component factory which had annual sales of RMB500m-600m. When SMC3 was introduced to this company, four other investment companies were chasing this project. Mr. Eng noticed that this company wanted to expand its business in the international market, and it so happened that the LPs of SMC3’s USD fund had resources in the automobile industry. In the following weeks, SMC3’s Wuxi team introduced this company to Porsche, BMW and other international brands. Eventually, SMC3 was able to gain the company’s interest and recognition, and became the preferred investor over others.
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