Private equity (PE) is the new darling of Wenzhou’s elite.
July marked the end of Sequoia Capital’s latest fund raising. A reported RMB1 billion (US$146 million) was put together thanks to the enthusiasm of Wenzhou investors. A year earlier, few people in the area knew anything about PE, but they were eager to open their wallets after hearing the big names - Sequoia Capital and Shen Nanpeng. One investor even said that people were so crazy about the fund that he could become an indirect investor based on his connections to a limited partner.
On July 10th, Wenzhou Zhongke Fuquan Venture Capital Co., Ltd. (hereinafter referred to as Zhongke Fuquan) was registered with RMB110 million (US$16 million). The lack of limited partnership, a newly merged organizational form, couldn’t deny its PE nature. It was co-founded by a rich Wenzhou businessman and an investment management team from China Science & Merchants Investment Fund (CSMI), the biggest professional PE management company in China. The company will be operated by CSMI with the capital being handled by Guangdong Development Bank.
Following the establishment of Wenzhou Donghai Venture Capital in August 2007, Zhejiang’s first public PE, leading electric company Chint Group, founded Yunshan Investment Management Co., Ltd., a company devoted to raising PE with initial funds of RMB500 million (US$73 million). The next phase could reach RMB5 billion (US$730 million).
The Fortune Center in Wenzhou’s Times Square is a good example of how popular PE has become in Wenzhou - there are more than 30 investment companies all in the same building.
So, what sparked the sudden love affair with PE in Wenzhou? Have eager investors there really discovered a pot of gold?
The PE Bounce
Hu Yungeng, the general manager of Yunshan, has been holding public lectures on PE in Wenzhou. He’s been overwhelmed by the response.
Hu used to work overseas for investment banks in finance consulting and fund management. He returned home in 1998. A year later, Hu was working as an acquisition project counselor. At the time, he was only vaguely acquainted with Nan Cunhui, the president of Chint. Eight years later, they would be working together much more closely.
Chint has seen many investment opportunities, but it has often had to abandon many cross-industry projects. This bothered Nan since many enterprises have been preparing for IPOs. Relatively speaking, the equity financing before listing carries smaller risks but higher profits, and this fits with Chint’s conservative financing strategy. This field has also caught the attention of Chint’s 400-plus shareholders.
So, Hu and Nan decided to establish a foreign investment platform, using fund management technologies and skills to manage the idle funds of Chint’s shareholders, and pooling funds of other local enterprises and consumers in the future. In this way, Chint’s focus remains unchanged, and the idle funds of shareholders are revitalized.
After it was incorporated, RMB500 million (US$73 million) was initially raised for Yunshan. Chint subscribed RMB200 million (US$29 million) as a limited partner while others contributed RMB300 million (US$44 million). This money mainly goes to energy-related industries, as well as areas that Chint is more familiar with, like large electrical equipment manufacturing.
The investors behind Yunshan come from diverse backgrounds. Aside from the hundreds of private investors, there are some familiar manufacturing companies - Chint, Delixi, Shenli and Huanyu Group. They represent a wide range of sectors: electrical products, real estate, lighters and glass. China’s recent macro-economic measures have led to a lot of capital being pulled out of manufacturing. Most funds stayed idle except for some that lent high interest loans to enterprises in urgent need. This, naturally, led to PE getting a lot more attention.
In Wenzhou, PE has been marketed as the hottest financial product of the season. As a leading retail bank in Zhejiang province, Guangdong Development Bank has spared no effort in competing for the trusteeship of CSMI’s initial offer in Wenzhou. “This big market can generate large profits,” observes one source in the banking industry. Although nobody knows the exact amount, there is speculation that Wenzhou’s private capital has reached RMB600 billion (US$88 billion). Massive profits are a certainty then as long as 1% of the capital is invested in PE. Wenzhou’s banks have been scurrying for managing resources in order to get a piece of the PE trustee market.