· PDF fileHBS Alumni Webcast, September 2017 ... RMB Funds Overwhelm Dollar Funds, Driving...

China Great Economy

Too Often a Disappointing Investment Destination

HBS Alumni Webcast, September 2017

Presented by: Peter Fuhrman, Chairman & CEO of China First Capital

Pervasive, shape-shifting and

enveloping regulatory

environment

Though its major goal isn’t to

prevent outsiders from

making money here, that is

often the ultimate outcome

www.chinafirstcapital.com

Challenges Currency

IPO & Capital Markets

M&A

“Guifan” What Are the Rules

& Who Follows Them?

￥

Many domestic companies are

doing great. Are the spoils

reserved for locals?


Barbarians Climb the Wall

In a decade between 1995-2005, China moved

from capital-starved to capital-excess

Early on, global PE and VC firms cleaned up in

China. Stealing the baby’s candy. Many 5-10X

investment successes by US giants --

Blackstone, Carlyle, Goldman, Bain, TPG

Lulled into false sense of over-confidence. They

raised far more than they can now easily deploy

Today, the global giants are often sidelined. Like

deposed royalty? Rich, nostalgic, melancholy

and idle

The Bygone Golden Era


RMB Funds Overwhelm Dollar Funds, Driving High Valuations and Herd Behavior

Is there a word in Chinese for “contrarian”?

“Value Add” Takes On New Meaning Bureaucratic fixers and bagmen. “Good or bad, our

portfolio companies will rise to the top of the long

China IPO queue. We print and keep the winning

lottery tickets”

Only One Way Out Pre-IPO investing in pursuit of valuation arbitrage

LPs unlike any others Often government-linked LPs, putting capital to

work not for IRR but in service to national goals

and civic one-upsmanship

Raise and spend local currency Avoid lengthy and uncertain process of regulatory

approval to invest and repatriate dollars


Principle of fiduciary investing not

native to China, nor easily transplanted

Copied the form – partnership with

carry – but not the formula

Result:

• Portfolio of longshot bets

• Zombie Kingdom

• Unparalleled partner turnover

• LP frustration

Asset managers not investors –

gathering AUM rather than delivering

cash returns

“Principle” vs. Agent

Poor Performance in Cash DPI Terms for China PE & VC


China’s “inevitable crash” indefinitely postponed A govt so rich, so sealed off from outside forces, with enough cash to paper over just about any problem .

Stock market: are these the 3000 worst companies in China? P/e multiples

generally at least 2-3X global comps. Applying Graham-Dodd to this cohort

is mad. HK and NY tend to be more pulled by fundamentals. But, still often

black box investing, VIE structure, Everyone is momentum investor

Economy still doing well, produce $1 trillion in new gdp this year

500 million newly-prosperous consumers, hugely optimistic about the future,

and spending like there's no tomorrow, even while maintaining high

savings. Every major consumer market booming, in play. No better place to

sell high-quality products, services, experiences, online and off

China Now


Active beats passive most every time

Illiquid portfolio investing here, expecting terms

of a SPA to hold, often a fool’s errand

Only tried-and-true is to start or back a business

and outcompete local competitors

Not as hard as sounds – not only Starbucks and

Apple, but General Mills, Zara, Zhongan, global

hotel brands and many more coining it in China

Yes, local copycats will steal your idea, but stay

true to your game and your DNA. Consumer

market shifting strongly against the copycats

Almost every brand doing well in China is

foreign

Yes, But Is There Any Way to Make Money in China?


Where The Money Will Be Made

The overarching imperative: Greater tech self-sufficiency. The

plan is to climb out of the global supply chain basement. Beg, borrow, buy, nurture or steal

China healthcare soon to be world’s single largest industry.

Top to bottom change and opportunity

Enormous household wealth driven by property values

underwrites Confucian Consumption Culture

“Man eat man”. China is the original education meritocracy, still paramount to out-test, out-

cram one’s peers

04 Engines


Above all: Try not to get carried out by riptides

China First Capital works with group of larger

domestic and international companies to

together find defendable areas of high margin

opportunity in China. Sounds obvious, but rarely

is. Result is Chinese corporate margins are

generally atrocious, and sinking

Work everywhere in China and globally, but

based in Shenzhen, China’s richest city, tech

capital, two best companies here, Tencent and

Huawei. Beijing and Shanghai are more difficult

places to live and work. Shenzhen invented and

perfected China’s free market

China First Capital: What Do We Do?


What’s Ahead for China

More haste less speed

– there is time and

opportunity still, one

more boom generation.

Then, China will grow

very old beginning in

2040, resemble closely

today’s Japan. Die is

cast. Even relaxing one

child policy won’t

change this. Kids an

expense not an asset.

New intergenerational

compact

Risks – major one is

blowup of relationship

with US. Would be

catastrophic for both

sides, but perhaps more

so for China. US has its

huge span of allies

powerful and capable

everywhere in the world,

and many of the world’s

best firms. China far

more isolated, weak

technologically

IRR is Job One, but keep in

mind you’re part of the most

important, positive economic

development story in human

history. Since I first came to

China as postgrad in 1981,

per capital GPD (PPP) risen

43X, from $352 to $15,417.

China achieved so much

more than anyone dare hope,

a billion people lifted out of

poverty, freed to pursue their

dreams, to make and spend a

bundle


Questions

Feel free to write and share ideas. I’d be delighted

to figure out ways to collaborate or, at least, try to

ferret out together what’s going on in China:

[email protected]

· PDF fileHBS Alumni Webcast, September 2017 ... RMB Funds Overwhelm Dollar Funds, Driving...

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