South China Morning Post

Monday, May 31, 2010: Page B3

Amanda Lee in Hong Kong

Global private equity firms continue to dominate investments in mainland companies, but smaller players are finding their way into the market, says Adam Bornstein, Hong Kong-based senior vice president of private equity firm CDIB Capital.

Fifteen out of 60 new China listings came to the market last year with the help of “mezzanine” funding injected by private equity firms two to three years before their flotation on the Hong Kong exchange, noted Bornstein.

Big names such as the Carlyle Group, which was a stakeholder in China Pacific Insurance when it became the mainland’s second largest IPO last year, also featured in fundings such as forest operator China Forestry and property developer Kaisa Group.

And private equity players such as Carlyle and Bain Capital have at least US$100 billion of assets under management, note Bornstein.

But smaller firms such as CDIB, which has just a tenth of the capital managed by such large funds are beginning to find value in niche sectors in China.

Bornstein is hoping CDIB Capital’s US$20 million investment in Dalian-based Chemphy, a manufacturer for pharmaceutical companies such as Japan’s Sumitomo Chemical and Germany’s Bayer, will meet this year’s financial budget so that its share sale will be on track. CDIB aims for a return that will double its investment.

Specialist companies such as Chemphy, which carries out research and develops new products, are drawing private equity investors’ attention because these firms are architects and operators not just manufacturers, said Bornstein.

“Upon exit, we’ll look to raise at least US$300 million in an IPO pricing the company at 14 to 15 times its earnings in the second quarter of 2011 in Hong Kong. That pricing is conservative when you consider the industry trades in mid to high teens.”

CDIB Capital, which injected cash into Chemphy last year, hasn’t ruled out a trade sale to a larger chemical company or an investor, such as a private equity buy-out fund.

Data compiled by the Centre for Asia Private Equity Research, a Hong Kong-based research company, show the amount of private equity funds raised for investing in mainland companies peaked in 2008, reaching a total of US$17.6 billion.

Investing was then hit by the liquidity crisis and as a result only US$9.6 billion was raised by private equity funds last year.

But there are signs that liquidity has returned because up to April this year a total of US$5.5 billion has been raised by local funds, foreign funds, and joint venture funds.

Bornstein said different types of investors were now eyeing the mainland market.

“Back in 2003, there were only a handful of foreign venture capital and private equity firms, and some home-grown domestic funds,” he said “Now the number of foreign and domestic funds has multiplied and the industry is increasingly localised.”

Mainland banks, which have been instructed by Beijing to curb lending are among the new entrants to setting up private equity funds but these funds are often managed through their Hong Kong-listed subsidiaries.

Bank of China International, Bank of Communications International, and China Construction Bank International have all established private equity funds investing in up-and-coming industries on the mainland such as media, health-care and alternative energy.

HuaFeng Mao, managing director and head of private equity at Bank of Communications International Asset Management, said while the bank’s US$500 million fund was not big enough to invest in large firms, it would target small-to-medium sized companies that have faster growth potential on the mainland and they could come from any sector.

“We believe companies that operate in specialist sectors are more appealing and the chance of these firms offering a higher return is better than those that are already plentiful in supply,” said a banker who works in one of the mainland banks but did not want to be named.

Analysts believe the mainland banks would have a competitive edge due to their relations with many local small-to-medium enterprises.

Foreign funds have also been beefing up their mainland investments over the past year. According to data provider Thomson Reuters, up to the first quarter of this year, a total of US$3.9 billion of offshore private equity funds has been raised targeting mainland companies.