Jiuding Capital’s Way: 100-member Due Diligence Team
2012-02-21
This story is not novel. Founder of Value Partners Xie Haiqing said in his speech: “The talent-based commercial mode is not sustainable. Even so, it can’t last too long. We are creating an enterprise based on “ordinary people” and cultivate them into excellent elites. We are trying to cast off the talent-based investment system, and to build a system and then convert it into a sustainable evolvable process.
This assets management company focuses on the secondary market. Its systematic research team is the one and only, and its investment team visits 2500 companies each year. In 2007, Value Partners was listed in The Stock Exchange of Hong Kong Limited (SEHK). In 2010, Value Partners made a net profit of 700 million HKD. Its market value was at most 15 billion HKD.
Jiuding Capital seems to continue this story…
Currently, Jiuding Capital’s more-than-100-member industry research team covers 6 industries (consumption, medical treatment, manufacturing industry, emerging industry, agriculture and mining industry), with nearly 100 segmented industries. Its modular standard industry research and due diligence system are characteristic in such a competitive industry.
“Standard” due diligence system
The insiders know that Jiuding Capital tends to recruit “the students from elite schools”. In their opinions, investment manager is not necessary to be a well-experienced individual, and the key is the basic quality. A well-educated, high-quality youth can grow up into an excellent investment manager rapidly under the guidance of method, thought, training and standard workflow.
In Jiuding Capital, each business module has a detailed “operation guide”. Such guiding documents are precipitated, enriched and perfected with the unceasing experience, so a slightly-experienced employee can meet the job requirements in accordance with “operation guide” easily.
Through standardization and processization, each employee’s experience and knowledge points in each business link are solidified into the system through training, exchange and flow. It is said that Jiuding Capital has the inner guidance on the highly individualized and experience-based things, e.g., entrepreneur judgment, corporate governance structure, analysis and judgment of management team. Such content includes experiences and lessons that corporate partners and investment team summarize previous cases. Such standard operation procedure is different from the traditional method that the master cultivates the apprentices in most of PE firms. The personnel change has no big impact on the institution’s investment style and investment quality. The systematism can avoid the dependence on individual star manager.
Moreover, Jiuding Capital’s due diligence procedure is completed by inner team to guarantee efficiency and quality, confidentiality of transaction, standardization and controllability of procedure and method in the due diligence process, thus avoiding randomness and other risks in the process.
Characteristics of Jiuding Capital’s due diligence system
“The most important characteristic of our ideal investment target is the irreproducible competitive superiorities. So does Jiuding Capital. To compete with other institutions, Jiuding Capital must determine our own core competitive superiorities in the due diligence system. Such superiorities should be irreproducible in the short term.” head of Consumption Investment Department I of Jiuding Capital Li Guoxing expressed that, “As for Jiuding Capital’s due diligence system, we have our own irreproducible superiorities.”
1. Experience curve effect forming through a large number of investments: Through the due diligence for a large number of projects, Jiuding Capital has accumulated rich industrial knowledge and investment experience. Our superiorities originate from the experience curve effect. In 2011, Jiuding Capital’s due diligence team has completed the due diligence of more than 700 projects, excluding the projects directly denied in the project research by Investment Department. Ordinary PE firms usually complete the due diligence of tens of projects each year. Through the due diligence for a large number of projects, Jiuding Capital has accumulated rich industrial knowledge and experience. For each new project, some previously investigated projects in the same industry or upstream and downstream projects are available for reference, and accumulated interview resources are interviewable. It is of great help to enhance the quality and efficiency of due diligence and investment analysis. This investment system is practiced, verified, summarized and upgraded in the due diligence of thousands of projects. Only through the test of a great number of projects can it be realized. There is no shortcut.
2. Division of specialization from relatively-large scale: Jiuding Capital’s industry research team is made up of more than 100 members, who can be divided according to various industries. Jiuding Capital’s industry research team is divided into various industries. Each industry is divided into multiple segmented industries. Each member is responsible for a segmented industry, and for the due diligence of the projects related to such segmented industry. So, the specific sectors for each member in the industry research team are relatively focused. Moreover, through integrating theory and practice, accumulate professional experiences and resources in relatively-short time, so as to grasp the law and characteristics of the segmented industries as soon as possible. Such high division of labor makes superiorities of specialization obvious.
3. Information superiorities from enormous resources system: Investment analysis can be roughly generalized as a logic inquiry process. “Logic” means the thought and framework of the analysis. “Inquiry” is to collect information. Information source is extremely important. As far as the due diligence of each project is concerned, Jiuding Capital must interview government, regulators, the enterprise’s upstream suppliers, downstream clients, industrial partners, competitors, etc., in need of a good deal of interview resources. Currently Jiuding Capital has 50 regional offices, hundreds of employees, nearly 100 invested enterprises, and hundreds of contributors, and has contacted with and investigated thousands of enterprises. Such an enormous resources network can provide the powerful information superiorities for the due diligence. Based on such the resources systems, with the help of corporate inner information sharing and help system, external interviews of each project can be performed rapidly.
4. Efficiency and cost superiorities from the due diligence procedure of inner team: All the due diligence procedures are performed by the inner team of Jiuding Capital, without the involvement of few third-party institutions. So, our due diligence has extremely-high efficiency. Except for external research and interview, perform first-round on-site preliminary due diligence within 2-3 weeks, and complete first-round examination, and then perform supplementary investigation. Normally, the time cycle for the due diligence to be performed by the inner team is a little faster than that done by the outsourcing institutions. With the increasing aggravation of investment competition, efficiency is extremely significant. Moreover, if outsourcing, the inner team and external intermediary agencies are not easy to coordinate with each other, which will result in lower efficiency and disclosure of project information. Jiuding Capital’s project team in general is made up of 3 members. Because the due diligence procedure is completed by the inner team, Jiuding Capital’s due diligence cost is lower than that done by the outsourcing institutions. Due to the cost superiorities, Jiuding Capital’s due diligence cases are far more than that in other investment institutions
“The excelsior spirit in each business link is corporate consistent requirement. The due diligence is just one of all the business links.” Li Guoxing expressed that the superiorities of Jiuding Capital’s due diligence system radically depend on corporate business mode.
Through years of development, the superiorities of Jiuding Capital’s systematized investment mode are emerged gradually. 195 out of 485 enterprises to be reviewed for IPO by the CSRC were VC/PE-backed enterprises: 19 enterprises invested by Jiuding Capital, and 13 enterprises invested by Shenzhen Capital. The listing reserve number, to some extent, determines the investment return of the investment institution, and also reflects the comprehensive competitive superiorities of the investment institution.