Zhongyi ZHAO: We Have Prepared to Quit within 4 or 5 Years


Beijing begins to turn warm in March. So does the current economic environment.

After launch, Zhongyi ZHAO went back through a square to his office on 15th Floor of Taikang Plaza on Beijing Financial Street with a reporter of Money Week. “It will look nice when the weather is warmer,” he spoke and pointed to the bare trees in the square. 

Just like his counterparts, Zhongyi ZHAO, former General Manager of Investment Department of Far East Securities Co., Ltd., switched to PE sector at the end of 2006, which has experienced both bull and bear securities markets. At that time, he and his friends set up Jiuding Capital. By now, the amount of its funds has exceeded 2 billion yuan.

Talking about the changes, he said, “It has no substantial change, except for the management scale. We are more cautious and focus on long-term competitiveness and external environment’s impact on us.”

The thinking can also be reflected in actual work. Chinese economy was overheated in 2007. At that time, 5 or 6 investing institutions competed for one project, but now the number is only 2 or 3. Lots of investors thought an investment could be finished within 2-3 years in 2007, but it takes at least 3-5 years at present. Some unreasonable investors often decided to invest or not after half day’s talk, but it will take us 3-6 months to make investment decisions.

After “fast-in & fast-out” investors fade out the market, powerful PE investors like Jiuding Capital will invest cautiously and select targets by spending a long time.

Value Sharing-Value Discovering-Value Creating

Previously, investment market was very hot and IPO could be realized very fast, so investors like those large and fast-listing enterprises. They were optimistic: “If everything goes well, it will take only one year to go on the market and exist for another year, totaling 2 years to finish the whole investment. Investors may be overcharged (10 times higher) but they can obtain a higher return through sharing liquidity premium due to its price-to-earnings ratio 20-30 times higher than the initial offering price.”

Sometimes, investors compete for one project for its high return and keep their eyes on enterprises’ go-on-the-market possibility, instead of thinking about their sustainable earning capacity.

It’s unnecessary to pay attention to long-term profitability because investors will have no relationship with those enterprises after exiting markets. Zhongyi ZHAO believed that investment at that time can be only called Value Sharing, namely sharing the value of an enterprise.

 “Unsmooth IPO makes PE change their thinking to care about more. “What we care about is enterprises’ development space and profitability. Meanwhile, we should provide professional and value-added services. Before, it’s ok to ensure to exit within 2-3 years, but it will take more time. Investors should focus on projects’ profitability and growth space. Now, investors are more closed with the enterprises. I think current investment is a process of value discovering and creating. In another word, investors are more closed with enterprises’ profits and growth. Besides discovering the profitability, investors should help enterprises with its own resources to create more values.

We Have Recruited 5 or 6 Persons

Obviously, it’s very difficult to give priority to enterprises’ sustainable earning capacity than their values. Mr. Zhao’s colleagues have to take much time to know about an enterprise.

A project was contended by many investors before, so decisions should be made in a very short time. 

Now, investors must bring no risks for their enterprises while investing. “Regardless of financial and management teams, industrial experts, upstream and downstream firms, relevant authorizes or competitors, we have clear investigation requirements.”

However, they can act decisively after a detailed investigation.

 “Under such environment, we were inadequate in investigating those to-be-invested enterprises and industries, made decisions hesitantly and invested little. However, we have a relatively thorough understanding of the enterprises so as to dare to invest 70-80 million yuan, even 100-200 million yuan.” said Mr. Zhao. Although the project numbers are decreased, the total investment amount is increasing.

Due to more hands required to do such detailed investigation, Jiuding Capital said it will hire more people to in future.

 “We have recruited 5 or 6 people already, with a staff of 30 at present.”

Money Week’s reporter found Zhongyi ZHAO’s office crowded with employees although several project teams were said to be travelling outside on business.” Some of them are new comers, and are accepting trainings.”

Nowadays, more and more university students have shown their interests in investment. “We have received more than 200 resumes on 5 posts, most of which are from renowned universities like Tsinghua, Peking University and GSPBC. The number is almost twice of that of last year.”

 “Haphazard investors are becoming less.”

 “Is it because institutional investors cut jobs or few PE or financial institutions recruit in financial crisis so that many people send resumes?” asked the reporter. Zhongyi ZHAO thought and answered yes.

Foreign investors favored by students were hit heavily in the crisis, and RMB-based PE funds can only create few jobs.

 “In 2007, 5 or 6 investing institutions competed for one project, but the number is only 2 or 3,” Zhao added, “Among the 5 or 6 institutions, only 2 or 3 may have strength and others are haphazard investors which have disappeared now.”

It’s very hard for small-sized PE enterprises to survive on current markets. “Some PE raised money after getting projects, but it doesn’t work now. Also, it’s very dangerous for those investing with a 10-fold PE ratio because its investing cost will be 20 times if the invested enterprises fail to go on the market.

We prefer IPO EXIT

Lots of PE enterprises choose to exit in various ways when its IPO never goes well and investment cost becomes higher. Mr. Zhao said Jiuding Capital is trying to exit based on IPO.

 “We have made a preparation for a long campaign, and feel better because the investment performance in 2008 was increased by 20% than 2007. I think IPO shall go on with a time horizon of three to five years. The IPO in mainland China cannot be stopped for a long time because banks undertaken huge risks for Chinese enterprises tend to use indirect financing, and direct financing (issuing stocks, bonds and PE) will certainly be increased,” Mr. Zhao explained.

We are also ready to exit at a 15~20-fold PE ratio after IPO.