Jiuding Capital: Running with Technical Analysis
2011-02-20
nationwide while most of the national PE firms are still holding their ground in Beijing, Guangzhou, Shanghai and Shenzhen.
In accordance with the proportions of GDP of different target districts in the national GDP volume, Jiuding Capital set the relevant talent recruitment proportions for each district. If one district fails to achieve the goal, the chief of this district will be fired. Many from other investment institutions sighed on the news: “We are now old-fashioned venture institutions that are unlikely to set up offices nationwide like them.”
It is the work intensity and pace for more and more venture institution employees to run across three to four cities and work more than 20 hours per day. Yet, they are still facing more competitors as well as higher project price. The investment life of strolling and idling has been long gone. Star schemes were replaced by team system, plural investment by specialized fund and individual discretion by group decision making. In the new competition environment, Jiuding Capital chose professionalism with technical support in a quick, accurate and ruthless style.
Good Project Waits for No One
In 2008, Jiuding Capital was rarely known in the venture industry, while in 2009, it was enlisted in the Top 10 of the 2009 China VC & PE Annual Ranking，the only private RMB fund to enter the top 10 in the year. By the end of 2010, Jiuding Capital ranked the fourth of the industry and the second in local PE firms.
With the development of no more than three years, this PE firm has invested nearly 60 enterprises, among which Gifore Agricultural(300022.sz)，Geeya Technology (300028.sz) and Huifeng Joint-stock(002496.sz) have been listed. Gifore Agricultural made a record of 300% increase and is a star enterprise with the largest share-price increase and best earnings for ventures in the first anniversary of launch of GEM. It is said that the ROI of Jiuding Capital on this project is over 2000%.
Now there is a term as Jiuding Speed in the industry. From those industries that shall benefit from consumption upgrading, urbanization, industrial upgrading and globalization division, Jiuding Capital formed five industrial teams specialized in consumer products, Pharmaceutical, agriculture, advanced manufacturing and emerging industry respectively. In those sectors, Jiuding Capital attaches great importance to the industrial and region market leaders or those who has the potential to lead the industry，and achieves synergy effects through scale operation and integration of upstream and downstream of the industry.
With the completion of regional layout across the nation, the team of Jiuding Capital expanded to more than 200 employees. “Jiuding Speed”has convinced its venture peers with the ability of Jiuding Capital and of course courted a lot of doubts. From the perspective of Mr. Lei CAI, partner of Jiuding Capital, the big picture of China’s sustained rapid economic growth and quick capitalization of industrial economy engendered Jiuding Capital’s investment pace with lots of opportunities presented by the market. For venture institutions at the entrepreneurial stage, this is when they accomplish their primitive accumulations.
The fierce competition over projects is also changing the rules of living for venture institutions. The good news is that the amount of funds and capitals raised has recorded apparent upward trend, which means adequate forage for venture institutions, while the bad news is that comparing the abundant capital supply, good projects are on the decrease with higher price. In the torrent of PE nationwide, investment activities was almost fanatical. According to the statistics of Zero2IPO, the number of enterprises being invested has broken the record in the past four years, which demonstrates unprecedented fierce competitions for venture institutions.
“The fight for projects in the future may move toward the west and the second or third tier cities.” Lei CAI reckoned, “This is brought by the fierce competition. In the following year, Jiuding Capital is likely to keep the current pace, which is supported by its business operation and team scale.”
For successful investment, the scale of team is necessary yet not sufficient. “95% of investment is technical while 5% is art.” Commented Mr. Xiaojie HUANG, president of Jiuding Capital.
Specification of Pharmaceutical Industry Investment
Professional fund is the core characteristics of technology-oriented PEs. Jiuding Capital is currently managing a number of RMB funds, namely Zhengdao Jodin, Kunwu Jodin, Xiaqi Jodin, Shangqi Jodin, Zhouyuan Jodin and Jiuding Pharmaceutical, and one USD fund.
In 2009, Jiuding Capital launched Kunwu Jiuding (Beijing) Pharmaceutical Investment Management Co., Ltd.(“Jodin Pharmaceutical”) , the first private pharmaceutical industrial PE fund in China. The scale for the first phase of the fund is 500 million yuan. Most of its LPs are private enterprises, including some from real estate and energy sectors, etc.
Jiuding Capital invited Mr. Bo YU as the general manager of Jiuding Pharmaceutical fund. Before joining Jiuding Capital, Mr. Bo YU assumed the position of general manager of Searainbow Pharmaceutical E-commerce Service Co., Ltd.(www.emedchina.cn) and assistant general manager of Searainbow Group. He also had working experience with China Drug Administration and China Food and Drug Administration.
It has always been the investment philosophy for Jiuding Capital to have a professional team before professional investment. The launch of professional fund led to the further sub-division of investment activities. At establishment, Jiuding Pharmaceutical Fund was mainly segmented by medicines, medical service, logistics and chain drugstores, and now it has covered nine relevant segments.
Based on the preliminary investigations, “the number of enterprises in the industry available for investment is over 500.” Yet Mr. Bo YU was not in the hurry to invest all. “We will first invest the best of the best, while keep contact with those with strong R&D capabilities.” Last year, Jiuding Pharmaceutical fund invested 19 out of more than 300 projects it reviewed.
Mr. Bo YU was honest and frank, “I know little of investment but I know the industry well.” He built a professional pharmaceutical investment team of nearly 20 members including authorities of R&D of new drugs and medicine manufacturing, core sales of new medicine promotion system, government officers who has participated in the medicine policies drafting of the twelfth five-year plan and media professionals in pharmaceutical industry. To help with the R&D of followed products, Jiuding Pharmaceutical team has been grooming the new medicines that SFDA approved every day in search of potential varieties.
At that time when specified funds were not the mainstream, they seemed to be quite different in the circle. “They may not be equipped with financial background, but they are experienced in the industry and are keen on finding prominent enterprises.” Jiuding Capital has the reason to be proud of it is now. Of the over 20 pharmaceutical enterprises being invested last year, almost half of them were in the pocket of Jiuding Pharmaceutical Fund. “Expertise enables us to move quickly, accurately and ruthlessly.” Mr. Bo YU said, “Most ventures missed the opportunity as they were not familiar with the enterprises and the industry.
Jiuding Pharmaceutical also differs from others with its communication with enterprises. “Other ventures may stress the capability of financial investment, but we prefer to discuss the routines in the industry with those who do business.” This would generate common language between the enterprises and ventures as well as intimacy. The internal business division also saves professionals from the chores of technologic processes of IPO. “We are not judging the IPO processes but the value of the projects themselves.”
They soon found that simply developing appropriate project were far from enough. “Only enhancement of after-sale service can assure a healthy development of fund and help with its branding.” Mr. Bo YU commented. For those quality enterprises, the value-added service of a professional team is far more attractive than capital and connections. It was from the investment of Zhejiang Wepon Pharmaceutical Holdings Co., Ltd that Mr. Bo YU learned this.
Mr. Bo YU negotiated with Zhejiang Wepon for over half a year. It was an enterprise that has no worries about capital. As Jiuding Pharmaceutical was in its starting phase, there was a lot to improve in value added service. Knowing this, Jiuding Pharmaceutical began to enhance its management service after investment.
Now, Jiuding Pharmaceutical led by Mr. Bo YU offers a comprehensive flow of after-investment service in the industry covering new medicine R&D, pharmaceutical manufacturing, marketing distribution, and internal enterprise M&A, catering to the needs of enterprises of all kinds. Professional after-investment management further dig out the potential of its value-added service. “For example, through M&A, we sorted out all the other relevant raw material manufacturers, making the enterprise we invested the exclusive supplier, which brought to it a revenue of 10 million yuan to 20 million yuan.” Mr. Bo YU revealed.
From value mining to value creation, Jiuding Pharmaceutical further developed the potential of its professional team. Yet with the rapid development of its team, a new issue comes up: how to keep the accuracy and value-creation capability while running?
More professional and intensive cultivation
Professional teams, well respected in Jiuding Capital, are the core value of it and they also have to abide by the rules, namely individual discretion gave way to group decision making.
In Jiuding Capital, the work division and decision-making of project development, project review, Due Diligence(“DD”) and risk control are totally independent. With regards to the importance of the project, Jiuding Capital established a multi-level appraisal procedure including first-level review, second-level review and third-level review with five partners being the standing judges and chief of the fund of relevant specialized projects. In the third level review, the partners would always make the decision. Yet even it’s in the third level review, according to Mr. Xiaojie HUANG, “there is no final decision maker in Jiuding Capital. All decisions are made by the group no matter who the boss is.” Therefore, in Jiuding Capital, it is hard to find a spotlight spokesman.
This decision-making mechanism can not only minimize the individual emotional judgment on projects, but also “give full play to the characteristics of the projects and help us finding project value in different angles.” Mr. Bo YU reckoned. This being said, how can you keep yourselves from ruling out good projects under this decision making mechanism? How can you guarantee the initiative of those developing the projects?
As a matter of fact, the investment standards and review are “indeed so HARSH” that it has to finally give up the investment opportunities of a number of enterprises, some of which proved to be successful later on. Lei CAI reckoned that this decision-making mechanism is on the basis of specialized division and risk precaution. The merit is distinct scale effect while the challenge is in management elaboration.
With rigorous internal division, the staff turnover of Jiuding Capital is quite open. With a philosophy that Respect the Capables, young employees with outstanding performance would be promoted quickly while those who were not able to meet the requirement of their positions would be fired, including partners.
Mr. Zhu Yi-jia, a master of building materials, entered Jiuding Capital as an intern in 2008. In June last year, he was promoted as investment director of pharmaceutical sector due to his excellent performance. This was his second promotion in less than two years. His subordinates now include his former supervisor.
Open internal flow means everyone has to fight in Jiuding Capital. After entering into Jiuding Capital, Mr. Bo YU found his working strength much larger than before. “I visited four cities up to a day. It was raining that day and I went out in 6 a.m. and lay down until 2a.m. the next day.” Yet he was also grateful for catching up with the best stage of China’s capitalization. “Think about it, all the resources you accumulated for all these years are waiting for this moment.” He said.
Lei CAI summarized the features of Jiuding Capital as “more market-oriented, scaled and professional”. As a more market-oriented private PE firm, the market environment Jiudings are facing is also getting more complicated. More and more government-sponsored funds are joining in the group, with market experience to be accumulated yet natural advantage of deployment of policy resources.
Private venture institutions, like Jiuding Pharmaceutical led by Mr. Bo YU, are getting more policy support while also up against more fierce competitions from government-sponsored competitors. When pharmaceutical industry rises to the national strategic level, it is a natural trend for national capital to penetrate in. For example, Sinopharm, CRE and GE have taking over the business of domestic vaccines, circulation and import & export respectively. For private pharmaceutical fund, it needs to give full play to local teams in finding the potential quality enterprises.
Under these circumstances, “We need to stick to the development as grassroots. Hardship and hard work shall all pay off so long as we keep our professionalism.” Mr. Bo YU reckoned. It is because of this that Jiuding Capital should keep its development pace and make it faster. “The number of enterprises to be invested this year shall add to over 30.” He said. In March, Jiuding Pharmaceutical will also accomplish its second phase of fund-raising with scale of 1 billion yuan.
The intensifying market competition heralds the coming of specification service age. “In the rapid expansion of market, the PE ratios of GEM are likely to go down quickly to a rational level. The market valuation of A-share will draw close to that of the mature markets in two to three years.” Lei CAI reckoned that the maturity of future capital market would have a great impact to PE firms as to pay more attention to sustainable development of the enterprises invested rather than the benefit from market.
All these will rely on a more professional and intensive cultivation. “ It matters whether you satisfy the true need, whether you own loyal clients and whether you create true values.” Lei CAI said.
Why Jiuding Model?
By He Fei
Once there was a book about top-level ventures treasured as the financing guide by entrepreneurs. That book was Capital Venture. Now it was the entrepreneurs’ turn to ask ventures about their shining points.
Before the blowout of venture market, capital was a scarce resource. Numerous entrepreneurs were buying tickets to various kinds of venture forums so as to meet VC investors. In comparison, venture investors were comparatively at ease. Some foreign investment institutions even said privately that they wouldn’t consider those knocking on the door. It was said that a partner of a famous foreign venture always left a word as “Email me if you have good projects” after every speech he gave in universities and forums, while few people received a reply from him.
VCs like to compare the relationship of ventures and entrepreneurs to love and marriage. There were cases of love at first sight. It was often heard that “We decided to invest them in no more than 20 minutes” from VCs. A number of investment at the value of tens of millions USD were done over a dinner.
This was, of course, exaggerating in some way. Even though enterprises and venture institutions find each other attractive, they still have to go through the procedures of DD and risk control. Yet there were a number of stars rising to fame in some of the stories. They were like exquisite artists who fabricated investment at their fingertips.
2010 is the most historic year in China’s venture history. The fund-raising, investment and exit in the venture market all hit the new record. According to the statistics of Zero2IPO, in 2010, the number of funds newly raised by venture institutions from home and abroad amounted to 158 with a total capital value of 11,169 million US dollars, 68.1% and 90.7% higher than that of 2009 respectively and 36.2% and 52.8% higher than the historical high in 2008 respectively.
The age of national investment has come on the quiet. On the contrary to the more abundant capital, good projects are decreasing and competition of projects is getting more and more furious. More than one VC sighed, “For projects that might need three years of survey in the past, we have to complete the tasks in three months.” The reviewing period is getting shorter, the price is getting higher and enterprises with no money issues are particularly picky of venture institutions. VCs and PEs start to withhold the information of nice projects as any carelessness might invite other institutions in for competitions. When a food-processing chain enterprise is having over 40 ventures knocking on their door, venture institutions learned suddenly that they had become the party B in the market.
The operational model featuring quick move, strict division and work flow, and after-investment management starts to take effect in the venture market. With the idea of competing in scale and professionalism, group decision making preceded individual discretion, which further led to rapid expansion.
Jiuding model is not rare in practice. Other venture institutions such as Fortune Venture Capital, a local VC and Kleiner Perkins Caufield Byers, the well-established foreign VC, have also set up specialized funds. It is fair to say it’s not Jiuding Capital who selected the model but the market. Though the long-term effect is yet be to seen, Jiuding’s trial had assignable positive significance both to this young PE and to the whole China’s venture market.