Zhongyi ZHAO: Equity Investment Industry Matures after Three Rounds of Knockout


Zero2IPO news- On July 14th, Jiuding Capital’s partner Zhongyi ZHAO pointed out that equity investment industry couldn’t become mature until being knocked out three times at the 10th China Venture Capital & Private Equity Semi-annual Forum hosted by Zero2IPO Group.

He explained the first knocking-out referred to the financial crisis of 2008. The companies weeded out in the second round include those companies survived in the crisis but achieved nothing in the following 3-4 years. The companies knocked out in the third round were those overconfident companies that failed to adopt risk control measures. 

He held that the institutional investment could be divided into three phases: “first-come, first-served”, “highest bidder, final winner” and “excellent service, final winner”.

The following are his points of view:

Jiuding Capital is a Chinese private fund management institution with flexible operation mechanisms. Besides RMB, we also manage US dollars. We have invested in dozens of Chinese enterprises, among which, Gifore has been listed on the market.

In fact, RMB fund has sprung up since 2007. Someone feel it’s highly valued and burst economic bubbles, but I think it’s a good phenomenon. In the long run, China is a country lack of capital despite excessive capital supply in certain periods. At presents, many funds prefer equity investment, so enterprises would be able to get enough capital support, which is a good thing.

Moreover, wise and diligent Chinese people always flock into one industry at the same time when they find commercial opportunities, which can be seen in many industries including equity investment. Equity investment industry will become mature until being knocked out for three times.

The three rounds of knocking-out perhaps like this: in the first round, a lot of institutions that were lack of financing ability were knocked out in the financial crisis of 2008; in the second round, some institutions were financed and began to invest. In 2006 and 2007, the investment industry developed well. Many institutions began to operate at that time and their gap was not obvious. 3-4 years later, the gap began to be enlarged. Some well-performed companies gained a lot, some of which were listed, but some bad-performed ones achieved nothing and were washed out finally. Hence, 2010 and 2011 are the second round of knocking-out.

After the first two rounds, some institutions performed well, but some were overconfident and radical in investment due to the failure of risk control. Hence those companies would be knocked once they lowered the standards in risk control and standards when suffering severe completion in project development. In conclusion, I think the third round knocking-out is because of inefficient risk control.

After third rounds of knocking out, the remaining companies would perform well in investment, financing and risk control, which are mature institutions and the industry can become mature after that.

At present, so many institutions are competing fiercely in project development and investment, which can be summarized into three stages:

Stage 1: “First-come, First-served”

In our experience, investment institutions could invest the companies he chose in 2005 and 2006. Those companies had nothing to know about investment.

Stage 2: “Highest Bidder, Final Winner” 

At the second stage, they competed by price. Usually, several investors may be attracted by one project at the same time. In that case, investors with the highest bidding price would become the final winner. The project owners thought money was more useful than their commitment in service.

Stage 3: “Excellent Service, Final Winner”

The final stage shows that an industry begins to enter into the mature stage, namely winning by service which can help enterprises grow and succeed. I totally agree to the point of view of “Few Investment, Much Service” proposed at the previous forum. The second stage is irrational. It’s better to loan from banks if you invest in those projects without any services because it’ll cost little. What investors pay attention to is service.

We set up our own service team to serve customers specially, which convinced our efforts in services. Although the final competition structure was shifted from good price to good service, many institutions were forced to raise price in the second stage.

I think the development target of investors should depend on their profession, and the investors can survive after setting foot in professional sectors.