The Mission of Equity Investment: Value Creation


The wealth stories that the listing of enterprise brings the VC/PE firms a big fortune have excited the people’s nerves. The media only report PE industry’s high profits instead of high risk. The success is at the cost of failures. Taking large- and medium-sized investment institutions as an example, only 50-60 out of more than 2000 projects realized their investments. Even if the investment is completed, it is hard to avoid the failure of IPO. 

According to the statistics, the enterprises which have not passed the examination of CSRC for IPO and the enterprises which have passed the examination of CSRC for IPO but have not been listed, have amounted to 72 enterprises in 2011. Most of such enterprises were invested by PE firms. The invested enterprises which have not passed the examination of CSRC for IPO were only a tip of the iceberg. Even some enterprises invested by some PE firms with weak risk control ability were in trouble before declaration. According to the investors’ summary, the success rates of the invested projects were 10% for the enterprises during the preliminary period, nearly 30%-50% for the enterprises during the growth period, and nearly 50%-70% for the enterprises during the mature period. There is no shortcut to success, so does the equity investment. 

Direct financing space 

In China’s financing system, the proportion of the bank financing (indirect financing) is over-high. The bank financing platform earns the interest margin through savings and loan, assumes the vast majority of risks caused by the industrial fluctuation. On the one hand, the enterprise financing cost is high. On the other hand, the banks’ ability to cope with risks is relatively low, with certain hidden dangers. In the well-developed capital market system, taking American assets capital market as an example, the direct financing, such as listing issuance, private equity, debt market, etc., accounts for 20%, with huge improvement space. China capital market needs to advocate and support the direct financing, solving the imbalance between supply and demand through market mechanism. Provide the enterprises stable and cheap capital, and spread industrial fluctuation risks effectively. 

Moreover, not all the enterprises have the bank financing qualification. In existing financing system, due to the banks’ control over the structural risks like non-performing loan, pioneering enterprises, small and micro enterprises and mature enterprises without reasonable asset structure and guarantee ability or mortgage ability are hard to obtain bank credit capital. Some enterprises in debt get into trouble, which can’t realize the direct financing through IPO in the short term. The long-term development of such enterprises is pressed for external capital. 

Meanwhile, the private capital investment channel is relatively limited. Besides the existing substantial economy investment channels, a large sum of capital make a deformed development in private usury inter-lending and idle capital speculation sectors. With the starvation of substantial economy and the restriction of capital, such enterprises find no way out. 

Optimize the enterprises’ asset structure, provide the enterprises with the direct financing, create diversified financing channel; find a way out for idle capital, reduce indirect financing risk, realize effective allocation of social resources. These are the basic functions of PE investment.

 The creator of enterprises value 

 PE is a discoverer and an impeller of enterprises value more than a sharer of listing premium and a looter of vested interest. This is PE’s maximum value.

 Vice president of Ping An Bank Wang Yanhui pointed out that, “the first significance of PE mode is that PE investment process includes value discovery and value realization, as well as value creation.” PE’s most important role is to discover corporate value and promote corporate value creation. A large number of enterprises grow up with the excellent PEs.

Sequoia Capital Fund, known as “Goldfinger”, has been playing a benchmarking role in value discovery and value creation in VC sector. Many enterprises during the budding period have been operated inside Sequoia Capital system upon launching, even during the growth period, or pushed by the investors and the entrepreneurs. The whole course of investing Qihoo 360 and from childhood to listing has witnessed the struggling history of the entrepreneurs and the investors: divergence, collision, running-in and cooperation. 

Fortune Capital with superior media resources is proficient in investing in the digital TV industrial chain. In 2001, Fortune Capital invested in Coship Electronics with the net profit of 60 million yuan. With the help of Fortune Capital’s strong background in the media circles, Coship Electronics rapidly occupied nearly 60% market shares in Hunan province. 

Jiuding Capital discovered Gifore in the field. Through a series of systematized, large-scale industrial merger and market layout, Gifore rapidly grew up into a leading nationwide agricultural machinery chain from an enterprise in the Central Sichuan, which has realized extraordinarily rapid growth, and has been listed in the second-board market to be the first high-price share in the second-board market.

Through strict system screening, some growth-type enterprises are discovered and supported by capital. Moreover, equity investment improves corporate governance structure. Through PE platform, the enterprises realize information exchange, resources sharing, and channel communication.

 The impetus of PE firms to industrial integration is higher than that of any capital financing platform. History has proven that PE firm has been the most active power in the merger market.

The industrial integration is the ultimate outlet of PE investment. Through supporting the leading enterprises, with the power of capital, expand the market shares, widen the gap of competition, and enhance the enterprises’ comprehensive strength and industrial overall premium.

Over a given period, PE has caused a lot of comments. Relation-based or predatory-type “Pseudo PE” to some extent exists. Moreover, unsoundness of industrial system and imbalance of restriction mechanism are some loopholes that can be used by some of PE firms. As for a majority of institutions, especially for current PE firms, the dependence on specialty is always mainstream trend. 

As mentioned, as the fund manager, PE firm needs to discover value, create value and realize value, so PE firm must have the accumulation of a wide range of market resources, experiences and knowledge. Without the deposit of specialty, the exploitation of value is almost impossible. Secondly, the excess return needs the gold-diggers’ diligence and efforts in excess of average social level. For most of PE firms, the success rate of project investment is below 1/20. Internal examination mechanism of excellent PE firm is not weaker than examination mechanism of IPO Examination Committee. Moreover, with the aggravation of competition, the scarcity of “quick-acting” projects, and the elongation of investment cycle, the enhancement of anti-due-diligence ability of industrial enterprises through industrial baptism and market education, and the increase of the proportion of high-risk projects and preliminary projects, out of 30000 investors, those without mental discernment among 30000 investors are likely to lose the foundation of survival. As the butler and porter of the wealth, PE in nature is an assets management institution. The trust obligation is its soul.