Cai Lei of JD Capital: Boost China’s Real Economy with “Bellwether Plan”


This is the speech delivered by President Cai Lei of JD Capital at the executive forum of China Venture Capital & Private Equity Forum on June 17, 2017. The text is presented with certain revisions.

Distinguished guests, good afternoon! Today, I would like to talk about equity investment. This sector includes two segments, namely private equity (PE) and venture capital (VC), which nevertheless are not essentially different from each other. JD Capital is a genuine locally-established PE firm. Hence, I want to share my understanding of the PE industry, and our thinking and practices in the current climate.

Two Basic Features of Equity Investment

Both forms of equity investment, i.e. PE and VC, have two most important and fundamental features. The first one is the integration of industrial and financial capital. Equity investment is all about capital featuring the combination of industry and finance. Though the current task in China’s economy is to prevent investment from being diverted out of the real economy, the equity investment institutions are inherently combining the real economy together with the virtual one, thus indicating an integration of finance and industry. 

Equity investment institutions are nothing like those solely engaged in industry and business. For one thing, their businesses at the capital end are typical financial activities: raising funds, be it by private offering or quasi-public offering, is necessary. For another, the financial capital of PE and VC institutions will be directly poured into the real economy. The major investment targets of these institutions are non-listed industrial enterprises, and the two parties have to be connected as one to achieve returns. The investment cycle is also relatively long, ranging from 3-5 years to 5-10 years. Therefore, the capital-end business of PE and VC institutions is deeply integrated with the industrial development and thus highly industrialized. In other words, equity investment always features the financialization of funding and industrialization of assets, regardless of its location and type.

The second feature of equity investment lies in the fact that it is strongly localized, as it must take roots in different regions. First of all, seeing from the capital end, PE firms are highly correlated with the development of local financial systems and the effectiveness of financial instruments. As quasi-financial institutions, PE entities have to come under localized regulations. Secondly, in view of asset-end businesses, the best investment targets must be strongly related to the local economic climate and development, indicating strong localization as well. Therefore, globally, equity investment industry must be a localized one, whose development is closely related to the local industrial development and financial environment. Furthermore, equity investment in the US and China, though both features integration of industrial and financial capital, has much different models as a result of different conditions. For instance, the US PE firms started with leveraged buyouts, while those in China started with shares investment in growth companies.

These are the two basic features of equity investment. 

History of PE in China

Based on the analysis above, I’d like to share with you my understanding of the three stages in the development of China’s PE industry. The first stage, starting from the year 2000, was a typical one featuring growth-oriented investment. So to speak, it was dominated by a passive investment model, in which investors made investments by buying into shares. Meanwhile, the first-generation entrepreneurs of most enterprises were still present, so it was impossible to seek buyouts. The major way to earn profits was to enhance the enterprises’ endogenous growth, and manage to obtain a share of the high-growth dividends of quality enterprises in those growth industries.

When the financial crisis occurred in 2008, the high-growth stage of China’s economy came to an end, and the PE industry in China entered a new phase. The industry was still dominated by the model of shares investment. However, with the development of China’s capital market, investors gained the opportunity to deliver profits through IPO and then withdrew from the A-share market. Starting from 2009, investment was mainly made under the pre-IPO investment model, during which time many China-based PE firms witnessed considerable growth, JD Capital included.

With the changes in China’s macro-economy and capital market circa 2014, the stage of pre-IPO investment model could no longer represent the PE industry in China. Then, what is the new core model? The latest topics in China’s industrial development are large-scale consolidation, supply-side reform, and the increase of industrial concentration. A number of real industrial bellwethers and giants are expected to emerge during the process. Meanwhile, the first-generation entrepreneurs in China are about to retire from their leadership; and it is now possible for PE firms to acquire excellent industrial enterprises. At present, the buyout model is yet to dominate the industry, and most PE firms are still engaged in shares investment. Thus, it may take another five to ten years to embrace the era of M&A investment represented by buyouts.

Currently, China is in an era of “1+N” industry consolidation. The “1” stands for industrial bellwethers, and the model refers to the practice of helping these bellwethers to perform industry consolidation. By acquiring other enterprises in an industry (“N”), a regional industrial bellwether can play a leading role in China and even all over the world. In fact, the birth and growth of this model matches with my understanding of equity investment. The industry integrates the industrial and financial capital together and adapts itself to local conditions, and the “1+N” model requires stronger locally-grown industrial and financial strength – all these are results of the constant development of the two elements.

Implement “Bellwether Plan” and Develop Real Economy

I have shared some theoretical considerations and summarized various investment models. Next, I’d like to talk about the plan of JD Capital.

Based on the previous practices and under the current circumstances, JD Capital proposed the “Bellwether Plan” after repeated discussions. It will be the core plan guiding JD Capital in implementing the “1+N” consolidation-oriented investment strategy in the next five to ten years. This is its first official release.

“Bellwether Plan” can also be called “Emerging Dragon Plan”. The term of “emerging dragon” comes from the Book of Changes. The book contains various sayings concerning dragons, including “the dragon lying hid”, “the dragon emerging in the field”, “the dragon on the wing in the sky”, and “the proud dragon repents”. They essentially reflect how things grow, and all, be it individual, enterprise, organization, or country, shall follow the law.

Things in their early days are like dragons lying hid in the deep, and rather than appearing active, they shall rest quietly so as to grow; then, things will become “the emerging dragons” which are so full of vigor and vitality that they can enjoy rapid growth; after that, they will grow into “flying dragons” in the heyday; later, they may become “proud dragons”…

The development process depicted in the book has a great alignment with the laws guiding us in evaluating enterprises and making investments. Enterprises have to experience the stages of being lying dragons, emerging dragons, and flying dragons. Hence, we can divide enterprises into three types, namely lying dragon enterprises (potential industry leaders), emerging dragon enterprises (emerging industry leaders), and flying dragon enterprises (industry leaders). In this sense, how to identify the stage enterprises are in and propose corresponding operation and investment strategies?

Industries differ in thousands of ways. Hence, in order to classify enterprises in a unified manner, their value can serve as the most fair and comparable criterion. The standards in our program are as follows: potential industry leaders are enterprises with a market value/valuation of USD 100 million; the value of emerging industry leaders is an order of magnitude higher than that of potential industry leaders, and the market value of USD 1 billion makes these enterprises “unicorns” in the Western context; similarly, the value of industry leaders is an order of magnitude higher than that of emerging ones, exceeding USD 10 billion.

All these levels of enterprises, especially the potential and current industry leaders, are of great importance to the economy of regions and countries they are in. Emerging and quasi-emerging industry leaders stand for the innovative strength of economy, and industry leaders can serve as an indicator of economic maturity – in other words, the number of industry leaders is one of the most important measures for the evaluation of the economic performance of a region or a country. As we know, Fortune 500 companies and globally renowned enterprises are almost all industry leaders.

Comparisons between China and the US are quite common. How many industry leaders are there in the US, the world’s biggest economy? The latest statistics show that there are 515. However, China, as the second biggest economy, has only 120 industry leaders, most of which are state-owned ones. In 2016, China’s GDP was USD 11 trillion, around 60% of that of the US – USD 18 trillion. Nevertheless, the number of industry leaders in China is only one-fifth that of the US. In the next decade, China’s economy is expected to approach or even surpass that of the US. Moreover, with the economic growth and industry consolidation in China, the number of its industry leaders will also approach or even surpass the US’s in the next five to ten years. I believe, 200 to 400 more industry leaders will emerge in China.

Among the 120 industry leaders in China, most are state-owned industrial enterprises and financial institutions based in Beijing. Apart from Beijing, Guangdong Province has the largest number of them. The 20 or so Guangdong-based enterprises include Tencent, Huawei, Midea, Gree, China Merchants Bank, Ping An, Vanke, Evergrande Group, Wen’s Foodstuff Group, and Haitian, etc. Involving both industrial and financial businesses, they belong to different industries and operate under various ownerships. It can be concluded that Guangdong’s economy is the most dynamic in China. Here in this country, if there can be one or several genuine industry leaders in a city or a region, we may say that the local economy is sound and mature. 

The dream of JD Capital is to help more emerging industry leaders in China to grow into real-sense leaders. How? We will realize this dream in three ways: firstly, we will select emerging industry leaders and entrepreneurs with great potentials, and help them figure out their strategic direction and provide valuable and competitive products for their customers and the whole society; secondly, we will help emerging industry leaders with capital management, competitiveness improvement and financial strength enhancement, so that they can go global; thirdly, we will help them take a hold on the market and perform consolidation along the industry chain, in and around China, as well as online and offline, so as to enable them to scale up. Once all these works get done, we believe that the value of an emerging industry leader will increase from USD 1 billion to USD 10 billion, and they will bring us a tenfold growth in our business. During the process, one emerging industry leader can bring about an investment opportunity of CNY 1 to 10 billion, and 100 of them will lead to investment opportunities totaling CNY 100 to 1,000 billion. This will truly be an enormous opportunity of China’s PE industry.

This is the “Emerging Dragons Plan”, or “Bellwether Plan” of JD Capital. We hope that, in the next ten years, we can help more than 100 emerging industry leaders in China to grow into industry leaders. Actually, this shall be the mission of all China-based PE firms. We also hope that, JD Capital can work together with various institutions, industrial capitals, and professional teams to implement the Plan, so as to achieve great leaps in China’s economy, especial in the real economy. If the aim can be realized, a number of China’s PE firms, including JD Capital, will grow into global industry leaders as well. In this way, China’s PE industry will be making considerable contributions to the development of our country. 

This is all I would like to share with you today. I hope that they could be some help to you, and that we could work together on it.

Thank you!