Lei CAI: Post Pre-IPO Era Is Coming


On April 12th, “2013 ChinaVenture China Investment Annual Meeting-Shanghai” sponsored by China's leading financial information service institution ChinaVenture was held in Grand Hyatt Hotel Shanghai. Partner of Jiuding Capital Lei CAI made a keynote speech. The contents for the speech are as follows: 

It is my honor to be invited by ChinaVenture. Now, I talk about my observation and thoughts on PE industry and industry environment. I will spend more than ten minutes in reviewing the past of PE industry and looking into the future of PE industry.

Over the past five years, the theme of China PE industry was Pre-IPO, characterized by “High Profit, Big Fortune, Quick Acting”. So-called “High Profit” means the projects’ high return on investment, up to 5 times, even 10 times, with annual Internal Rate of Return (IRR) of more than 100%. So-called “Big Fortune” means that, over the past 20-30 years, a great number of China’s high-quality enterprises have been left outside the door of the securities market; if such enterprises are invested with Pre-IPO mode, it may be called “land of gold”. So-called “Quick Acting” means that, a great numbers of firms invest and withdraw within 2-3 years, even 1-2 years. This was the characteristics of “Pre-IPO Era” - “High Profit, Big Fortune, Quick Acting”.

My co-worker told me that the early Pre-IPO Era was “an era of picking up money”, I think so. The past five years were indeed a historic feast. So, Jiuding Capital came into being to share the results of this era with everybody. The climax of this era was called “National PE” or “PE Foam” by media. Just as the scenes that the historic law has presented repeatedly, it is at the mess after the feast. Now that Pre-IPO was a historic opportunity, it is about to or has become a history. 

Looking back to the Pre-IPO Era, I have never mentioned such an opinion. Today, I’d like to have a talk. As for so-called “National PE”, we should divide it into two. PE has made a great contribution to the development of China’s economy and capital market. Even the growth over the past years from local economy to central finance couldn’t have been achieved without PE. The reason is known to us. As for “PE Foam”, in my opinion, it is normal, even necessary. Without the network hi-tech foam in 2000, there would be no developed convenient internet application. Hundreds of years ago, whether shipping in the 18th century, or train in the 19th century, or aerospace and aviation in the 20th century, the similar industrial foam has been existing. Flowers and bones always can be seen on the development road. We should not see the flowers, but forget the bones. 

This is my conclusion for China PE industry over the past five years. The past five years was the Pre-IPO Era, but it has come to an end.

Pre-IPO Era”. Why did I mention Pre-IPO again? Although the feast was over, the leftovers remained. Another reason is that the suspension of IPO and the large-scale IPO inspection of the regulator over the past half a year continued some business opportunities of the Pre-IPO. Of course, it is not as good as before.

Now, I make an exchange with everybody about my prediction for characteristics and patterns of China PE industry in new historic period.

The first characteristic is that future China PE industry will accelerate its integration. It seems to have a kind of “China Phenomenon” in the industrial development. Once Chinese enter an industry, the life cycle of the industry will be shortened. For example, China solar energy industry created China’s richest people rapidly, and returned to zero soon. In the recent years, we have witnessed the vanishing of many PE firms. I regret to announce that, in the coming years, we will witness the vanishing of more firms. 

The second characteristic is that PE investment enters new normal development period. PE industry will present highly-customized characteristic and longer investment cycle. The overall profitability of PE industry tends to be the social average level. This will be a new normal development period. In fact, the investment environment itself should be like this.

The third characteristic is that the businesses of PE and VC firms will be developed in accordance with the international practice. PE industry in Europe and America, through tens of years of development, finally forms two types of firms: one for merger and another for VC. There is no fresh thing under the sun, and so does future China PE industry.  How to win out in the new era? It is theme of this meeting. I firstly give out my standard answer: The competitive firms can win out. Our investment firms perform research and judgment on the enterprises with such mode each day, and the same theory is suitable for us. With some competitive advantages, the institution can survive and develop; without any competitive advantages, it will be weeded out.

If you think that this answer has no operability, I give you my thought. Because I have no enough time to unfold it, I hope we can exchange later. Capital is the essential attribute of PE. Capital is classified into financial capital and industrial capital. The two types of capitals play the important role in the process of social development, and have their own characteristics. The outstanding characteristics of the financial capital are mobility and passivity, while the core characteristics of the industrial capital are long term and initiativity. I think that, in China’s new PE era, really significant PE capital should have the characteristics of the financial capital and the industrial capital. A good PE firm should perform fundraising management and examination with the mode of the financial capital, and should perform investment and operation with the mode of the industrial capital. It is suitable for merger or VC.

Let’s get back to today’s theme: New Era of China PE Industry. My outlook on such era is that: it is the best era as well as the worst era.

Thank you!