2013.07.19 Costone Capital Views:
CoStone Capital is a boutique Chinese private equity firm founded in 2001. During the past 11 years, more than 50 firms were invested by the CoStone Capital, including Sunward Intelligent Equipment (002097. SZ), Hubei Huitian New Materials (300041. SZ), New Hope Liuhe (000876. SZ). These investments brought 30 to 50 folds of returns, which enabled the firm to be outstanding in return ranking in the industry up to now. In an interview with the 21st Century Business Herald (21 CBH), the chairman of CoStone, Wei Zhang, states that the firm is benefited from its concentrated scale and value-focused investment route, this investment strategy raises less fundraising pressure. However, the concentration also poses challenges to the team’s risk management and post-investment management.
21CBH: what is the impact of the IPO moratorium on the company?
Zhang Wei: One impact of IPO moratorium is on the exit and return. the portfolios on-hand have already generated certain profits, so the financial pressure is relatively low than peers. We are now having five projects lined up at the gate of the IPO already passed the financial verification that will have a big probability of going public. More direct impact is on fundraising, especially those who’s seeking fundraising through banks and trusts due to the suspension of sales by bank proxy for PE funds this year. Fortunately, we normally give priority to direct sales. Although the China Merchants Bank and Noah Wealth once helped us issuing new products, the total fundraised through bank channels accounted for only 20% or less. Around 60% of our commitment capital was funded by entrepreneurs that used to be our portfolio, and ten percent from our management team.
21 CBH: Why CoStone uses a unique way to raise funds?
Zhang Wei: On the one hand, our goal is to be a medium-sized fund firm, and only raise capital that we are capable to manage. On the other hand, firms were funded by CoStone will also invest CoStone reversely, and the investment pressure under such conditions would be totally different. We are acquainted with those firms funded by CoStone and back to invest us as a friend, we trust each other and invest each other’s firm. It is hard to hand over the result with any trick.
In addition, our team is made of a large chunk of personal wealth to follow on investment, this minimizes the agency cost. Also, our team follows up the whole fund instead of a specific project, which avoids partiality between projects.
The large Follow-On by CoStone partners can also offer ‘balance’ in the decision-making process. Many institutions praise a democratic vote on the surface, in fact, the founder of a big influence controls the result of voting. In CoStone, 6 of 7 partners have the right to vote, the even number of partners means no one can be controlled to determine the result of voting by contributing the last vote, moreover, two-thirds of the votes shall prevail. If I conflict with other partners, I am also embarrassed to persuade them, because their personal wealth is tied up here. In total, we want to make a feature of large Follow-On investment, which is also an effective measure to control risks.
21CBH: How to create the ‘luxury’ brand of asset management industry?
Zhang Wei: Many institutions want to invest in the firm which brokers are willing to underwrite, so that the probability of being underwrote will higher. The investment arena under such a strategy will keep broad, which can be seen as each enterprise been invested a little money as " pepper the soup". However, this kind of method will be inefficient later. The first reason is that China already passed the stage of rapid growth and it is difficult to invest in fast-growing enterprises. Secondly, some financial investors only provide cash rather than value-added service, which is not conducive to the growth, we need to build a sound value-added service system.
Our investment is relatively concentrated, with an investment of more than 60 million yuan per project on average, which requires the firm with a higher ability to balance risk and return. This year, we will narrow our investment channel to fewer industries, such as media, medicine, etc.
Our investment team accounts for about 70% of the personnel, and our attention is divided into three parts: research, due diligence, and post-investment service. The research of many brokers and funds focus on "industry fundamentals + financial data ". In contrast, we conduct a more detailed research than the majority. For example, we must interview all the CXOs of potential portfolio, visit their vendors and customers, and make a judgment on the team.
21CBH: Will the CoStone mode being the mainstream of growth PE and late-stage VC?
Zhang Wei: Not necessarily, we could say the traditional PE business is suggested to follow this direction. Many large PE and VC institutions have diversified, such as CDH is doing well in the secondary market and real estate market, the priority of industry may also be shifted this way.
The fixed income will be the mainstream of the asset management market in the future. In recent years, trust is flourishing, and a lot of PE firms also turned to mimic the way of trust. My understanding is that fixed income products are more popular, similar to Uniqlo and Zara in the clothing industry, while PE is involved both high profitability and high risk in nature and can only be made into ‘luxury’ goods targeting a niche market.
Rewritten by: Siyuan, Edited by: Du Zhixin, Li Yunzhen
The year 2019 marks the fortieth anniversary of China’s Reform &Opening-Up, once again, we meet at the turning point of history. What’s the next step for the game, is there any clear guidance? The answer is affirmative.
Our country is enjoying a good momentum of development, which does not come from the Washington Consensus nor the Beijing Consensus. China’s experience has proved that both the visible hand and the invisible hand are crucial: the visible hand, stands for the government-led reform, and would yield benefits for reform and opening up; the invisible hand, stands for the Marginal Power represented by the private sector, and would improve economic efficiency and tax collection, create jobs and employment opportunities.
Provided that we want to protect and expand the benefits form reform, three simple but mandatory agreements are to be made and followed: No.1 Private ownership must be recognized, protected and treated equally with public ownership constitutionally, both ownerships are scared and inviolable;No.2 Make further clarification of the principal position of market economy, “deepen economic system reform by centering on the decisive role of the market in allocating resources”, as President Xi addressed in the third Plenary Session of the 18th CPC Central Committee;No.3 Implement the guiding principles of “comprehensively promoting law-based governance” of the fourth plenum. The rule of law is essential for economic growth, irreplaceable to protect private ownership, and necessary to encourage innovation and entrepreneurship.
Above are three rules for us to avoid falling into the Middle-income Trap. Assuming that we are breaking systematic barriers to private enterprises’ participation in market economy, and boosting innovation and entrepreneurship of our society, then we are heading towards a promoting direction. We are marching in the path of light, regardless of the ups and downs of Sino-US relationship, the drop in GDP growth rate, or the monetary policy.
These principals also apply on knowing how better to run a business: don’t be hedged by rules and regulations at the beginning, pay more attention to your survival, and you’ll learn more when you start your second business.
For many years, Huawei has been the only Chinese company on the list of the Top 50 R&D Spenders. Regardless of the economy and its income, what Huawei has been doing is investing in its future, dedicated to R&D, continuously and resolutely. This provisional work underscores Huawei’s accomplishments, making Huawei anindustry leader.
So, there are standard answers on how to run a company,which could be summarized as concentration and professional dedication, continuous investment on innovation and trying harder in R&D. Entrepreneurship is also important, every single company needs entrepreneurs to push aside all obstacles and difficulties, to implement strategies and ideas. We, as investors, are destined to look for such outstanding entrepreneurs and their companies, invest in them and partner with them.
At this key point of history, a country, a company, or asingle individual, will all need to find the right path. Four decades after the Reform and Opening-up, it’s time to learn from our experience and stop “wadding across
