November 29, 2011

How Investors Can Succeed in China

The country's nascent venture capital market can be lucrative, but complexities make it tricky.

Sharon kahn

Private equity investment in China: the concept would have been an oxymoron a couple of just two decades ago. But for those who can navigate the world’s second biggest economy, opportunities abound, according to Shujun Li, founder and managing partner of TrustBridge Partners.

In Li’s November presentation for the Sir Gordon Wu Distinguished Speaker Forum, sponsored by the Jerome A. Chazen Institute of International Business, titled “China: An Insider’s View on Investing and Private Equity,” he told a packed house that success comes down to a set of basic principles.

Lessons Learned

Private equity is a local business. “Local knowledge is critical,” Li said. TrustBridge deploys 30 investment professionals throughout China, giving it a significant advantage over most competitors, he said. “Our approach is to identify promising entrepreneurs and build trust with them,” he explained. “China does not lack growth, but it does have a shortage of leaders who can realize and sustain growth.”

Growth is in the subsectors. TrustBridge concentrates on the Internet, consumer, and healthcare sectors — and further specializes within those industries. “We’re interested not in pharmaceuticals, but in healthcare services,” Li said. “China’s pharmaceutical companies have to compete with large global firms that have established pipelines and research bases.”

It all boils down to people. Entrepreneurs — and investors — must be prepared to execute and evolve. TrustBridge searches for “real entrepreneurs who have passion and vision,” Li said. When looking for team members, he seeks investment professionals who are “curious while maintaining probing skepticism.”

A New, Tougher Stage

China’s private equity industry, and the country in general, is entering a new phase, Li said. Its advantages, while still potent, may weaken in coming years as global demand dampens. China will also face internal challenges as its population ages, its cost of living rises, and inflation takes hold.

Meanwhile, competition is building in the private-equity arena, which could lower prospects for investors. This year, China’s private-equity industry is on track to raise a record-breaking $20 billion in 2011, Li said, but the lack of an M&A market means investors can cash in only by taking their companies public. For private equity investors in small companies, the local renminbi market, which maintains relatively limited liquidity, remains the exit route of choice.

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