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Chinas private equity industry offers attractive fundamentals but is not without its challenges for GPs China is expected to continue to offer strong macroeconomic fundamentals for the next five years, with real GDP growing at 9-10%, driven by increasing consumption, urbanization and development of lower tier cities The Chinese private equity market, while sizeable (RMB 60 billion) and growing at ~40% CAGR (2003-08), still has plenty of room to expand, as it only accounts for 0.2% of the countrys GDP (vs. 0.8% in the US) However, 5 key challenges persist: 1) Deal sourcing is mostly about guanxi, not auctions; 2) Regulatory environment is complex and constantly evolving; 3) Majority stakes are difficult to obtain; 4) Conducting due diligence is challenging due to highly asymmetric information environment; 5) Management and execution capabilities are still developing Company, is well positioned to meet these challenges and capitalize on Chinas private equity opportunities, thanks to the solid foundations on which it is built Strong institutional affiliation: its relationship with Parent provides us with strong regulatory relationships, broad and deep industry networks Well-rounded investment team with strong track record: Led by Person A and Person B, the investment team offers a unique blend of domestic Chinese talent and international experience; local insiders know the team members for their strong track record, i.e., Investment Committee members have made nearly RMB X billion investments in the past Market-oriented organization: we have put in place an independent corporate governance structure, a comprehensive investment and risk management process and an aligned incentive system that attracts and retains top talent
Contents
1. Overview of Chinas private equity industry 2. Introduction to Company 3. Our first fund, Fund A 4. Our second fund, Fund B Appendix: Awards for Company
Contents
A. Current prospects for the Chinese economy B. Size and growth of the Chinese PE industry C. Challenges faced by PE firms in China
2. Introduction to Company 3. Our first fund, Fund A 4. Our second fund, Fund B Appendix: Awards for Company
Chinas economy is expected to grow robustly over the next five years
+24% p.a.
3.5 2.7 1.8 2.2
4.3
2004
05
06
07
08
09E
10E
11E
12E
2013E
1 Annual household income: RMB40,000-100,000 2 Areas with population density >1,500 people per sqr. km SOURCE: Global Insight 2009 McKinsey & Company | 5
Growth of Chinas PE market has outpaced that of more developed Asian counterparts
Value of PE investments(1) (USD billions)
Mainland China 39%
1.6 3.1 8.9 9.4 9.5 8.6
Japan
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7.2
7.3
2003 04 India
05
06
07 2008
2003 04 Korea
07 2008
59%
0.9 1.5 2.1 6.8
14.4
4%
9.0
2003 04
05
06
07 2008
2003 04 Australasia(3)
05
06
07 2008
22%
2.9 2.6 3.1 19.4 17.4 7.9
2003 04
05
06
07 2008
2003 04
05
06
07 2008
1 Includes buyouts, growth capital/Pre-IPO, PIPE 2 Southeast Asia consists of Malaysia, Singapore, Philippines, Indonesia, Thailand, Laos and Vietnam 3 Australasia consists of Australia and NZ SOURCE: AVCJ; Marr McKinsey & Company | 6
Penetration of PE in China remains relatively low and thus the potential for growth is significant
2008 PE investment(1) penetration as % of GDP Average deal size(1) USD millions Buyout as %of total investment in value(1) Typically less than 10%, high share in 08 due to USD2 billion Honiton buyout deal
38 174 271 46 39 81 93
9
34 52 83
~100
65 56
1 Includes buyouts, growth capital/Pre-IPO, PIPE 2 Includes Australia and New Zealand SOURCE: AVCJ McKinsey & Company | 7
The Chinese market is still in its early days and posts a series of challenges for PE firms
Challenges
n
PE firms need!
n n
Deal sourcing
Deal sourcing is mostly about guanxi (relationships), with auctions generally held for the largest transactions only For most industries, regulatory environment is complex and constantly evolving
Proprietary deal sourcing capability Ability to build local networks in key geographic locations Deep understanding of industries regulatory developments Strong working relationships with regulatory bodies Ability to enact change in minority context, i.e., access to Board seat Ability to identify and influence high quality management teams is critical Deep sector knowledge Extensive local networks to conduct proper due-diligence Sector and functional expertise Collaborative partnership approach
n n
Regulatory complexities
n n
Asymmetric information
Financial & business info are oftentimes inaccurate; support infrastructure (e.g., expert networks) still a work in progress, making due diligence challenging Many companies still lack the management and execution capabilities to successfully grow and compete with the best-in-class organizations
n n
Management capabilities
n n
Contents
A. Our vision and strategy B. Strong institutional backing C. Well-rounded investment team with proven track record D. Market-oriented organization
3. Our first fund, Fund A 4. Our second fund, Fund B Appendix: Awards for Company
Our vision is to become a world-class PE firm based in China, enabled by a balanced strategy and strong culture
Vision
To become a worldclass private equity firm based in China
Missions &Strategy
To generate attractive returns for investors as well as achieve win-win results through in-depth analysis, solid execution capabilities, accurate investment decisions, efficient operation management and professional value-added services provided to portfolio companies
Culture
Dedication
Excellence Proactive
Prudent
Innovative
Market-oriented organization
n n n
Parent reputation Unrivaled industry access and network Proprietary deal sourcing SOEs Private enterprises
Local on the ground expertise and international experience Transformation and capital markets experience Established investment track record
n n
Independent investment decision making World class corporate governance, risk management Comprehensive investment process Effective incentive system
n n
n n
Parent
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Financial services
Manufacturing
Work Experience
"
Chairman of Investment Committee X years of investment Xrelatedof investment years experience related experience Education
n
"
Track Record
Work Experience
"
Education "
Track Record
Significant experience working together" X years of investment related experience " RMB X billion " X years of investment / portfolio management experience
X 54%
Company Name
Net Profit
Shareholders Meetings
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Board of Directors
Board
LP Advisory Committee
Committee
Manufacturing
Services
Mgmt Dept.
Research Dept.
Relations Dept.
Dept.
Resources
Retail
Compliance Dept.
Accounting Dept.
HR Dept.
Appoint directors and supervisory board members to exert effective risk control
Company
Board of Directors
n
Internal Audit
Other support departments 1st control level: The business and other departments control daily operational risks 2nd control level: Investment Committee and Legal Dept exercise control on key issues
Stage
Stage I
Stage II
Commercial due diligence
Stage III
Stage IV
Process
Deal sourcing
Portfolio management
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No
No
Assessment of commercial due Assessment of Yes Financial, legal, and other due diligence Documentation execution Value-added service
Document Filing
Preliminary due diligence Negotiations on investment terms Deal qualification memo Approval by the custodian bank
Exit management
No
Deal investment memo Apply for deal qualification Yes Establish a formal deal team Investment application No
Decisionmaking
Investment Committee
Compensation structure
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Basic salary
Bonus
Carried interest
Our aligned incentive Co-investment scheme Portion of key personnel bonus Carried interest distribution IRR over hurdle rate system ensures team cohesiveness and top talent retention
Fund
Contents
1. Overview of Chinas private equity industry 2. Introduction to Company 3. Our first fund, Fund A
Fund A
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".
Company name
Investment date
Sector
Private/SOE
Deal sourcing
IRR (Expected)
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Investment A (1/2)
Investment Date Exit Date Investment Instrument Equity Stake Board seat Co-investor (and co-investment amount) Industry Headquarters Business Profile Deal Sourcing Deal Team Investment Structure
McKinsey & Company | 25
Amount Realized Value Unrealized Value (as of June 2009) Investment Status Total Return (multiple of capital) IRR
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Investment A (2/2)
Investment Highlights
Value-added Services
Contents
1. Overview of Chinas private equity industry 2. Introduction to Company 3. Our first fund, Fund A 4. Our second fund, Fund B
Fund overview
Fund B
"
Partnership approach
Company
n n n
Strong institutional affiliation Well-rounded investment team with strong track record, led by Chairman Person A and President Person B Market-oriented organization: independent corporate governance structure and aligned incentive system that attracts/retains top talent
92
Focus on SOEs
n
Selective in growth
n
Under-penetrated with
n
Pragmatic approach in
n
We will focus on 4 sectors and respective sub sectors with high growth,
Market size and growth Market size and growth n " Key drivers of growth n " Sub-sector focus n
Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus 4 sectors focus Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus
C Market size and growth Market size and growth " Key drivers of growth " Sub-sector focus