Investor Profile: Clark Song, Investment Specialist, Genertec Investment Managers

Genertec Investment Managers (GTIM) is an asset management firm focused on private equity and hedge funds in China. The firm is a subsidiary of state-owned conglomerate China Genertec (Group) Holdings. GTIM now has 11bn yuan ($1.6bn) assets under management and offices in Beijing and Shanghai.

Clark Song is an investment specialist at GTIM, and is responsible for alternative investments based in Shanghai. Previously he had worked with Mercer Investment Consulting and Simon Murray & Company as an investment analyst.

How would you describe the private equity industry in China?

“The Chinese private equity market has been an important part of the Asian, and even the global, private equity market. In 2008, private equity funds had invested $9.6bn in 155 deals in mainland China, which is about one sixth of the global private equity market. More money will flow into China – as an emerging market, it will grow faster than developed markets after the global financial crisis. Global investors may find huge opportunities in China in the next 20 years due to the population becoming more wealthy and the consumer market expanding. China has begun to invest lots of money in alternative energy and clean technology. The authorities also encourage private equity investors to join the reform and reconstruction of state-owned enterprises. Private equity funds can play an active and positive role in the development of the country.
 
At the same time, there is a Nasdaq-style stock exchange, ChiNext, which allows venture capital and private equity investors to exit, with recently listed companies on the exchange pricing on average at 50 times price to earnings. Many Chinese small- and mid-sized enterprises want to attract money from financial investors, not just source loans from banks. Going forward there will be more SMEs listing on the ChiNext and that will be a huge opportunity for private equity funds.

Private equity investors with global experience could also help Chinese companies on cross-border M&A, like TPG did in the Lenovo-IBM deal. Many Chinese companies have revealed plans to buy natural resources and commodities over the world. I’m sure they would like to partner with global private equity funds.

From a fundraising perspective, China could also be an important source for global managers. The sovereign wealth fund, China Investment Corporation, has decided to invest part of its $200bn in alternative assets. The National Social Security Fund, China’s national pension system, has confirmed investments in private equity funds. The number of Chinese limited partners will grow over the next ten years as the social security system matures and the middle class grows.”

Many investors are put off by the lack of track record in China as many GPs are first time fund managers. What are your thoughts on this?

“China’s private equity industry does lack experienced talent, but I think you can still find the right people, who are doing very well in this market. Also, there are Chinese players, such as CDH Investments and Hony Capital, who have established reputations in the market based on their successful track records.

I should point out that it is still easy for Chinese managers to raise money due to low levels of interest and high levels of liquidity. Limited partners should move faster than ever to build relationships with leading players in this market.

If you don’t have access to those leading players in the Chinese market, the best way to invest is through a fund of funds, which is a good move for institutional investors like insurance companies and endowments.”

Do Chinese funds of funds simply invest in an index of the biggest domestic funds?

“Chinese funds of funds will not select managers just based on their total assets under management. They will conduct due diligence on those managers, on their work experience, teamwork, track records and even family relations. In China, the private equity industry is still very small and people know each other. We like to hear from our peers in order to assess the capability of managers. As an investor, we have invested with lots of smaller, boutique firms and have seen good returns.”

The Chinese government has taken steps to attract foreign investment in China. What more can be done to entice private equity funds to the country?

“The government has encouraged global investors to launch yuan-denominated funds in Shanghai and allows them to raise money from local institutional investors. The Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) may release more friendly policies for foreign private equity investors in the future, such as cutting the length on approval processes and allowing foreign investors to invest in more sectors and industries.”

What are the best and worst things about investing in private equity in China?

“In China you may explore opportunities in many sectors, from traditional agriculture to high-tech fields. As Chinese private companies find it difficult to get credit loans from commercial banks, investors may find a higher demand on financial activities. The worst things for foreign investors include policy regulations and legal risks. When foreign investors want to invest in a local venture, they need to get approvals from several authorities including MOFCOM and SAFE. When you do business in some provinces, you need to take care of all parties, which sometimes include local government officials.”

What advice would you give to a limited partner looking to invest in China?

“I think the most important thing is choosing the right people. Many foreign limited partners will invest with Chinese managers because they think those people have worked in global financial institutions and are educated in US and European universities. That is not the right way. People with prestigious backgrounds may not do well in the local market. Limited partners should find those people who have local experience and good relationships with local governments, as well as an understanding of international standards.”

Many western firms like Carlyle and Blackstone are now setting up private equity funds based in China. What effect do you think this will have on homegrown managers and would you invest in one of these funds?

“I think it will have some positive effects on local managers, which is why the Chinese government wants to introduce global private equity managers to the domestic market. Giants such as Blackstone and Carlyle will employ local professionals if they want to explore good opportunities and make good deals.

What I am concerned about is the conflicts that may arise between local limited partners and overseas limited partners investing in these funds. In China, investors like to have control over their own money. If global managers are not capable of understanding local business knowledge, they won’t be trusted by local limited partners.”

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