Key to successful PE investments lies in trusting instincts, says industry veteran

Hugo Shong, the founding general partner of private equity firm IDG Capital Partners and president of IDG Asia, says that successful PE investors are those who have the power to dream and the confidence to back their instincts.

"To be a successful private equity and venture capital investor, you need to have dreams. The dream is to find good companies and then grow with them. But the dreams will also make you curious and unsatisfied. It is that spirit of curiosity and persistence that has helped many PE investors overcome stiff challenges and march on the path of success," says Shong, one of the pioneers in the Chinese PE and VC industry.

Looking at Shong, it is hard to believe that he is one of the most aggressive PE investors in China. His office in the central business district of Beijing resembles more of a bustling financial firm rather than a quiet PE firm.

The only clue that IDG Capital is a PE firm comes from the photos of the successful investments that dot the walls. Set up by the Boston, Massachusetts-based International Data Group, IDG Capital was one of the earliest foreign firms in China to provide PE and VC funding for domestic companies.

Shong says that IDG Capital was one of the first companies to back Baidu.com, which later became the largest and most popular Internet search engine in China. In other words, "we backed our dream", he says.

In 2000, IDG invested $1.5 million (1.13 million euros) in Baidu.com, at a time when the Internet industry was in the doldrums after the dotcom crash. Confident of the recovery of the industry, IDG continued to back Baidu and five years later the search giant successfully listed its shares on the Nasdaq. IDG eventually sold its minority stake in Baidu for $100 million.

IDG Capital has also been involved in many other successful investment projects, such as Sohu.com, one of China's largest Internet portals, and Tencent, a leading Internet service portal in China.

"We are proud that we were one of the first foreign firms to step into this market, and there is no exaggeration in saying that IDG has witnessed and grown up with China's Internet industry," Shong says. "Our investments fit into those sweet spots of fast-developing technologies, showing our insightful vision."

Since its successful entry into the Chinese market in 1993, IDG Capital has managed assets to the tune of more than $4 billion. It has invested in more than 200 companies, and successfully exited from more than 70 investments through mergers and acquisitions or initial public offerings in the United States, Hong Kong and the A-share market.

Without Shong's constant efforts and business acumen, IDG China would not have ended up making such huge investments or tasted success, says Patrick McGovern the founder and chairman of IDG.

Never satisfied, Shong says that his team is constantly on the lookout for the next "Baidu" or "Tencent" in China. Dressed in a simple suit, Shong rues the fact that small PE and VC investors are ruining the industry landscape in China.

"The VC and PE industry in the United States is fairly mature, and the major players are mostly institutional investors, such as some large companies' pension funds and some charity funds, which have strong and persistent commitments and usually focus on long-term investment," he says.

"But in China, most of the investors are wealthy individuals focusing on short-term returns, or in other words, speculative investors."

Most of the small PE and VC investors do not conduct proper research or analysis before making fast investments. As a result they end up paying more, which in turn leads to higher valuations and hence reduced exit options for other investors, he says.

He says that though there are about 10,000 VC and PE funds in the Chinese market, many of them will go under this year, while several others will enter a consolidation phase.

"Generally speaking, the investment period for a fund before exiting its investment ranges from three to five years. Yet many funds will run out of money even before the fifth year, the normal period when investors start getting returns on their investment," he says.

Shong describes his association with IDG as a gamble that paid off. "McGovern wanted me to head IDG Capital even though I did not have any investment experience. I was a journalist working for McGovern's Asian Affairs. But I realized that there is no difference between an investor and journalist, as both jobs require detailed and objective investigation and insightful predictions. The only difference is that journalists release what they know as soon as possible to the public while investors would not release what they are doing until an investment is finished."

He recalls that back in the 1990s, most of the Chinese companies considered PE and VC investors to be liars. "Back then, it was hard for the companies to understand and accept the concept of private investment funds," Shong says. "We gave them money and asked for a minority stake and promised to cash out sometime later. This was a 'free but poisonous' lunch for many entrepreneurs."

But nowadays, the VC and PE funds are prevalent everywhere, and when Shong appears at an investment forum, he is surrounded by lots of eager entrepreneurs who want to persuade him to get some possible investments.

"The market has expanded a lot and is now on a steady growth phase. I am somewhat relieved to say that our gambling has led to positive results," Shong says with a smile.

He says the emergence of domestic PE and VC funds is one of the characteristics of the fast-growing industry. "The local PE and VC funds are developing very fast, which pose some challenges for us."

Jon Parker, a PE partner at KPMG China, says that apart from common challenges like a lackluster stock market, domestic and foreign PE and VC investors have to contend with challenges in terms of investment speed.

"Chinese PE and VC funds are typically quicker and more flexible in terms of deal-making as they do not have to get investment approvals from abroad or undergo scrutiny in the risk side," says Parker, who has been in the financial industry for more than 10 years with a special focus on the Chinese PE industry during the past five years.

Parker also points out that foreign PE and VC funds also have rich experience in overseas expansion.

"Most of the large global PE and VC funds are already in China, and they have know-how in various sectors. If the Chinese companies want to expand overseas, they can get more understanding from talking to the global PE funds," says Parker, who is based in Hong Kong.

Shong is a great admirer of Warren Buffett and often quotes from The Snowball, the legendary PE investor's autobiography. "The Snowball indicates that success is like gathering snow while climbing a steep slope. The longer you persist, the more snow (wealth) you will gain," he says.

Though the current economic slowdown is a cause for concern, it has not deterred PE or VC investors from making investments in China.

"Based on the huge domestic market, China's PE and VC industry will experience a tremendous growth in the future despite the current stumble. We will definitely see some world-class businesses coming out of China soon.

"How to find them and contribute to their growth is my lasting dream," Shong says.

huhaiyan@chinadaily.com.cn

(China Daily 01/18/2013 page6)