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Review Risk Management Institue NOV 2016 · VOL 3 PRIVATE EQUITY GOSS INSTITUTE OF RESEARCH MANAGEMENT LIMITED NATIONAL UNIVERSITY OF SINGAPORE REVIEW RISK MANAGEMENT INSTITUE HAITAO JIN Qianhai Fund of Fund, LLP Exploring the Business Model of China’s Private Equity/Venture Capital (PE/VC) Fund of Funds (FOF) Investments KATAHIRA MASAKI Eastasia Investment (International) Limited New Findings on Japan’s Capital Market: A Study on Japan Post Group’s Successful Transformation through Capital Market WEI CUI, MIN DAI, AND STEVEN KOU Risk Management Institute’s New Research Initiative A Pricing and Risk Management System for Chinese Bonds PRIVATE EQUITY REVIEW PRIVATE EQUITY REVIEW CONTENTS EDITORIAL BOARD Darrell Duffie, Stanford University MESSAGE FROM THE EDITORS Quanjian Gao (Editor-in-Chief), GOSS Institute of Research COVER ARTICLE Management Ltd. 01 Exploring the Business Model of Jeff Hong (Co-Editor), China’s Private Equity/Venture Capital (PE/VC) City University of Hong Kong Fund of Funds (FOF) Investments Li Jin, Haitao Jin Oxford University Steven Kou (Co-Editor), ACADEMIC INSIGHTS National University of Singapore 10 New Findings on Japan’s Capital Market: Neng Wang, A Study on Japan Post Group’s Successful Columbia University Transformation Through Capital Market Houmin Yan, Katahira Masaki City University of Hong Kong Lin Zhou, CASE STUDY Shanghai Jiao Tong University 22 Will Private Equity (PE) Firms Continue to Invest in China’s Auto Consumption and Sales Industry? Yankun Hou ADVISORY BOARD 32 Quantitative Methods for Venture Capital Investment Weijian Shan, in Telecom Media Technology (TMT) Chairman of PAG Asia Capital Shu Yang and Alex Yang Neil Shen, CEO of Sequoia Capital COLUMN Qiang Sun, Risk Management Institute’s New Research Initiative Chairman of Black Soil 36 Yichen Zhang, A Pricing and Risk Management System for Chinese Chairman of CITIC Capital Bonds Based on research by Wei Cui, Min Dai, and Steven Kou PRIVATE EQUITY REVIEW • NOV 2016 VOL 3 A MESSAGE FROM THE EDITORS he year 2016 started with concerns about a weaker about the China’s auto consumption and sales industry global growth; hard landing of Chinese economy, and analyzes the possibility of future investment from Tuncertainty of European policies, and expectations PE firms in this industry. Mr. Hou thinks that PE firms surrounding repricing of Federal rate hikes. The will continue to invest in China’s auto consumption and development of global economy continued at an unsteady sales industry, especially repair and maintenance, used pace in the first half of this year, given slow growth rates car, and auto retail finance segments being the highlight. in major economies. Most of the developed economies The second article, by Alex Yang, Partner of Beam Capital still remain weak with low potential growth rates. The and Shu Yang, School of International and Public Affairs outlook on emerging markets and developing economies (SIPA) Master’s candidate at Columbia University, aims at are different and more uncertain. During the second half the quantitative approach for VC funds in Telecom Media of 2016, the world economy experienced two shocking Technology. In addition to the approach, the article lists events, the U.K. leaving the EU and Donald Trump a few examples that show how to use multi-dimensional wining the presidential election, both of which led to high data on sourcing deals and how to evaluate target volatilities in the financial market. companies using this data. The global economy is facing more challenges and Finally, in the Column section, we have a research uncertainties in recent years. Especially in 2016, article based on a new research initiative that the Risk international political situations, which have a deep Management Institute (RMI) of National University impact on the world economy, have become even of Singapore (NUS) is undertaking, starting in 2016. more unpredictable. Private equity (PE) investors are The initiative focuses on developing a pricing and risk exploring new investment opportunities, and researchers management system for Chinese bonds based on previous from academia are focusing on more effective risk research by Wei Cui of National Interbank Funding Center management methods. For investment practitioners and along with Min Dai and Steven Kou of NUS. researchers, the most important theme in 2016 is making appropriate investment decisions in light of the global With the third issue of PE Review, we endeavor to provide economic downturn. In this regard, the Private Equity our readers with valuable information as well as academic Review (PE Review) provides PE firms with approaches innovations and various perceptives on analyzing data. We and measures to make more informed risk management hope to encourage widespread interests and discussions decisions in the volatile market environment. on the fields of PE investment and risk management. As we endeavor to improve the rigor of the publication, we The third issue of PE Review includes seven articles hope to provide you with more valuable insights. Finally, devoted to the fields of private equity and financial We look forward to hearing from our readers, so please risk management. In this issue, we have four sections do not hesitate to contact us if you have any comments consisting of Cover Article, Academic Insight, Case Study, about the PE Review. and Column. The cover article by Haitao Jin, the Chief Executive Partner of Qianhai Fund of Funds, is based on business model of renminbi (RMB) PE or Venture Capital (VC) fund of funds (FOF). China’s commercial PE/VC FOF is still in the initial stage. As the first commercially funded large- scale FOF, recently Qianhai FOF has been successfully Mr. Quanjian Gao launched with total assets of 21.5 billion yuan. The article Editor-in-Chief explores the business model of Qianhai FOF, which is GOSS Institute of Research also a new model of PE/VC FOF in the Chinese market. Management In the Academic Insight section, we have a contributing article by Katahira Masaki, the Chief Executive of Eastasia Investment (International) Limited in Japan. The article interprets the details of Japan Post Group’s Initial Professor Steven Kou Public Offering. The company used to be a Japanese Co-Editor state-owned conglomerate, which was divided into three National University of Singapore units and went public last year. The article shares new findings of Japan’s capital market through the successful transformation of Japan Post Group. This issue also features two case studies focusing on Professor Jeff Hong China’s auto consumption and telecom media technology Co-Editor industries. The first article, by Yankun Hou of UBS, talks City University of Hong Kong PRIVATE EQUITY REVIEW • NOV 2016 VOL 3 Exploring the Business Model of China’s Private Equity/Venture Capital (PE/VC) Fund of Funds (FOF) Investments Haitao Jin, Chief Executive Partner of Qianhai Fund of Funds LLP The financial environment and the basic purpose of a Fund of Fund (FOF) is different in China from that in the United States. The legal and personnel system of China's venture capital industry is still in the early stage. FOF fund managers play an important role in promoting the development of the industry, which requires different skills and strategies from their western peers. Obviously, China needs to develop an FOF industry with its own characteristics. (Christopher Lane Davis, China Venture Capital Yearbook, 2011) Private equity (PE) fund of funds (FOF) originated in I. The Development of PE FOF in China the United States. After decades of development, FOF is a fund structure, which can be divided into Fund its business model has been widely accepted by of Mutual Funds, Fund of Investment Trust Funds, investors in the U.S. and European markets. The U.S. Fund of Hedge Funds (FOHF), and Private Equity Fund FOF is designed to meet the demands of portfolio of Funds (PE FOF). diversification from institutional investors, who usually manage a huge pool of financial assets. Enjoying PE FOF specializes, but indirectly engages, in PE a higher potential rate of return as well as a more investment by holding shares of other funds. By independent value system than other investments, investing in different types of private equity funds, PE PE/VC investments help enhance the overall yield of FOF can achieve diversified portfolio. These days, by the portfolio and reduce risks at the same time. developing and diversifying, FOF is also involved in direct investment in enterprises, stocks or bonds. For China’s PE FOF originated from government guided a summary of PE FOF’s operation mode, please refer fund. In order to promote the country’s scientific and to Figure 1 on page 2. technological innovation, support the development of small medium enterprises (SME) and accelerate In general, PE FOF has three kinds of investment economic restructuring, the central and local methods: governments guide and set up a large number of a. Primary Investment (Sub-fund Investment): refers government guided FOFs. to the investment FOF makes during PE/VC’s collect period. Primary investment is the original In comparison, China’s commercial PE/VC FOF is business of FOF. Since the PE/VC fund is newly still in the initial stage. Actually, FOF fund managers established, with no track record of performance, have presented a number of PE FOF business FOF mainly evaluates the fund manager’s team models with distinctive features to adapt to China’s instead of their portfolio or strategies. market environment, but no mainstream model has been formed yet. Recently, Qianhai FOF, the b. Secondary Investment: refers to the investment first commercially-funded large-scale FOF, has FOF makes in the secondary market of PE. There been successfully launched, with an asset under are two forms of such investment; one is buying management (AUM) of 21.5 billion yuan. The success is existing units and/or newly issued units of the PE largely attributed to the fund’s innovation in business fund, and the second is buying the equity portfolio model, which has important reference value to the held by the PE fund.
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