GETTING THE GOODS: Boyu’s purchase of a substantial stake in Sunrise Duty Free showed Jiang Zemin’s grandson could gain access to a state-controlled sector. REUTERS/KOH GUI QING

CHINA Princeling of private equity A firm co-founded by the grandson of China’s former leader landed a sweet deal in a state-controlled sector of the economy. Now, many in the industry are flocking to invest with Alvin Jiang

BY STEPHEN ALDRED AND IRENE JAY LIU

SPECIAL REPORT 1 PRINCELING OF PRIVATE EQUITY

PRINCELING PEDIGREE: Jiang Zemin (L) was China’s president from 1993 to 2003. His son Jiang Mianheng is CEO of Shanghai government investment vehicle Shanghai Alliance Investment, which has a stake in Oriental Dreamworks. REUTERS

HONG KONG, APRIL 10, 2014 them to Boyu. Jiang Zemin had a role in helping Boyu Investors were also impressed with win a part in the Sunrise deal or in any he 28-year-old wears black-framed Boyu’s 2011 purchase of a controlling stake other transaction. That hasn’t stopped the glasses perched on cheeks still round in Sunrise Duty Free – which runs all the belief from spreading that Alvin Jiang is Twith youth. A discerning eye might duty-free stores at Shanghai and Beijing’s tapping his family connections. notice the resemblance to his grandfather: international airports. That deal, they be- Alvin Jiang and Boyu Capital declined former Chinese president and Communist lieve, provided evidence that Jiang Zemin’s to comment for this story. Party leader Jiang Zemin. grandson could gain access to a strictly con- PRINCELING INFLUENCE Alvin Jiang has a knack for landing lu- trolled state sector and convert those assets crative deals in China, the world’s biggest into a highly profitable investment. Alvin Jiang’s Chinese given name is emerging market for private equity. He is The Sunrise investment is expected to Zhicheng, which means, “with ambition, a founding partner at Hong Kong-based earn a substantial exit payout for Jiang, his you can achieve.” He is a “princeling,” Boyu Capital, now one of the hottest firms Boyu colleagues and investors in the firm’s the relatives of current or former senior in China. Boyu has attracted high-profile first $1 billion fund, people in the private Chinese Communist Party leaders. His fa- investors such as Asia’s richest man, Li Ka- equity industry say. ther, Jiang Mianheng, is also a princeling. shing, and Singapore’s sovereign wealth Whether the young private equity ex- He is the CEO of one of Shanghai’s largest fund, Temasek Holdings Private Limited. ecutive actually uses his personal connec- state-owned enterprises and is in charge of Founded in 2010, Boyu Capital is poised tions in the way investors attribute to him China’s push into alternative nuclear en- to earn big paydays from two of the most remains unclear. There is no evidence that ergy sources. notable initial public offerings to emerge The extensive control of China’s from China in the last 18 months - e-com- Communist Party over almost all aspects of merce giant Alibaba Group Holding Ltd, China’s economy and society has often al- and state-backed debt trader China Cinda lowed princelings to leverage their political Asset Management Co. No other China- connections to amass wealth. Conflict of focused firm with such a short history has interest laws in China are weak and cover- found its way into both deals. age of the business dealings of the political Boyu is regarded as among the most elite is heavily censored in the largely state- professional operators in China private controlled media. equity, with seasoned executives at its Princelings have played central roles in helm. But according to multiple investors, businesses involved in finance, energy, do- Alibaba and Cinda are not only what lures mestic security, telecommunications and

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the media. Private equity, featuring deals that are often by their nature opaque, has China’s private proven to be a natural haven for them. Within China’s private equity realm, equity princelings 15 firms identified by Reuters were either founded by a princeling, or have employed princelings in senior roles. Between them, LIU LEFEI movies and build a theme park in Shanghai. these funds have raised at least $17.5 bil- CITIC Private Equity Funds Management lion for investment since 1999. $5. 1 billion funds raised ALVIN JIANG The most powerful investors in private Liu Lefei is the son of politburo member Boyu Capital Consultancy Co Ltd equity funds, known as limited partners, Liu Yunshan and CEO and president of $1.6 billion funds raised include giant U.S. pension funds and insur- CITIC Private Equity Funds Management, Grandson of Jiang Zemin, Alvin Jiang was a ance companies; sovereign wealth funds; which has raised a total of $5.1 billion for founding partner of Hong Kong-based Boyu university endowments; and ultra-high net investment from international and domestic Capital by the age of 25, putting him on an worth individuals. For some of these big in- investors. Liu Lefei is also vice chairman at equal footing with some of the industry’s vestors, the China game is straightforward: CITIC Securities, and many investors regard top executives in Asia, including ex-TPG “You just have to know the right people,” him as the most powerful of China’s private and Lenovo businesswoman, Mary Ma. said one veteran limited partner. “It’s why equity princelings, because his father is still Boyu’s other investments include Alibaba you invest with a princeling fund.” in office. Group Holding and China Cinda Asset Several limited partners told Reuters Management. Boyu is finalising a second that their firms assess princelings on their WINSTON WEN fund of $1.5 billion. political connections and ability to convert Co-founder of New Horizon Capital those ties into business deals. $3.2 billion funds raised HE JINTAO Alvin Jiang and Boyu Capital, these in- Wen Yunsong or Winston Wen, is the son Nepoch Capital vestors say, rank high on those lists. of former China premier Wen Jiabao, and $200 million funds raised is the best known of China’s private equity Nepoch was the first new princeling private AN OUTSTANDING RETURN princelings. Winston is co-founder of New equity firm to emerge in the wake of Xi In mid-2011, Boyu agreed to pay around Horizon Capital, which has raised a total of Jinping’s election as paramount leader. He $80 million for a 40 percent stake in $3.2 billion for investment. Wen became Jintao, co-founder of Nepoch Capital, is Sunrise Duty Free, according to three chairman of state-owned China Satellite the son of He Guoqiang, who until the last sources with direct knowledge of the deal, Communications Co in 2012. leadership change was head of discipline in valuing Sunrise at $200 million. the Communist Party.

The ownership of the remaining 60 per JIANG MIANHENG cent of Sunrise has not been made public. New Margin Investments, Shanghai Alliance Data sources: Thomson Reuters and Preqin Boyu, however, has told investors it has a Investment Ltd controlling stake, sources with knowledge $1.1 billion funds raised of the matter said. Son of former premier Jiang Zemin, Jiang At the time of Boyu’s investment, Mianheng was a pioneer of China private Sunrise ranked 15th among the top 25 equity investments. Dubbed the “Prince of travel retailers in the world, with annual Information Technology” in the early 2000s, revenue of around $670 million, according he was involved with NewMargin Ventures, to the Moodie Report, which tracks the whose investments included AsiaInfo duty free industry. Holdings and RedFlag Software. His influence By early 2013, Boyu had marked the remains evident through the Shanghai Sunrise business on its books at a value of government investment vehicle, Shanghai around $800 million, two of the sources Alliance Investment Ltd, where he is CEO. with direct knowledge of the valuation Shanghai Alliance is part of a joint venture said. Bankers, however, value Sunrise at with DreamWorks Animation to produce

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twice that amount - at around $1.6 bil- experience in the industry. lion - based on 2012 sales figures the com- Raising capital Sunrise won a 10-year contract to sell pany filed with Chinese authorities, which Despite a recent slowdown, over $168 tobacco and alcohol at Shanghai’s Pudong billion has been raised for China private Reuters reviewed. equity investments since 2006 Airport, World Duty Free won a five-year Based on Boyu’s more conservative val- contract to sell perfume and cosmetics, and uation of $800 million for Sunrise, Boyu PRIVATE EQUITY FUNDRAISING Orient King Power won the concession to could be sitting on a paper gain of around Billion dollars sell luxury goods. four times its money in just under three 60 SPECIAL APPROVAL years - an outstanding return in an indus- try where earning a multiple of two times 50 In 2000, China’s State Council approved over five years is considered a success. Boyu a measure that handed control of all duty has already recovered much of its Sunrise 40 free businesses - except those in Shanghai investment through dividend payments, ac- - from local governments to state-owned 30 cording to three people with knowledge of China Duty Free. Foreign companies were the matter. 20 banned from setting up joint ventures or directly owning duty free businesses in BEHOLD THE SUNRISE 10 China. The man who founded, built and then sold Yet in 2001 Sunrise Duty Free took Sunrise to Boyu is Fred Kiang, a Chinese- 0 over the perfume and cosmetics duty '06 '07 '08 '09 '10 '11 '12 '13 American businessman with close ties to free concession at Pudong airport when Source: Asian Venture Capital Journal the Jiang family, according to Alvin Jiang’s World Duty Free pulled out of its con- friends and business associates. tract. Published reports at the time quoted Kiang founded Sunrise in 1999. That World Duty Free as calling it a “strategic was the year the central government under Three international companies were withdrawal” because passenger traffic had Jiang Zemin opened up the operation of selected to operate at Pudong airport, in- not reached forecast levels. Sunrise in time duty free shops to international bidders at cluding two established duty free firms: would also take over luxury goods at the the new Pudong International Airport in World Duty Free, owned at the time by the airport. Shanghai - Jiang’s political power base. British Airport Authority, and Orient King In 2005, Sunrise won a 10-year conces- Previously, duty free operations had been Power, a subsidiary of Hong Kong’s King sion at Beijing International Airport, out- a monopoly controlled by state-owned Power Group. The third tender went to bidding China Duty Free and Orient King China Duty Free, and foreign firms like Kiang’s newly formed Sunrise Duty Free, a Power. In 2009, its contract at Pudong was Kiang’s were excluded from the business. foreign-owned company with no previous renewed for another decade.

Rise and shine Valued at $800 million by Boyu, Sunrise Duty Free holds exclusive duty-free rights for Beijing, Shanghai Pudong and Hongqiao airports. The company has grown to become the second largest duty-free company in China by revenue, trailing state-owned China Duty Free.

1999 2000 2001 The Shanghai government announces China hands management of duty Sunrise takes over World Duty Free tender o‚er for Pudong International free to state-owned China Duty Free. perfume and cosmetics concessions Airport duty free. World Duty Free, Foreign companies are barred from at Pudong airport. Oriental King Power and newly formed duty free concessions, but Pudong Sunrise Duty Free win concessions. airport's contracts remain in place.

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Sunrise was granted “special approval” the San Francisco-Shanghai Sister City to operate duty free shops by China’s cabi- Committee, led by then city mayor and now net, the State Council, despite restrictions U.S. Senator Dianne Feinstein, accord- against foreign ownership, according to ing to a person close to Kiang. Kiang and a 2009 report by China Business News, a Jiang noted their common surname, which state-owned media outlet. No other details though spelled differently in English, is were given on the Sunrise exemption. the same character in Chinese, said the Today, business at Sunrise is booming. source who is Alvin’s friend and business According to the company documents seen acquaintance. by Reuters, Sunrise had revenue of $1.08 In 1989, Jiang Zemin became billion in 2012. The Moodie Report ranks Communist Party General Secretary; Sunrise just behind state-owned China in 1990 Kiang established his base in Duty Free, which controls nearly all of Shanghai. China’s other duty free shops. Kiang was a senior executive at Newbridge, the former name of TPG KIANG AND THE JIANGS Capital in Asia, one of the world’s biggest Why Fred Kiang would sell 40 per cent private equity firms, three people with di- of a thriving company at what appears to CO-FOUNDER: Mary Ma, former CFO at Lenovo, rect knowledge told Reuters. be a discount remains the central puzzle helped set up Boyu. REUTERS/PAUL YEUNG From the late 1990s to the 2000s, surrounding the Sunrise deal. Apart from Kiang was an advisor to U.S.-based insurer Sunrise, Kiang’s mainland business remains MetLife Inc as it looked for a joint venture unknown. Friends and associates note his partner to build its business in China, said a taste in expensive cigars, and the little pub- source with knowledge of the matter. Kiang licity he has received is largely devoted to negotiated on MetLife’s first mainland li- that passion. In 2009, he hosted an event $1 .08 cense in 2004, the source said, one of the in Shanghai to smoke the 40th anniversary first major Sino-foreign ventures created Cohiba Behike, a limited edition Cuban ci- billion after China’s 2001 entry into the World gar that sold for $500 apiece. Sunrise Duty Free’s Trade Organization. Kiang, who is in his late 60s, shuttles be- revenue in 2012 TPG and MetLife declined to comment. tween Shanghai, Hong Kong and Tucson, BOYU’S RISE Arizona, where he owns properties in ar- Source: Sunrise company document eas ranging from gated communities to In 2010, Alvin Jiang, newly graduated from low-end rentals. Alvin Jiang and Jiang roots, but was raised in the United States. Harvard with a bachelor’s degree, was just Mianheng have used a Kiang residence ad- He received his undergraduate and MBA another newbie banker in Hong Kong, dress in Arizona for small personal business degrees at Massachusetts’ Babson College working as an analyst at Goldman Sachs transactions. in 1970 and 1975, respectively, and now sits private equity unit. Nine months later, he Kiang declined to respond to e-mails on the college’s board of trustees. left to launch Boyu. On September 21, and phone calls from Reuters. Kiang first met Jiang Zemin in 1986, 2010, he filed incorporation documents Born in China, Kiang claims Shanghai when Kiang served as vice-chairman of in Hong Kong, listing himself as the

2005 2009 2011 Despite a bar on foreign duty-free Sunrise begins exclusive 10-year Boyu buys a stake in Sunrise, valuing operators, Sunrise wins 10-year duty-free contract at Pudong airport the company at around $200 million. concession at Beijing International and now controls all duty free business The Moodie Report estimates Sunrise’s Airport, China’s busiest airport. at China's third busiest airport. annual revenue at $670 million.

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company’s sole director. When Boyu first made news in 2011, it was private equity veteran Mary Ma whose name captured headlines, not Alvin’s. Ma, the former CFO at Lenovo Group, left a senior role at TPG to help set up Boyu. Additional co-founders soon fol- lowed: Louis Cheung, former executive director of Ping An Insurance Group of China, credited with its turnaround from 2000; and Sean Tong, a veteran of U.S. private equity firms Providence Equity Partners and General Atlantic, where he was Alvin Jiang’s boss during a summer in- ternship in 2008. Ma and Cheung were known in the private equity industry for turning around FACE-TO-FACE: Alibaba founder Jack Ma negotiated with Alvin Jiang in a $7.1 billion deal to buy back struggling companies; Tong was a noted Yahoo!’s 40 percent stake in Alibaba. REUTERS/CARLOS BARRIA dealmaker. Combined, they had 50 years of industry experience. Boyu’s investment as part of the CIC con- DILIGENT AND FOCUSED Our firm is pretty equally divided on investing with sortium has increased more than three and Two subsequent investments cemented princelings. I see princeling funds a half times in value in 18 months. The e- Boyu’s reputation for having the influence commerce giant has announced it will list to find its way into profitable, high-profile as a double-edged sword. shares on one of the New York exchanges assets. Alvin Jiang played a role negotiating European private equity investor in the third quarter of this year, a deal ex- both deals. pected to exceed Facebook’s $16 billion of- In 2012, Alibaba founder Jack Ma found according to two sources directly involved fering in 2012. himself face-to-face with Jiang Zemin’s in the negotiations. Alvin Jiang also brought in Boyu to in- grandson. Boyu had joined a consortium Alibaba and CIC declined to comment. vest around $50 million in Cinda, created led by China Investment Corp (CIC) The CIC consortium received a 5.6 in 1999 to buy bad debts from state-owned to raise some of the $7.1 billion that Ma percent stake in Alibaba in exchange for banks, said two sources familiar with the needed to buy back half of Yahoo! Inc’s 40 raising capital to help buy half of Yahoo!’s deal. Banks and private equity firms were percent stake in Alibaba. Some high pro- shares in China’s giant e-commerce com- jockeying to get a piece of the $1.6 billion file departures had left CIC, China’s giant pany. Alibaba was valued at around $38 bil- stake that Cinda was offering to strategic sovereign wealth fund, short of personnel. lion then. investors ahead of its initial public offering. That left it up to Boyu to lead the nego- Analysts estimate Alibaba is worth The consortium of investors that were tiations, with Alvin on Sean Tong’s team, at least $140 billion today, which means allowed to make a pre-IPO investment in

2012 2013 2015 China's duty free market grows 27 Boyu values Sunrise at $800 million. China’s duty free market is expected to percent to reach $2.8 billion. Sunrise's In 2014, bankers value Sunrise at twice grow to reach almost $5 billion. annual revenue grows to $1.08 billion, that amount — around $1.6 billion — according to company documents based on 2012 revenues. seen by Reuters. Sources: Reuters; The Moodie Report.

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CHINA CONNECTIONS: President Xi Jinping’s anti-corruption campaign has raised worries among some investors about deals involving princeling connections. REUTERS/ED JONES (POOL)

Cinda included China’s social security fund many private equity investors. investors for its second fund, 50 per cent NSSF, UBS AG, CITIC Capital, Standard Because they work for companies gov- more than its first fund, people with knowl- Chartered Bank - and two private equity erned by Western laws, some have turned edge of the matter said. funds, the powerhouse Carlyle Group and cautious about investing in princeling Boyu Capital. firms. In private, investors discuss “headline Additional reporting by Xinqi Su, Megan Zhao, Some of Jiang’s friends stress he is more risk,” the fear that a business deal will end Jean Lin, Chris Ip and Gui Qing Koh. Editing than just a well-connected face. He works up on the front pages of newspapers. by Bill Tarrant and Michael Williams through a company’s numbers when nego- Those worries have risen with President tiating, a skill he picked up during his brief Xi Jinping’s anti-corruption campaign, time at Goldman, said one friend and busi- and the U.S. Securities and Exchange FOR MORE INFORMATION ness acquaintance. “Many people from his Commission’s investigation into Wall Stephen Aldred, Asia private equity background would not bother to do that,” Street’s hiring practices in China. correspondent the friend said. “Our firm is pretty equally divided [email protected] on investing with princelings,” said one Irene Jay Liu, Greater China “HEADLINE RISK” European investor. “I oppose it, but many Correspondent Princeling privilege isn’t necessarily per- of my colleagues are for it. I see princeling [email protected] manent in China, even for the grandson funds as a double-edged sword.” Bill Tarrant, Enterprise Editor of a living former President. The extraor- For Boyu, profit and prospects have so [email protected] dinary fall of former Chongqing governor far trumped any such anxiety: Alvin Jiang’s Michael Williams, Global Enterprise Editor Bo Xilai in 2012 reinforced that notion for firm has swiftly raised $1.5 billion from [email protected]

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