In the same year, China's US dollar fund began to appear on the stage of history. After 13 years, the private equity industry today is playing an increasingly important role in the Chinese market due to its innovation and value investment influence.

Planning and execution | Wang Qingwu Ma Teng Ke Tao Huidong

Source | Toutiao.com

In 2005, Toutiao was established. In the same year, China's US dollar fund began to appear on the stage of history. After 13 years, the private equity industry today is playing an increasingly important role in the Chinese market due to its innovation and value investment influence. In 2013, in the blink of an eye, Treasury and China grew up with the industry, and also witnessed the ups and downs of the industry. In 2018, the 40th anniversary of reform and opening up, Investment China.com launched a large-scale planning topic "Value Revelation", trying to show a different history of the development of China's private equity industry.

Today, the strategy of the battlefield has been upgraded.

Junlian Capital Managing Director Li Jiaqing said in an exclusive interview with a reporter from Investment China.com that the original value concept of US dollar funds is not unpredictable and has not changed much to this day. At this time, the value enlightenment of US dollar funds is discussed because it changes dynamically in a long-term environment, and many demands from the market, supervision, and even the sources of funds and investors are closely related to it. It is not easy to understand its differences under different market environments and maintain high standards.

"Dollar funds may be squeezed more. In the future, how many US dollar institutions in China still have is actually a question worth thinking about." This is the judgment of Xu Chen, managing partner of Gobi Venture Capital. In his opinion, the RMB funds are becoming increasingly radical and active, and their size has soared in the past two years, which has brought unprecedented challenges to US dollar funds.

As a result, dual currency funds have become an irreversible trend, and their judgments and preferences about "value" are converging. What kind of value thinking does mature US dollar funds bring to RMB funds? Under the trend of dual currency funds, what role will US dollar funds play? Toutiao.com invited front-line investors who digitally manage dual currency funds to discuss the value implications brought by US dollar funds.

Silicon Valley experience encounters "validity period": China's localization challenge

Looking at the first batch of emerging Internet companies in China, most of which copy US model . Therefore, the US dollar fund had sufficient demonstrations for reference for the value judgment at that time, but the moving forward Chinese market allowed the "validity period" of American experience to appear soon.

"People often associate China with 'low-tech' and 'counterfeit'. But in the past five years, the situation has completely changed. Chinese entrepreneurs have led Silicon Valley in certain fields, such as live broadcasts, short videos, shared bicycles, etc. It can be said that the mobile Internet has given Chinese entrepreneurs an unprecedented opportunity, proving that they may be the creators of world-class business models." In the view of Sequoia Capital's global executive partner Shen Nanpeng , "China is now entering a new era of constant surprises and excitingness. We have far surpassed the past technological development opportunities, solid industrial soil, and the possibility of achieving world-leading in some fields."

For example, China's localization innovation makes it difficult for American investors to understand why China needs such projects. "They will ask why Chinese people need to sing karaoke social networking on their mobile phones, why e-commerce needs to build their own logistics, and why they need to subsidize users." , founding partner of , Chuangshi Partner Capital, , gave an example. Liu Qiangdong also said that in the JD board of directors, he and Zhou Wei had the highest communication efficiency, and neither party would particularly emphasize the US model. This is fully reflected in JD's self-built logistics.

"Before 2008, the Chinese market was a process of imitation, drawing on some models of the mature American market; by 2014, more and more innovations that conform to China's local characteristics, such as Internet consumer, have begun to form the formation of China's own Internet ecology; now it is China's entrepreneurial projects going overseas. Of course, some industries, such as enterprise IT service technology, are still leading China for 2-3 years at this stage." Hongdou China's managing partner Yuan Wenda told the reporter of Toutiao.com.

"The early replication model of US dollar funds depends on whether they can adapt to the Chinese market. It is not feasible to completely copy the experience of developed countries." Cheng Zhanglun, co-president of Warburg Pinyin Investment China, said in an interview with Investment China. In 2004, Warburg Pincus invested in a semiconductor design company Ruidike . Cheng Zhanglun recalled that if he had the idea of recreating Qualcomm, he would definitely have "dead" and understood the flexible and dispersible reality of the Chinese counterfeit machine market. Ruidike formulated a strategy that was appropriate and was greatly successful. Such cases brought great feelings to Cheng Zhanglun.

failed to learn to "let go" and let the Chinese team make independent judgments, and some US dollar funds faded out of the Chinese market one after another.

"After all, the obvious trend is that independent decision-making is necessary. The market environment has changed a lot, and we must understand local user behavior and new business models. Therefore, there are two major trends at present. Now US dollar institutions must be independent in China. Either give completely independent decision-making power, or this team can independently build their own funds." Zhou Wei believes.

PE US dollar fund suffered a heavy blow, encountering greater squeeze and subversion

On the other side, RMB fund has the home advantage and evolved into a new force, coming in full force. In the first few years, most RMB funds entered the fast lane of development through Pre-IPO. With the completion of the stock reform in 2006, we ushered in the era of full circulation, a large number of entrepreneurial enterprises have been listed one after another, directly prompting China's equity investment institutions to quickly complete the initial accumulation of volume.

Compared with the acceleration of RMB funds, US dollar funds maintain a relatively stable speed.

The difference that Xu Chen, managing partner of Gobi Venture Capital, feels is that RMB funds are becoming more and more radical and active in the market, and their size has soared in the past two years, which has challenged US dollar funds. "In the future, how many US dollar institutions in China still have is actually a question worth thinking about." Xu Chen's unoptimism comes from that US dollar funds may be squeezed more.

In fact, in recent years, the addition of the national team PE has caused the scale of RMB funds to increase rapidly, and US dollar funds have encountered great challenges.

"Really reflects that RMB funds surpass US dollar funds, which is more reflected in the amount of funds, not the ability of VC investment leading projects. The current major projects on the market are still mostly US dollar funds." Li Jiaqing believes.

"In fact, the biggest change in US dollar funds is not in the VC end, but from PE dollar funds. After the amount of RMB funds is large enough, the squeeze and subversion of PE dollar funds is much greater than that of VCs." In the interview, a senior investor told the reporter of Investment China.com.

Deng Feng also felt this concern from Xu Chen's exchange with the US dollar fund LP. "The US dollar funds are optimistic about the future Chinese economy, but they are worried about whether they can make money in China in the future. The first is that they are worried about intellectual property protection issues. Second, they are worried that China's investment environment is stricter for foreigners, resulting in the inability to invest." Deng Feng believes that the first point of worry may be a bit excessive. China's intellectual property issues are far better than expected, and will get better and better; but the second point is that the concerns of the US dollar LP are real, which includes the difficulty of implementing some encouragement policies and the intervention caused by foreign exchange policies.

Another change is that technology plays an increasingly important role in China. Shen Nanpeng said that whether it is information technology, environmental protection, medical care, and new energy, entrepreneurial innovation in many fields has sprung up and grown rapidly on the land of China. In the mobile Internet, artificial intelligence and some frontier fields of life sciences, China is accelerating to become an "innovation magnetic field", attracting attention and envious attention around the world.

"AI may be a typical industry. For AI, the US market attaches more importance to underlying technology, and China's commercial application development is faster. The leading position of artificial intelligence in real scenarios and data will help China make up for its shortcomings in component hardware and underlying software technology." Zhou Wei believes.

For emerging economies, Hong Kong stocks and A-share markets are frequently issuing policy favorable policies.Shen Nanpeng said that he hopes to see a more mature capital market and have more flexible mechanisms and means to attract the "leading" Chinese companies to list on the domestic A-share market.

For emerging economies, Hong Kong stocks and A-share markets are frequently in favor of policies. In Xu Chen's view, once the favorable situation is implemented, it will have an impact on the investment strategy of the US dollar fund in the future. "Many companies will choose the domestic market to exit and transmit it to the front end. The project financing intention may be tilted towards RMB funds. The founders will believe that the company does not meet the domestic listing standards in the early stage. As long as it is done big enough, it can be listed domestically through the green channel."

Xu Chen also provided a new perspective. He believes that China's economy is changing from a simple national economy to a regional economy, which will make the Chinese economy not only affect the local market in the future, such as lighter models, unicorn companies engaged in entertainment and social categories, in Southeast Asia. The market already has strong penetration. "In the future, the investment dimension of USD fund in China will not only be local to China, but also to the Pan-Asian region with China as the core, but may be the main opportunity for USD funds. With its inherent advantages, it will lead Chinese companies to a broader market."

Similarly, in the view of Wang Jun, founding management partner of Kunzhong Capital, the advantages of USD VC funds still exist in non-restrictive industries, such as being good at capturing companies with explosive growth potential, short profit cycles, long investment exit cycles, and international expansion prospects.

Dual Currency Trend: Convergent "value" judgment and preferences

Now, more and more RMB funds are focusing on early investments, but there are still big differences in the views and perceptions of the market between RMB funds and US dollar funds.

"The VCs in the United States are basically only focusing on VC investments. However, many US dollar funds in the Chinese market are already large enough and are no longer VCs in the traditional sense." Deng Feng emphasized that in addition to focusing on VCs, the two key points of the value investment of Aurora Venture Capital are early (early) and technology (technology), which are also the investment types that Aurora has always occupied the majority. In 2015, Northern Lights invested more than 20 million yuan in an early project and held 40% of the shares; the company is currently in contact with orders with an annual amount of over 100 million yuan, and the company is expected to reach a valuation of 10 billion yuan after its listing. "This is the style that US dollar funds like. Once one comes out, the return of a project may come back to five funds."

Since 2014, the practice of dual currency funds has become a trend that is difficult to reverse. Today, except for a few such as KKR, which still insists on operating a single dollar fund in China, most funds adopt a dual currency fund method. In the latest example, Red Dot China announced the final fundraising of the first 700 million yuan fund, which is also the first RMB fund raised and managed by the Red Dot China team since it announced its independent operation and establishment of the US$180 million first-phase fund in 2016. In this way, as a veteran US dollar VC, Red Dot Venture Capital has successfully upgraded to another dual currency fund.

"Dual currency drive can better help Chinese local entrepreneurial innovators and better capture high-quality projects in the market." Yuan Wenda said.

Whether it is operating a US dollar fund separately or owning a dual currency fund, the judgment and preferences of "value" in investment philosophy are converging. A typical example is that, in addition to the US dollar fund, the term of RMB fund is as long as a decade. This means that while RMB funds are moving towards the early stages, they are also beginning to try long-term value investment.

"I think front-line fund managers, whether they are RMB funds or US dollar funds, have gradually converged in value investment, high standards requirements, etc., and there will be no big differences." Li Jiaqing said that with the gradual maturity of the market and managers, a small number of RMB funds have also begun to pursue and become the 20% of the 28th rule. From the perspective of value investment, the concept of this part of RMB funds has begun to converge with US dollar funds.

"A simple example, the first wave of investment opportunities caused by relying on demographic dividends is getting fewer and fewer investment opportunities. At the same time, the PE difference between the first and second-tier capital markets has become smaller, and there are fewer fruits that are low, which will also push institutions to do some more difficult things. It should be seen earlier. This is the subtle convergence between RMB funds and US dollar funds." Deng Feng said.

Discover value Create value

More investors are more willing to split the discussion of value into two parts: discovering value and creating value. Deng Feng believes that the focus of discovering value is not on judgment, but how to connect value faster. "The down-to-earth term is to look at your case source. The future measurement of value investment is not whether you can judge whether it is a good project, but whether you can see and get connections ahead of others."

Zhou Wei feels that local innovation is upgrading, and VCs must also cooperate with the upgrade. The main driving force for China's entrepreneurship future will be technological innovation, which requires VCs to be more professional and patient. In the future, there is probably only the difference between RMB funds and US dollar funds, which capital market is more suitable.

For post-investment, Deng Feng believes that the most critical value of VC is not to connect with upstream and downstream resources, but to help enterprises solve management level problems and help entrepreneurs grow. "Everyone starts at the same level, and entrepreneurs' abilities improve quickly, so the company will be different in the future."

Yuan Wenda's view is similar to Deng Feng. He believes that American venture capital is already a very mature market, and the value investment essence of the inherited value of US dollar funds is determined by the team's genes. "As a fund manager, he should iterate with the changes in the Chinese market, and use his international perspective and connections to provide more additional value in addition to investment for the invested projects."

Shen Nanpeng believes that combining with Sequoia, he should also use his expertise in internationalization and connections to provide more additional value in addition to investment."

Shen Nanpeng believes that In China, a small goal is to be the earliest and most important investor of China's best and fast-growing enterprises. "However, we also know what our role should be, and be the entrepreneurs behind entrepreneurs."

"Really innovative, able to obtain high premium and high returns are the dream of all VCs. There is no difference between the currency." In Li Jiaqing's view, only RMB funds that adhere to these things can have a future, but RMB funds that can complete such conversion will only be a minority.

Among the more than ten institutions interviewed, investors acknowledge that the parallelization of dual currency funds will be a major trend in the future. "Dual currency funds converge in value investment, but complement each other in operation. For example, US dollar funds focus more on early innovative technology investment, while RMB funds focus on investment in expansion stages such as services and supply chains.

"In fact, today we are discussing the US dollar and RMB, there are actually many such reasons behind the market reasons, supervision reasons, fund sources and the reasons for many investors' demands..." Li Jiaqing said.

"I believe that the coexistence of US dollar funds and RMB funds will last for a long time and will not change within at least 5 years. "Zhou Wei believes.

It is true that currency has no attributes. Based on different market rules, it is possible to distinguish between US dollar funds and RMB funds. Seeking value discovery and value creation is undoubtedly an industry consensus, and the discussion on "inspiration of value" will continue. From April 23 to 25, 2018, the 12th China Investment Annual Conference of Investment China Information met you in Shanghai and continue to listen to the "power of value".

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