Why Chinese investors are wooing India

With almost unlimited funds, and their government’s blessings, Chinese private equity firms are coming to India. Fosun has already set up shop here. Will this change the face of PE?
By Mansi Kapur

LAST MARCH, MUKESH AMBANI, chairman of Reliance Industries, India’s largest private sector group, received a visitor from Shanghai. Guo Guangchang, the 46-year-old chairman and co-founder of China’s largest privately held conglomerate, Fosun International (ranked 100 on the Fortune China 500), and one of China’s wealthiest people, wanted to meet the head of India’s largest corporation. It appeared that Guo simply wanted to get to know Ambani.

One businessperson meeting another is not exactly the stuff of headlines. Except to those used to doing business with the Chinese; they saw this as the first step to a business pitch. It’s considered a trademark Chinese approach, where an almost inordinate amount of time is spent building rapport before pitching business. “Comradeship, if not friendship, is always a necessary precondition to doing business together. It’s not who you know, but how well you know them. If you haven’t shared a meal—and more important, a few hundred laughs—you will never share a business deal,” says Peter Fuhrman, chairman and founder of China First Capital, a China-focussed advisory firm based in Shenzhen.

Reliance is traditionally close-mouthed about Ambani’s meetings, and Guo’s office refused to comment on whether the two shared a meal—or indeed, a few laughs. But from what Fosun officials say, it’s clear that his India visit was as much to make friends as it was to drum up business. Fosun in China is a diversified conglomerate with a finger in many pies—from manufacturing pharmaceuticals to selling real estate to funding companies—but outside its home country, it is seen mainly as a private equity (PE) player.

Fosun’s PE play in and outside China has often been with large global private equity companies, including The Carlyle Group, one of the largest U.S. PE firms with $91 billion (Rs 5.6 lakh crore) under management, and Prudential Financial, a leading American financial services company. Fosun has been in India for about a year now, and its India head Pan Song is scouting for a local partner—an international investor or a local PE. It is also planning an India fund. Pan was earlier India managing director of power equipment maker Shanghai Electric, and was instrumental in facilitating that company’s largest deal: an $8.3 billion order placed by Reliance Power, controlled by Mukesh Ambani’s younger brother, Anil.

Fosun’s brass in China hope that Pan’s 16 years of experience here, and the contacts he would have made, will help establish the PE company. On the phone from Shanghai, Liang Xinjun, vice-chairman and CEO, and one of the co-founders of Fosun, says he hopes that under Pan, Fosun will develop close associations with a “senior bureaucrat or someone famous”. The Chinese company is no stranger to friends in high places; in 2010, three years after it listed on the Hong Kong Stock Exchange (HKSE), Fosun roped in former U.S. treasury secretary, John Snow, as advisor to the board. (“I assisted the Fosun team to devise its global map,” says Snow in an internal newsletter.)

In the last two years, teams from Fosun’s headquarters in Shanghai have visited India to network among senior executives. “I know that industrial manufacturing in China is a little bit better than in India,” says Liang. “But India has a large rich population, so we are also very interested in building a friendship with billionaires and millionaires in India. We hope that they will want to invest something in globalisation projects which can benefit from the China momentum. We will welcome them to join our fund.”

Over breakfast on the 21st floor of Taj Land’s End in suburban Mumbai, I ask Pan about the “famous” associates lined up. “I’m meeting people—companies, government, potential recruits—to understand the opportunity [of investing in India] better,” is all he will say. While Fosun doesn’t share names, people close to the company say Pan and his team have been holding talks with companies in the Tata group—Tata Finance, Indian Hotels, Tata Steel—as well as e-commerce firms such as Snapdeal, and Nashik-based wine maker, Sula Vineyards. Word on the street is that Fosun is bidding for a pharma company in India.



BUSINESS TIES BETWEEN India  and China are old (remember the Silk Route?), but in modern times most Chinese companies have come in as sellers or manufacturers. That wave was headed by telecom and power equipment manufacturers in the late 1990s. In less than a decade, Chinese equipment manufacturers began undercutting competition on pricing and delivery, even getting Chinese banks to finance some deals. This has eaten into the business and profits of multinational and local competition in these industries.

Imagine the same with Chinese PEs, which are likely to show up with almost endless resources. “Not many can put that kind of money into big deals. I’m talking hundreds of millions of dollars for almost each deal,” says Peng Zhang, vice president, Xander Funds, a global investment firm.

Here’s an indication of the kind of money at play. The China Investment Corporation (CIC), the platform on which all state-backed (and several private) funds operate, had $575 billion of assets under management as of August 2013, according to the Sovereign Wealth Fund Institute. (Compare this with another large state-owned fund, Singapore’s Temasek, which has assets under management of $173 billion.) The Chinese government has indicated that CIC will focus on investments overseas, leaving the other state-backed funds—the National Social Security Fund (NSSF) and SAFE Investment Company—to cater to investments within China. In the venture capital and PE space, CIC is a huge player; it owns stakes in Morgan Stanley and Blackstone.

Furhman says that some of the bigger Chinese PE firms such as CDH Investments, SAIF Partners, New Horizon, and Hony Capital form one part of a tripartite alliance, the likes of which the investment world has never seen. The other two parts are NSSF, soon to be the largest source of investible capital in the world, and the China Securities Regulatory Commission (CSRC), China’s securities regulator, which has all the say in approving all domestic IPOs. The euphoria created in the Chinese PE market in 2010 was the result of NSSF announcing that it would invest up to 10% of the national pension system’s capital (then a whopping $139 billion) in alternative investments, particularly PE.

“We’re really at the start of a trend where the Chinese are starting to say, okay, we have this source of capital in China and we should also look at markets overseas,” says David Brown, Greater China private equity group leader, PricewaterhouseCoopers, in Hong Kong. Zhang adds that the renminbi’s rise against the dollar is fuelling the hunt for assets outside.

A 2013 OECD paper, China Investment Policy: An Update, says China’s “go global” policy “has been highly successful in that it has achieved a tremendous acceleration in China’s outward foreign direct investment. Having punched far below its weight in this regard in the first two decades of economic reform, the country now ranks as one of the world’s largest exporters of capital.” 

Zero2IPO Group, a well-known PE/VC research institution in China, says PE fundraising had grown from a little over $1 billion in 2002 to $11 billion in 2010, while the number of new funds increased from 34 in 2002 to 158 in 2010, fuelled by sovereign funds. During the period, dollar-denominated funds that marked the PE industry in China in the early 2000s gave way to renminbi funds, which allowed investors to tap the domestic markets, where valuations were higher than those in Hong Kong and New York. 


Furhman says, “Shenzhen’s stock exchange was the world’s busiest and largest IPO market during the first half of 2010. By the end of June 2010, 161 firms raised $22.6 billion in IPOs on the exchange. The Shanghai Stock Exchange ranked No. 4, with 11 firms raising $8.2 billion, far ahead of HKSE and NYSE [New York Stock Exchange].”

Returns as high as 100% were not unusual as PE firms dipped into the endless pool of entrepreneurs eager to scale up. A PE veteran says that Carlyle’s China fund, set up in the mid-2000s, gave around 8x returns within a few years. It was a heady time to be a PE firm in China, and Fosun was riding the wave. By the time Guo visited India, Fosun had invested in 35 projects with an investment amount of $2.47 billion. 


FOSUN WAS FORMED in 1992 by four Fudan University graduates. Three of them—Liang and his two classmates Fan Wei and Wang Qunbin—were studying genetic engineering, while Guo majored in philosophy. The first company they formed was Fosun Pharma; very soon, they diversified into health care, real estate, insurance, and the consumption business; it entered private equity in 2000. In other interviews (Guo was not available to meet Fortune India for this story), Guo has made no secret of the fact that he idolises Warren Buffett (he has been called China’s Buffett) and the way he has built Berkshire Hathaway, one of the leading American businesses. Judging by his moves, he wants to build Fosun in the same way.

Liang says that in the last 21 years, the group, which recorded revenues of $8.4 billion (for the year ended 2012), has delivered an internal rate of return of nearly 28% on its investments (without taking PE into account; with PE, it goes up to 39%). He says the ability to invest is core to Fosun. “We perceive ourselves as a value investor instead of a conglomerate. That’s the image we are conveying globally, we hope the same is true in India.” A lot of Fosun’s processes are based on industry best practices, but Liang admits that there are no shortcuts to high returns. “As a professional investor, yes, we want to get a high return, but we try to find an efficient way to reduce our risk. The most important factor is to be sure that our research is a lot deeper and wider than others.” 

Typically, Fosun’s teams not only study the company they’re looking to invest in, but also that company’s competitors, and local as well as global industry trends. “If you have information about these three things, maybe you can reduce risk,” says Liang. He adds that like for most PEs, due diligence determines success. “If you get the due diligence right, you can get 60% of your target returns. Then you need to work on improving the company’s efficiency which will bring in the next 20% to 25%. The last 10% to 15% is dependent on your exit strategy,” he says.


Fosun’s decision to globalise was taken at a time when the PE market in China was booming. Liang says: “When other investors looked at China as the best investment option, we had an inside view of what was driving the growth. We realised that maybe in the next 10 years, China would not be the fastest growing country in the world.” So, Fosun began looking to invest in countries that had businesses that could be brought to China—or which had a Chinese business that needed to be expanded. So far, these have been in North America or Europe.

In 2010, Fosun made its first move in Europe by buying a minority stake in French luxury resort operator Club Méditerranée. Later, it paid $85 million for a 9.5% stake in the Greek jewellery and accessories company, Folli Follie. Early last year, Fosun launched a successful takeover bid for Club Med with French insurance giant AXA. More recently, it bought a 35% stake in Raffaele Caruso SpA, an Italian maker of suits for top fashion labels; invested in the American apparel brand St John; and, in October, paid $725 million to buy One Chase Manhattan, a landmark building on Wall Street housing J.P. Morgan’s global headquarters.

But now Fosun is looking keenly at Asia, including India and Japan. Around the time Fosun was engaging with Folli Follie, it had begun to think about India. According to Bain & Company’s Global Private Equity report for 2013, GDP in China expanded at 7.8% annually in 2012 and is forecast to grow at 8.4% in 2013. The report adds that in the longer term, China’s growth potential will slow sharply as factors that acted as a tailwind for GDP—strong capital flows, favourable export conditions, and a growing labour force—are now reversing and beginning to weigh on the economy. “So, we asked ourselves: Who’d be the next No. 1? We believe India has a very good chance,” says Liang. 


THE SIMPLEST WAY to describe Fosun’s plans for India is that it’s leaving no option unexplored. Liang says Fosun would prefer a “pre-IPO company, but is open to what we call PIPE [private investment in public equity] opportunities.” Other than specifying sectors they’re interested in—real estate, infrastructure, and manufacturing in the near-term, and consumption and personal finance in the long term—they’re not particular about the size or stage of the company as long as it fits in with the group’s philosophy of leveraging China’s growing demand for brands and services. “In the next few years, both China and India will see the emergence of a new middle class which will create a huge demand for consumption and personal finance. We’re looking at investing in companies that can grow by catering to this demand,” says Liang.

And what’s in it for India or Indian companies? Quite a lot, at least on the face of it. “We will encourage those companies we have invested in (in China and other places) to enter India. Not only to sell their products and services, but also to build companies in India and even to manufacture locally,” says Liang. One of the ideas behind Fosun’s investments in Indian companies is to help them set up operations in China quickly. Although Indian companies have ventured into China before—the most significant players are Tata Consultancy Services and Mahindra & Mahindra—most entrepreneurs agree that working with a Chinese partner has undeniable benefits when setting up shop there. These include quickly navigating through red tape and local policies, but more important, getting a comprehensive understanding of a layered and highly complex market.

In all this, Fosun plans to leverage domestic growth in India. “The plan is to invest in companies that can benefit from the momentum in the Indian market as well,” says Liang. In fact, he adds, Fosun has been working with its existing investee companies—both in China as well as in Europe and the U.S.—to consider developing their business in India. 

While Pan and Liang decline to talk about the amount earmarked for India (though they say all investments here will be from Fosun’s dollar-denominated fund), they explain that this is because the amount invested in a company will depend on the route chosen for investment. For instance, Fosun would like a larger stake in startups but will be happy with a low stake in an established company. 

What’s most interesting about Fosun’s plans for India is that they are not restricted to bringing in capital and drawing out profits. Liang talks about an announcement Fosun made recently about investing 100 billion yuan (or $16 billion) on tourism projects across China. While he does not expressly mention a potential partnership, he indicates that associations with Indian companies such as Indian Hotels could prove beneficial for such projects. “The idea of partnerships with Indian firms that have successfully globalised is to learn from them,” he says.


Fosun isn’t too keen on providing its target companies cheaper sourcing options in China. “Labour costs are rising. Resources used for manufacturing are prized, while land and environmental costs of running a manufacturing setup are increasing. We feel that just helping Indian companies to source from China to cut down costs may not be a good long-term solution for these companies,” says Liang.


BEFORE FOSUN CAN chart out its growth path in India, it has to overcome its biggest challenge—building a brand in a sector that’s dominated by big Western names. Liang agrees that Fosun will have to take on the global giants sooner or later, but plays down the ensuing contest. “The Indian market is so big, it’s a bit like China. If you look carefully enough, you’ll find an opportunity or niche for yourself.”

However, a senior executive at a Mumbai-based financial services company says Fosun can’t afford to be so sanguine. “If one has to choose a Chinese investor over more established names such as Blackstone and Carlyle, the obvious question would be: What extra can the investor offer, over and above just funding?” he says. 

In some ways, the answer comes from Umberto Angeloni, co-owner of the Italian suitmaker Caruso, Fosun’s most recent partner, who says that the reason he agreed to sell 35% of his company to Fosun even though there were other offers was because the Chinese company had the “unique combination of the same extreme diligence found in more seasoned financial investors, combined with a degree of optimism and positivity that you don’t find in the West anymore.”

Add to this Fosun’s experience in Europe, which is likely to help. A Reuters report in September said that the Portuguese government had shortlisted Fosun along with American investment fund Apollo, for the privatisation of the insurance arm of state-owned bank Caixa Geral de Depositos. Around the same time, there were reports of Fosun considering a stake in top Italian fashion label, Gianni Versace SpA. 

Po Chi Wu, a former investor and currently adjunct professor at the School of Management at the Hong Kong University of Science and Technology, says, “European companies are welcoming Chinese investors because they [the Chinese] are willing to invest. American investors have little faith in the EU markets; there are few European investors. Some European companies hope to enter China and look to Chinese investors to facilitate that. That is the only value that Chinese investors have in greater supply.”

But there’s a deeper problem that potential partners in India have to deal with: There is a general perception that Chinese businesses is inextricably entwined with their government. “One can never be sure about what the source of the funds are. You don’t want to get on the wrong side of  the RBI or the government,” says the Mumbai-based financial services executive. Angeloni echoes the concern that there are European firms which are still biased by fear and prejudice when it comes to Chinese investors. “The belief is that Chinese investors are either part of the establishment (i.e. sovereign funds) or an expression of new and unsophisticated money, with the intent of dominating the sources of raw materials or technology.”

So, there’s a marked degree of wariness. This is mainly because the (state-owned) Chinese financial system is still repressed. Big banks follow directives on whom to lend. “What makes it work is the fact that Chinese savers still do not have many options to put their savings (apart from property, which is an urban middle-class phenomenon), so the banks continue to have a cheap source of funds, leading to what is called China’s financial repression,” says Yuwa Hedrick-Wong, the New York-based chief economist and chair of the Academic Advisory Council at the MasterCard Center for Inclusive Growth.

However, PwC’s Brown says it need not always be the case that the state involves itself in Chinese PE investing abroad. “Increasingly, there are PEs being set up in China specifically to invest overseas and sometimes they are state-backed. There’s some degree of state investment but I’ve not really heard of any sort of pushback, at least about the source,” he says. A  senior financial analyst in Hong Kong adds that the reason Chinese PE firms can compete with global giants today is because the Chinese companies “can leverage their local China connections to gain preferential access to deal flow”. He admits that the Chinese companies are moving towards global best practices, but there’s a way to go yet. Hedrick-Wong echoes this when he says: “The biggest Chinese players tend to be those with preferential access to financing, enjoying very low cost of capital.”

That said, there’s no doubt that future PE powerhouses could emerge from China. “State institutions in China are now allowed to  invest in alternate assets, which means the local PE industry has potentially a very large source of capital,” says Brown. He adds that he doesn’t think the current crop of PEs from China has the maturity needed to produce the likes of say, a Blackstone or KKR, but this is something that will get fixed in the next decade or less. “I absolutely do believe that the next KKR will emerge from China. It’s difficult to talk about the time frame but if you asked me to bet, I would say closer to five [years]. It happens quicker than you think,” says Brown. 

A PE industry veteran adds that Fosun lacks the depth as yet to pull off sophisticated deals. But, he’s quick to add: “The acquisition of global assets will allow it to get this experience. It will also help it get and retain talent. It won’t surprise me if one day Fosun bids for a big, global PE firm.”

Brown says that just as Western funds today want an exposure to China or to emerging economies, so too will behemoths like China Life Insurance want exposure to the U.S. or to Europe. One of the ways they’ll get this is by investing in a Chinese PE that invests there. “Exactly the same way that Blackstone or Bain Capital uses money from Yale and invests in China,” he says.

Wu says that the Chinese have been studying PE and venture capital investing very seriously for the last decade—and learning very fast. “One observation that may be counterintuitive to non-Chinese analysts is that China, especially the Chinese government, is bravely experimenting with many different kinds of models for investment and for various businesses,” he explains. These are mostly low-profile efforts, scattered among major as well as second-tier cities.


IN ITS EFFORTS TO globalise, Fosun has standardised its business model with the help of its associations with Carlyle and Prudential. Most other Chinese PEs work on what is emerging as the Chinese model of investing. Wu says that investment strategies have to reflect the local ecosystem—the infrastructure and professionalism of the financial sector (public stock markets, investment banks, liquidity), corporate culture (for M&A), including corporate governance, investor profiles, corporate growth strategies, availability of other investment choices (real estate), and government policies.


Other than the fact that a financial transaction is taking place, literally, everything is different in the way local investors view risk, compared with Western investors in their home market. “The perception of risk depends on how you balance the value of what you know and what you don’t. In China, what you don’t know is massively greater than what you know. How is an investor going to have an unfair advantage? Only through personal contacts,” says Wu.

The ecosystem in China being still relatively immature, interactions among the players end up being a lot more complex than those in Western countries. Information about companies, industries, markets, even government regulations (especially enforcement) is often unavailable or highly unreliable. “About the only thing that Chinese investors have in common with their Western counterparts is the focus on return on investment—but even that can have a very different meaning because the cultural history emphasises indirect benefits which are not mentioned in a contract,” says Wu.

In his early days of operating his advisory, Furhman says the term sheets given by American companies were vastly different from those of the Chinese ones. “In business negotiations, Americans need to specify as much as possible in writing to protect against the ultimate evil of American business life: business litigation. Chinese seem to have a far less obsessive need to document everything in writing, and certainly don’t have the same persistent, gnawing fear of litigation. It’s a guanxi society, where trust between individuals forms a more insoluble bond than any contractual term.”

Yinglan Tan, a professor at the Singapore campus of business school INSEAD, and author of Chinnovation, a book about the way Chinese innovate, says: “Chinese tend to be laser focussed on revenues.” Tan quotes Eric Tao, vice president of Keytone Ventures, a Beijing-based venture capital fund, and former associate at the China office of Californian investment firm, Kleiner Perkins Caufield and Byers: “The investment strategy for China is very different. VCs tend to do later-stage deals and invest in the later rounds. For example, U.S. Kleiner Perkins offices invest in over 30 pre-revenue companies. The Kleiner Perkins office in China is completely the opposite; our China team never invests in companies without revenue, unless the company has an extremely convincing model and revenue and clear customer absorption rate.”

These differences are often influenced by cultural factors. Brown says “you need to be a local to be able to do deals in the local Chinese market—mainly because of the language.” Wu adds that Standard Chinese (the dialect spoken by most in China, based on Mandarin Chinese) is not structured for expressing abstract concepts clearly and concisely. “When you have a culture that discourages confrontation, and direct questioning, and a language that encourages explaining the complexity of multiple relationships, it takes real work to achieve understanding,” says Wu.

A pictographic language is fundamentally metaphoric, says Wu. The Chinese word for ‘invest’ is made of two characters representing commitment of personal efforts and resources, while the word for speculative investing includes a character that refers to opportunity. “As a result, many investors in China think that investing is actually speculative, similar to gambling, something the Chinese love. A large part of the motivation in making a speculative bet is actually the thrill, and not the expectation or calculated risk of a possible high reward,” says Wu.

Peng Zhang of Xander Funds says that although the Chinese understand how to play in “global markets dominated by westernised rules”, there are some things that have not been influenced by the West. “If Deutsche or Citi were financing a deal, the loan documents will be 100 pages, full of clauses that have evolved over 200 years. In comparison, if you borrowed money from a Chinese bank, you’d find them more deal and relationship driven and probably the whole transaction would be done in 10 pages.”

That brings out a key difference in the mentality of Chinese and Western investors: The Western investor thinks of his business as an analytical exercise, based on a careful, thorough assessment of resources, using quantitative data and financial models. The Chinese investor looks first at personal relationships to ascertain who he can trust, rather than delve into account ledgers, which he suspects are inaccurate in the first place. This is, after all, as Furhman says, the country where people for hundreds of years have greeted each other not with “Hello” but with the question “Have you eaten?