Min Lin: Chinese Private Equity Secondary Deals May Peak In The Next Few Years

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A: We like to buy assets that have grown and increased in value over time, which means that the GP has already made money.

Often, the situation is that a company is projected to grow 50% a year and become exit-ready in five years. But it only grew 20% annually instead, and therefore needs an extra three to four years. That is when we can come in and play a role.

We will value the company using the usual valuation metrics. Whether it’s a discount or premium to what the GP paid for the asset, we really don’t know.

Q: As a secondary deal-focused firm, how do you consider your own exit options in today’s hard exit environment?

A: Over the past seven years, our team has made over 60 exits in total. In the past two years, we already had two IPO exits. We also had a few trade sale transactions, sellback to sellers, and selling to other investors. So it’s a combination of various methods.

Q: In China, NewQuest has invested in the industrial, new energy and healthcare sectors. What kind of qualities do you look for when you invest in a company?

A: Because we buy secondary stakes, we don’t really pick an industrial company from a top-down approach.

Q: So you are sector agnostic?

A: Yes. We would look at the available assets from a GP, and either select the ones that we think will generate value for our investors, or take over a whole portfolio.

We only have an industry view in the sense that some sectors are less fitting for our strategy. For example, Internet companies may not work well. These companies are normally not profit-making. They need to ride a technology trend.

If an investor backs an Internet company five years ago, he either has made a lot of money, or the opposite. It’s difficult for us to come in as a direct secondary investor to make it work.

Q: NewQuest just took China Hydroelectric Corporate private from the NASDAQ in July, after raising the bidding price by 20%. What do you plan to do with the company?

A: Now that we own about 95% of the company after the take-private deal, it has removed the distractions and the high listing expenses, which helps the company a lot.

We have discussed with management on ways to improve operational efficiency, as well as financing methods to improve its capital structure. We are hoping that with the money generated from the operations, we can also grow the company.

Q: Would you focus on acquisitions?

A: We are open to acquisitions. If the opportunity is right, raising the capital should not be a problem. In the hydroelectric industry, it’s harder to grow organically as you are dependent on rain volumes. Your installed capacity is fixed. So for existing plants, it’s really about improving efficiency and technical improvement.

Q: Lastly, you also incorporate the concept of Environmental, Social and Governance (ESG) investing in your activities. What is the biggest challenge in a country where many things can be compromised for profit?

A: Based on our experience, China and its people are becoming much more environmentally conscious. Entrepreneurs are happy to listen to (our ideas). When we help them use best practices that can actually bring good results, they recognize that.

The other thing is that China is not growing that fast any more. The pressure of having to grow very quickly while disregarding other problems is lessened. So it’s a good time to help Chinese companies move in that direction.

About Min Lin:
Min Lin Min Lin is a founding partner of NewQuest Capital Partners. She co-heads its Greater China business. Min also oversees investments in retail, clean energy and industrial sectors. Most recently, she was a director focusing on China investments for Bank of America Merrill Lynch’s Asia Private Equity Group in Hong Kong. Before that, she worked for Merrill Lynch in New York, and as an accountant for Arthur Andersen in China.