Talk with the average PE professional in Asia and the one of the things you hear is that “there are no buyouts in China .” John Zhao , the CEO of Legend/Hony Capital says that nothing could be further from the truth. Zhao should know, he is investing from Hony's second Chinese buyout fund and already planning on raising his third fund. I spoke with Zhao this week before his presentation at Thomson's Buyout Conference in San Francisco for an in-depth interview with T&I.
Zhao, is typical of the Chinese born, U.S. educated over-achievers returning to China these days. Possessing dual graduate degrees in engineering and physics, Zhao spend 15 years in the U.S first studying, then performing research at Bell Labs, then as a working engineering executive and finally CEO at Schurr, Vadem and Infolio before being bitten with the China bug. In 2002 Zhao started eGarden, a small fund with funding from high net worth funding from individuals in the technology industry, and at the same time acted as an advisor for China’s UT Starcom and Legend Computers. The work at Legend, where Zhao helped formulate the decision that led to the group’s acquisition of IBM’s PC business, also led to the formation of Legend sponsored, Hony Capital’s first fund.
Hony I was a $38 million fund that invested in 3 deals, including the acquisition of assets in 28 startups from the Bank of China. Zhao won't say how much he has made by turning those assets into valuable properties, but says that it was sufficient to allow him to raise a second fund, Hony II , of $88 million in 2004, and of which, half is already invested. LPs in Hony II include Legend, Goldman Sachs , Temasek of Singapore and high net worth individuals.
Not only is Zhao succeeding at making a name for himself in the buyout world, he's making money. More importantly, Zhao says he is painstakingly building a team of 22 investment professionals that will help him to invest from $10 to $20 million apiece, to acquire State Owned Enterprises (SOEs) form the Chinese government. Zhao says he's interested in media, pharmaceuticals, auto parts, construction materials and consumer goods. So far, Zhao has made 3 investments from his second fund into Ginan Auto Works , Kebao (home theater systems) and Nanjing Simcere , a generic pharmaceuticals manufacturer. Zhao says that he'll do 2 to 4 more acquisitions from his current fund.
Meanwhile, Zhao and his team are building a template for the acquisition of state owned enterprises, the realm that most U.S. Chinese PE professionals call “Roach Motels” where investors go in and never come out. Zhao says that the thousands of to-be-privatized assets that will be sold over the next decade represent one of the world's best streams of proprietary deals; at least for those with the connections and feet on the ground to bring them to fruition.
Zhao is apparently onto something, LPs are already asking when Hone III will begin fund raising.
