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Eric Solberg: China’s Property And Steel Sectors Look Interesting Now
In this episode of China Money Podcast, guest Eric Solberg, founder and CEO of Asia-focused private equity and wealth management firm EXS Capital, talked to our host Nina Xiang.
He discussed how he is preparing to invest in China's property sector in its downturn, and why he thinks there are attractive investment opportunities in the Chinese steel sector.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: You resigned from Citigroup Venture Capital International Asia in 2007 and started EXS Capital. What was your consideration behind that decision?
A: In early 2007, private equity deals in Asia were very expensive. The average public market PE multiple was 60 times. CVCI has raised a US$4.3 billion global emerging markets fund at that time. As all partners, I was required to invest a very large portion of my net worth, in fact, Citi was going to loan me a lot of money, so that I can make a large personal investment in this fund.
But I was concerned that valuations were too high. So I resigned. I withdrew all my money from the fund and sold my Citi stock at US$54, which went all the way down to 97 cents. That turned out to be a lucky decision.
Q: What happened to that fund?
A: In my understanding, the fund invested very aggressively in 2007 and 2008. That fund was sold recently to a much smaller group. I am no longer involved in that fund, but my guess is that the fund didn't lose a lot of money, also didn't make a lot of money. It did get investors the type of performance they were hoping for.
Q: Give us more background on EXS Capital. What does the name stand for?
A: It's a play on the initials of my and my son's name, which is Xavier. But we call it "excess" capital, because we think everybody needs "excess capital"; it's our private joke.
Essentially, we believe that the volatility in the Asian markets makes the typical closed-end, finite life private equity funds difficult. So if you can have either permanent capital, or can do this on a deal-by-deal basis, we think Asia is the best place to do private equity.
Q: Your firm did try to raise an evergreen fund, but it wasn't successful?
A: We did try to raise a permanent capital vehicle around 2011. At that time, investors are putting a lot of money into domestic Chinese or Indian funds. There weren't the appetite for that new type of vehicle.
Some day, we may go back to that idea now that we've built a longer and stronger track record. But in the meantime, our deal-by-deal basis approach has given us a great deal of flexibility.
Q: Chinese private equity firm Capital Today is planning to raise a private equity fund with a 28-year fund life. What do you think will be its biggest challenge?
A: Frankly, I don't think that's a right way to do it. Taking a standard private equity fund model, and just making the fund life very long, doesn't solve the problem.
If you look at more sophisticated evergreen funds such as Golden Gate Capital and General Atlantic, they have rolling mechanisms to allow investors in and out, and to periodically realize investments. That more creative approach is a better solution.
Q: Can you tell us more about a deal you did in China, which was a buyout of a distressed shareholder in a Chinese residential project called Project Byblos?
A: We were working with a developer who had a single project with a 3900-unit residential project in Southern China on the coast. This developer was originally financed by a Southeast Asian group, which got into trouble after the global financial crisis.
The developer saw this as a good opportunity to buy out this Southeast Asian group. We raised some money for the developer, and structured the deal to give incoming investors minimum IRRs (internal rate of return), as well as sharing the upside with the developer. That worked out well.
Q: What kind of investment opportunities do you see in China's property sector now? Recently, the chairman of Hang Lung Group Ronnie C. Chan said that his firm is building up firepower to take advantage of China's distressed property?
A: Like Ronnie, we think there will be a lot of distressed situations in China. The challenge is always the fear of "catching the falling knife."
We are less afraid of that because of our business model. We don't have to wait for the bottom. We want to find good assets and good management team.
We think a number of sources of capital for Chinese developers, such as bank debt, shadow banking, RMB-denominated private equity funds and dim sum bonds (or domestic and foreign equity markets), are drying up at the same time. As a contrarian investor, China is interesting to us again.
Q: Are there any geographic locations or types of real estate that you are interested in?
A: We are agnostic toward (those factors). We are looking for value and great management teams.
Q: You also invested in a Vietnamese property company called Son Kim Land last year. How did that deal work?
A: We started looking at Vietnam in 2011 and 2012. Vietnam was in the middle of a financial and banking crisis. Inflation was out of the control, the government had slammed on the brakes and interest rates went up to 26%.
We interviewed 27 groups, did extensive due diligence on six of them, and we picked one called Son Kim Land. We structured a deal that's good for investors but also worked to further the development of the company.
Q: Did you take equity of the company?
A: It was a mezzanine structure, which is a debt-like instrument with asset backing that provided downside protection for us. We charged 10% interest rate. If the company could not provide a listing or some other type of exit, they will have to pay a premium redemption.
But if Son Kum Land can develop its business and potentially list the company on Vietnamese domestic markets, then we can convert to equity to share the upside, and their cost of capital will also be reduced.
Q: Back to China, what are some other opportunities that you think are interesting now?
A: A lot of people are coming to the conclusion that China has a two-speed economy now. Things like e-commerce and healthcare are growing very fast. Another realm such as steel, manufacturing and construction are growing very slowly. As a contrarian investor, we are seeing good value in those slow-growing sectors.
Q: How do you invest in those sectors that are usually dodged by overcapacity?
A: We have been in industries where the government has been pushing for consolidation before. Back in 1997, I (when working at a previous company) got involved in Harbin Brewery Group. At the time, there were 600 breweries in China. Harbin Brewery was a small brewery in Northern China worth around US$8 million. The government was trying to consolidate the industry.
We funded Harbin Brewery to acquire other breweries and grew stronger. Later, it was sold to Anheuser-Busch Companies for US$800 million. At that time, we were not involved any more, of course.
But that was a consolidation play that worked along with what the government wanted.
Q: Which specific sector in China are you looking at deals right now?
A: Now, we are looking at the steel industry, which is tremendously distressed with lots of overcapacity. The government desperately wants to consolidate this. I think there will be quite a lot of pain, a lot of bankruptcies and non-performing loans (from this sector).
But ultimately, China will continue to be one of the most powerful and competitive steel producers in the world. China's domestic steel consumption will still be huge. If you can find the potential winners and give them the capital resources, help formulate good strategy and management teams, you can get into the sector at such great valuation today because nobody wants it.
Q: What are the biggest risks?
A: The biggest risk for a foreign group like us is trying to understand local politics. Trying to figure out who the Chinese government wants to be the winners or the losers can be challenging. So, we try to partner with local groups who have a good understanding of what's going on.
Q: Do you consider your firm as having good connections in China?
A: I wouldn't claim that we have good "guanxi" (relations) with any particular entities in China or anywhere else. We know how to structure good transactions, and we know how to work with local groups who have those connections.
My personal belief is that some private equity firms have raised a lot of money by telling investors that they have great connections. The problem is that if you are doing the deals on connections, it's hard to do good due diligence or to negotiate hard. Like we say, you can't look into the mouth of a gift horse.
We have not been impressed by the performance of those firms who promoted themselves on the basis of "guanxi". We look at fundamentals. In addition, we generally look at places where not a lot of money is competing, so "guanxi" doesn't matter anyway.
Q: So you are not interested in the fast-track new economy of China?
A: I think e-commerce is the future direction of the whole world. But globally and especially in China, I believe investors are overpaying and overvaluing those businesses right now. Are those business real? Yes. Is the growth real? Yes. Am I going to pay 100 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)? No.
About Eric Solberg:
Eric Solberg is the founder and CEO of Asia-focused private equity and wealth management firm EXS Capital. Before founding EXC Capital in 2007, he was managing director and partner of Citigroup Venture Capital International Asia, Citigroup’s proprietary private equity group for Asia.
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By ChinaMoneyNetwork.com
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In this episode of China Money Podcast, guest Eric Solberg, founder and CEO of Asia-focused private equity and wealth management firm EXS Capital, talked to our host Nina Xiang.
He discussed how he is preparing to invest in China's property sector in its downturn, and why he thinks there are attractive investment opportunities in the Chinese steel sector.
Read an excerpt below, but be sure to listen to the full episode in audio. Don't forget to subscribe to the podcast for free in the iTunes store.
Q: You resigned from Citigroup Venture Capital International Asia in 2007 and started EXS Capital. What was your consideration behind that decision?
A: In early 2007, private equity deals in Asia were very expensive. The average public market PE multiple was 60 times. CVCI has raised a US$4.3 billion global emerging markets fund at that time. As all partners, I was required to invest a very large portion of my net worth, in fact, Citi was going to loan me a lot of money, so that I can make a large personal investment in this fund.
But I was concerned that valuations were too high. So I resigned. I withdrew all my money from the fund and sold my Citi stock at US$54, which went all the way down to 97 cents. That turned out to be a lucky decision.
Q: What happened to that fund?
A: In my understanding, the fund invested very aggressively in 2007 and 2008. That fund was sold recently to a much smaller group. I am no longer involved in that fund, but my guess is that the fund didn't lose a lot of money, also didn't make a lot of money. It did get investors the type of performance they were hoping for.
Q: Give us more background on EXS Capital. What does the name stand for?
A: It's a play on the initials of my and my son's name, which is Xavier. But we call it "excess" capital, because we think everybody needs "excess capital"; it's our private joke.
Essentially, we believe that the volatility in the Asian markets makes the typical closed-end, finite life private equity funds difficult. So if you can have either permanent capital, or can do this on a deal-by-deal basis, we think Asia is the best place to do private equity.
Q: Your firm did try to raise an evergreen fund, but it wasn't successful?
A: We did try to raise a permanent capital vehicle around 2011. At that time, investors are putting a lot of money into domestic Chinese or Indian funds. There weren't the appetite for that new type of vehicle.
Some day, we may go back to that idea now that we've built a longer and stronger track record. But in the meantime, our deal-by-deal basis approach has given us a great deal of flexibility.
Q: Chinese private equity firm Capital Today is planning to raise a private equity fund with a 28-year fund life. What do you think will be its biggest challenge?
A: Frankly, I don't think that's a right way to do it. Taking a standard private equity fund model, and just making the fund life very long, doesn't solve the problem.
If you look at more sophisticated evergreen funds such as Golden Gate Capital and General Atlantic, they have rolling mechanisms to allow investors in and out, and to periodically realize investments. That more creative approach is a better solution.
Q: Can you tell us more about a deal you did in China, which was a buyout of a distressed shareholder in a Chinese residential project called Project Byblos?
A: We were working with a developer who had a single project with a 3900-unit residential project in Southern China on the coast. This developer was originally financed by a Southeast Asian group, which got into trouble after the global financial crisis.
The developer saw this as a good opportunity to buy out this Southeast Asian group. We raised some money for the developer, and structured the deal to give incoming investors minimum IRRs (internal rate of return), as well as sharing the upside with the developer. That worked out well.
Q: What kind of investment opportunities do you see in China's property sector now? Recently, the chairman of Hang Lung Group Ronnie C. Chan said that his firm is building up firepower to take advantage of China's distressed property?
A: Like Ronnie, we think there will be a lot of distressed situations in China. The challenge is always the fear of "catching the falling knife."
We are less afraid of that because of our business model. We don't have to wait for the bottom. We want to find good assets and good management team.
We think a number of sources of capital for Chinese developers, such as bank debt, shadow banking, RMB-denominated private equity funds and dim sum bonds (or domestic and foreign equity markets), are drying up at the same time. As a contrarian investor, China is interesting to us again.
Q: Are there any geographic locations or types of real estate that you are interested in?
A: We are agnostic toward (those factors). We are looking for value and great management teams.
Q: You also invested in a Vietnamese property company called Son Kim Land last year. How did that deal work?
A: We started looking at Vietnam in 2011 and 2012. Vietnam was in the middle of a financial and banking crisis. Inflation was out of the control, the government had slammed on the brakes and interest rates went up to 26%.
We interviewed 27 groups, did extensive due diligence on six of them, and we picked one called Son Kim Land. We structured a deal that's good for investors but also worked to further the development of the company.
Q: Did you take equity of the company?
A: It was a mezzanine structure, which is a debt-like instrument with asset backing that provided downside protection for us. We charged 10% interest rate. If the company could not provide a listing or some other type of exit, they will have to pay a premium redemption.
But if Son Kum Land can develop its business and potentially list the company on Vietnamese domestic markets, then we can convert to equity to share the upside, and their cost of capital will also be reduced.
Q: Back to China, what are some other opportunities that you think are interesting now?
A: A lot of people are coming to the conclusion that China has a two-speed economy now. Things like e-commerce and healthcare are growing very fast. Another realm such as steel, manufacturing and construction are growing very slowly. As a contrarian investor, we are seeing good value in those slow-growing sectors.
Q: How do you invest in those sectors that are usually dodged by overcapacity?
A: We have been in industries where the government has been pushing for consolidation before. Back in 1997, I (when working at a previous company) got involved in Harbin Brewery Group. At the time, there were 600 breweries in China. Harbin Brewery was a small brewery in Northern China worth around US$8 million. The government was trying to consolidate the industry.
We funded Harbin Brewery to acquire other breweries and grew stronger. Later, it was sold to Anheuser-Busch Companies for US$800 million. At that time, we were not involved any more, of course.
But that was a consolidation play that worked along with what the government wanted.
Q: Which specific sector in China are you looking at deals right now?
A: Now, we are looking at the steel industry, which is tremendously distressed with lots of overcapacity. The government desperately wants to consolidate this. I think there will be quite a lot of pain, a lot of bankruptcies and non-performing loans (from this sector).
But ultimately, China will continue to be one of the most powerful and competitive steel producers in the world. China's domestic steel consumption will still be huge. If you can find the potential winners and give them the capital resources, help formulate good strategy and management teams, you can get into the sector at such great valuation today because nobody wants it.
Q: What are the biggest risks?
A: The biggest risk for a foreign group like us is trying to understand local politics. Trying to figure out who the Chinese government wants to be the winners or the losers can be challenging. So, we try to partner with local groups who have a good understanding of what's going on.
Q: Do you consider your firm as having good connections in China?
A: I wouldn't claim that we have good "guanxi" (relations) with any particular entities in China or anywhere else. We know how to structure good transactions, and we know how to work with local groups who have those connections.
My personal belief is that some private equity firms have raised a lot of money by telling investors that they have great connections. The problem is that if you are doing the deals on connections, it's hard to do good due diligence or to negotiate hard. Like we say, you can't look into the mouth of a gift horse.
We have not been impressed by the performance of those firms who promoted themselves on the basis of "guanxi". We look at fundamentals. In addition, we generally look at places where not a lot of money is competing, so "guanxi" doesn't matter anyway.
Q: So you are not interested in the fast-track new economy of China?
A: I think e-commerce is the future direction of the whole world. But globally and especially in China, I believe investors are overpaying and overvaluing those businesses right now. Are those business real? Yes. Is the growth real? Yes. Am I going to pay 100 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)? No.
About Eric Solberg:
Eric Solberg is the founder and CEO of Asia-focused private equity and wealth management firm EXS Capital. Before founding EXC Capital in 2007, he was managing director and partner of Citigroup Venture Capital International Asia, Citigroup’s proprietary private equity group for Asia.