Ludvig Nilsson: China’s Western Regions Are Private Equity’s Golden Frontier

[Apologies for the sound quality of this podcast as the interview was done outdoors.] [This podcast is also in video, please check it out on our website: http://www.ChinaMoneyNetwork.com] In this episode of China Money Network, guest Ludvig Nilsson discusses the challenges facing China’s private equity industry and where he sees attractive investment opportunities. Listen to the podcast, watch the shortened video or read an excerpt: Q: Last year, you described China’s private equity industry as a hyped market with strong fundamentals. Have you changed your opinion? A: Not really, I think the hype is still on. The inflows of new capital into China are actually increasing, not just from overseas investors but also from local institutions. Specifically, China’s insurance companies. The insurance industry is only now allowed to allocate significant money into private equity. On an overall basis, the potential is very large. The combined assets of the insurance industry are a few hundred billion dollars. If you apply a percentage of two to three percent that could arguably be invested into private equity, that’s a quiet a large number. Q: You answered the first part of the question, but how about the fundamentals? People are concerned that there is now too much money chasing too few deals? A: Yes, but that’s always been the case for as long as the industry has been around. There are new opportunities right now and they derive from two areas. One, there are a range of newly emerged industries that need capital for consolidation, the consumer industry, for example. On macro basis, China has never seen as tight a credit condition as the present ever. Some six months ago, it was the tightest condition I’ve ever seen since I moved to China 15 years ago. China has always had lots of money sloshing through the system. Now a lot of that money has dried up. What I think we will see is that there are currently two thousand (private equity) funds. They will consolidate into perhaps one thousand or so funds. And, only half of them will make seasonable returns. That sounds like a lot, but (it means) 75 percent of the funds you see in the market will not do well. Q: Is there any particular industry or strategy that you think presents better opportunities at present? A: We are looking at western China regions more. Given the new development phrase that the western China regions are going through, we see a lot of opportunities of investment ahead of the curve. Some of the managers there tend to have strong local connections and very good deal flow and very good understanding of risks at that area. They have been able to do deals at very attractive valuations. There are a large number of fund managers that emerged in Chengdu, Chongqing and Xi’an. Most of them started out as small RMB funds backed by leading industrial families in those regions. Many of them are looking to increase their capital base as the investment opportunities there are huge. Q: But going to a frontier market represents unique risks and challenges. How do you manage that? A: Exactly. The reason we want to work with local funds over there is because they know how to manage that risk. Some of the funds from Shanghai going to China’s western region, they are as foreign as I am. So, many of those local risks can best be managed by those with local connections. Our Guest Today: Ludvig Nilsson is a co-founder and managing director at Jade Invest, a Shanghai-based private equity fund-of-funds manager focused on China. Prior to co-founding Jade Invest in 2005, Ludvig was a consultant at PricewaterhouseCoopers where he focused on commercial due diligence for private equity clients. For more information, go to http://www.ChinaMoneyNetwork.com