Interviewing entrepreneurs in China: A guide to investing and valuing companies in China|Daxue Consulting
Daxue Consulting interviewed Peng Li, founder and managing director at Merger-Link to understand better the structure of the investment market in China and how he managed to develop his consulting business dealing with private equity, venture capital, and corporations.
Peng Li, a thorough expert in capital raising and investment in China
Graduated from the EDHEC business school in France, Peng Li has been working for 13 years in finance in China.
He started as an investment banker at William Blair which is an American investment bank where he learned a lot about cross-border transactions. After 10 years of doing investment banking, he moved to the buy side and worked for a large Chinese investment company called Fosun, and then worked as a strategy and business development person at Yum China.
Peng Li has therefore been able to gather relevant insights and real expertise on finance in China but warns that working in this field can be intricate:"In China, it’s just challenging to be an investor, a proper investor, a professional investor because you have to be careful with the inter-valuation". Click To Tweet
Merger link is a powerful competitive advantage for any investor in China
Merger-Link is a business intelligence provider in the form of a SaaS in China. They generate, collect and structure proprietary information and intelligence and sell that information to private equity funds,investment banks and multinational who are making investments in China.
Today Merger Link has over 50 clients, most of them are global USD private equity funds or Chinese venture capital funds.
The momentum has been really good for this investment company because they only launched their Saas platform for over a year and are now 20 people to work every day in their office in Shanghai.
According to Peng Li, the platform’s success is because they operate just as an outsource service for their clients: indeed, the initial part of the investment process, which is sourcing deals, screening, looking for potential targets, finding the contact and getting connected, can be outsourced.
‘’We believe that we are a businesses development tool as well, using business intelligence so we can help our clients free their time, empower their time to do more things that are a value add.’’
SAAS in China: Offering the best-customized solution for your clients is key
When working as a SaaS and therefore offering a software, Peng Li explains that it is important to ensure that the software is unique and adapted to the needs of customers. For this purpose, Merger Link called on an IT company:
“I don’t think there is any other software like this, it’s purely based on the needs of basically private equity investors or MNA department of MNCs, and it’s straightforward”.
The clients only have to look at the intelligence, click on it, and they can request on meeting them, having a call or having more information. In a nutshell, the idea for the client is to give all their criteria to Merger Link, and they will find those targets, clear it, qualify the market and save you time.
How to value companies in China?
According to Peng Li, there is one significant thing to remember when valuing companies in China:"The main difference in the valuation in China and abroad is that in China the valuation is – relatively speaking – much higher than in the US or in Europe." Click To Tweet
And there are three main reasons for this:
Today China’s economic structure is composed of a majority of state-owned companies on which you can’t make an investment. These companies are state assets which means that they are managed by the government. Then, there are listed companies and private companies on which you can obviously make an investment. However, there are only a few thousand listed companies in Cina, around 4000, and they all are very young; and because they are young, they grow very fast, and the growth is a real factor of high valuation.
As reported by Peng Li, the second reason is the lack of investment vehicles or investment options in China. Chinese can’t go abroad or buy US stocks or European stocks; it is purely Chinese stocks. This means that retail investors and institutions put all their money into the stock market and so the valuation goes up very high.
Finally, the third reason is the massive amount of liquidity that has been created by the government in the market. The huge amount of money that had been poured into the market means that a large part of it tends to invest in infrastructure: indeed many of them are directed into real estate, into companies, into the stock market.
So, all those reasons will affect the valuation and make the Chinese companies highly valued. And this must be taken into account when trying to evaluate companies in China.
Make the new economic China Paradigm positive leverage for your business: listen to this episode here!