Seoul, Korea. At the Harvard Project for Asia and International Relationsâ€™ annual conference, I gave a talk today titled â€œChina, The Worldâ€™s Best Risk-Adjusted Investment Opportunityâ€. A copy of the PPT can be downloaded by clicking here.Â
The slides are mainly just talking points, rather than fully fleshed-out contents. The idea was to work backwards from the conclusion, as propounded in the title, to the reasons why. My argument is that a confluence of factors are at work here, to create this agreeable situation where investing in Chinese private companies offers the highest returns relative to risk.
Those factors are:
- Chinaâ€™s current stage of six-pronged development (Slide 2) Â
- A large group of talented entrepreneurs tested and tempered by the difficulties of starting and managing a private business in China (Slide 5)
- Plentiful equity capital (from private equity and venture capital firms) with clearly-articulated investment criteria (Slide 6)
- An investment strategy that offers multiple ways for capital to impact positively the performance of a private company,Â lowering the already-minimal risk an investment will tank (Slide 7)
- The returns calculus (Slide 8 ) â€“ the formula here is profits (in USD millions) multiplied by a p/e multiple, producing enterprise valuation. The first equation is an example of investor entry price, pre-IPO, and the second is investor exit price, after a round PE investment and an IPO. The gain isÂ twenty-fold.Â Thus do nickels turn intoÂ dollars
- Downsides â€“ best risk-adjusted returns does not mean risk-free returns. Here are some of the ways that a pre-IPO investment can go bad (Slide 9)Â
Since the audience in Seoul was largely non-Chinese, I also included two slides with the same map of China, illustrating the progression of economic development in China, from a few favored areas on Chinaâ€™s eastern seaboard during the early phases, to the current situation where economic growth, and entrepreneurial talent, is far more broadly-spread across the country.
As a proxy to illustrate this diffusion of economic dynamism across China, slide 4 shows, in gold, the areas of China where CFC has added clients and projects in the last 18 months. Slide 3 shows the original nucleus of economic success in China â€“ Guangdong, Fujian, Zhejiang, Shanghai, Jiangsu and Beijing. We also have clients in these places.Â
On seeing Slide 4, I realized it also displays my travel patterns over the last year. Â Iâ€™ve been everywhere in red or gold, except Gansu, but adding inÂ Yunnan, during that time. Thatâ€™s a big bite out of a big country. This trip to Korea is my first flight outside China in two years, excepting a couple of short trips back to the US to see family.Â
In the next two weeks, after returning from Korea, Iâ€™ll make three separate trips, to Henan, Jiangsu and Beijing, to visit existing clients and meet several potential new ones. While Chinese private SME provide the best risk-adjusted investment returns anywhere, you canâ€™t do much from behind a desk. Opportunity is both widespread and widely-spread.