China First Capital (CFC) this week announced that weâ€™ve established a strategic partnership with Horwath Capital China (HCC), part of Crowe Horwath, one of the ten-largest international accounting firms. HCC is led by David Yu, a very impressive individual and fast becoming a good friend. David qualified both as a lawyer and a CPA, and has built HCC into a powerful financial services firm, based in Beijing, and focused largely on providing Chinaâ€™s SME businesses with accounting, legal and other strategic advisory services.
I wanted to spell out more of what lies behind this partnership â€“ why weâ€™re doing it, the strategic intent, the scale of the opportunity, and the ambitious goals we hope it will achieve. Through the partnership, our aim is to raise the level of financial services available to Chinaâ€™s best SMEs, to meet their specific needs. Thatâ€™s a tall order, and weâ€™re cognizant of the challenges. Itâ€™s now down to both companies to make this a reality.Â Â
HCC are an optimal partner for China First Capital, and so weâ€™re genuinely pleased and honored to be working with them. CFC and HCC both share that same focus on Chinese SMEs, and for the same good reason: both firms see that many of Chinaâ€™s best SMEs will emerge over the coming years as some of Chinaâ€™s most successful and dominant private companies. They wonâ€™t be â€œSmall or Mediumâ€ for long. Â
While Chinaâ€™s largest and most internationally-known companies tend to be partly state-owned (China Mobile, CNOOC, Sinopec), the private sector is where Chinaâ€™s economic future resides. By some estimates, over 70% of Chinaâ€™s GDP is generated by private companies. Twenty years ago, the percentage was less than 10%. Thatâ€™s a remarkable transformation, unparalleled in modern economic history. Another key differentiator: Chinaâ€™s economy has privatized without privatization. In other words, this shift from state-owned to privately-owned economy happened not primarily because state firms were privatized. Thatâ€™s the route taken in Europe, most famously in the UK, where during the 1980s, Margaret Thatcher sold to private investors previously nationalized companies like British Petroleum, British Telecom, British Gas. Â
In China, privatization has played a very minor role in lowering the governmentâ€™s share of GDP. Instead, China created legal and economic circumstances where private companies could form, compete and prosper.Â Â And prosper they have. With few exceptions, the best and fastest-growing companies in China are now private ones, the SMEs that China First Capital and Horwath both work with. These SMEs are still smaller in scale than the state-owned giants. But, that will change. Â
The strategic rationale behind our partnership with Horwath is to â€œchange the gameâ€ in corporate finance and advisory services in China. The partnershipâ€™s explicit goal is to be the first in China to deliver to these strong SMEs the highest international standards of corporate financial advisory work. Together, we offer SMEs a complete platform including capital-raising, audit and M&A advisory, to assist in their continued growth, and eventual IPO listing on public stock markets. Â
No other firm can offer this range of services to SMEs, at a uniformly high international level. The big investment banks and accounting firms charge too much, and generally wonâ€™t work with smaller firms. Domestic firms tend to be weak in areas such as private equity capital-raising and implementing international accounting standards that structure a Chinese company for a successful IPO. Â
Just as important is what we won’t do. We won’t push a Chinese SME to go public before the right moment; we won’t put earning fees ahead of the best interests of the client. Sadly, in China, there are many, many precedents of unscrupulous or unprofessional “investment advisors” who have damaged or destroyed Chinese SMEs by pushing them to IPO too early, on the wrong market (example, the US Over-the-Counter Bulletin Board) or via an ill-structured “reverse merger”. The advisors make millions, and the SMEs never recover.Â
Both David Yu and I share a similar purpose here: we think these great Chinese SMEs should have access to financial advisory services that are of a similarly high caliber to what larger companies now use.Â We are not chasing fees. If so, weâ€™d go after larger companies. We both see an opportunity to work with some outstanding SMEs that are on the verge of becoming industry leaders. If we do our part with this partnership between CFC and HCC, the SMEs reach that next level of success more quickly and efficiently than they would otherwise.
That’s the measure of success for us — not that CFC and HCC will increase their own fee income. If that happens, it should only be a result of the one thing that really matters to us: that our SME clients grow faster and strongerÂ than their peers.Â