2012年6月1日 星期五
Nature's Own Hedge Fund
On the day in May 2008 when Mark Tercek, a managing director at Goldman Sachs (GS), got a cell-phone call from a headhunter informing him that he’d likely gotten the job of running the Nature Conservancy, he was so excited that he backed his Jeep Grand Cherokee into a tree, shattering the back window. Anxious that gouging a tree might be a bad omen, he jumped out to see how bad it was. To his relief, he’d done far more damage to his vehicle than the tree.
Tercek spent more than two decades on Wall Street, and none of those years in green think tanks or chained to a bulldozer blocking a logging road. As a city kid from Cleveland who camped and hiked infrequently, he had come late to the joys of the outdoors. Now, it appeared, he’d be leading the world’s largest conservation organization, which has a million members, chapters in 50 states and 34 countries, and more than $5 billion in assets. The Conservancy’s $1 billion in annual income dwarfs all conservation competitors. And it had been run, for most of its 60-year history, by lifelong conservationists. Tercek had big ideas about how to radically change the traditional approach to solving environmental problems and improving the Conservancy’s operations, but would career greenies listen to the theories of a banker?
Photograph by Dave LauridsenLed by Tercek, the Conservancy earned $246 million in investment income last year
Reservations about his background quickly diminished after he took the helm in July 2008: The stock market tanked, real estate cratered, and the Conservancy’s donations and dues, heavily timed to tax-related yearend giving, fell by 27 percent. The organization’s $1.6 billion investment portfolio racked up losses of $321 million by the end of fiscal 2009—especially alarming because the fund typically covered 10 percent of operating costs. The timing was perfect for a guy with a head for numbers to save the day.
Tercek quickly cut $80 million from the Conservancy’s $530 million operating budget and ordered reductions of 9 percent of its 3,700-member staff in February of 2009, a painful decision in a place full of passionate lifers. “I had to lay off a large number of people that I really respected,” says Peter Kareiva, the Conservancy’s chief scientist. “Yet everybody realized Mark was right—that he could prioritize, see this unemotionally, that his Goldman experience was a credit.”
Tercek, 55, didn’t come to the Conservancy to fight financial brush fires. With the help of his board and the input of the Conservancy’s 600 scientists, he wants to remake the face of the American and global environmental movements. He has no quarrel with the current model—largely built on the strategies of confront, litigate, regulate. But by itself, that approach has proven inadequate. “All the things we care about—forests, coral reefs, fish stocks, biodiversity—we have less of instead of more of, despite everyone’s best efforts,” Tercek says.
Environmentalism, he fears, has become too elitist, too white, too partisan, too full of doomsayers, too concerned with saving nature from people instead of for them. He’d like to expand environmentalism to include the world’s largest polluters so that ecologists and corporations can work jointly to preserve nature because it’s the smart economic choice.
He knows that there are “bad actors” who may never see the light and that some of his more confrontational environmental allies believe cozying up to polluters only serves their greenwashing efforts. Greenpeace, for example, categorizes the Conservancy as “a right-wing environmental organization” and frets that collaboration with industry undermines the green movement. In 2009 the Conservancy helped broker pollution credits to three large U.S. corporations to protect Bolivian forests. Greenpeace dubbed it “a carbon scam.”
Tercek counters: “Why wouldn’t we want to work with companies with the biggest environmental footprints? It would be irresponsible for us not to try.”
With his pressed chinos, beige sweater, and polished loafers, Tercek looks far more like a Harvard MBA (which he is) than someone who studied English and published poetry as an undergrad at Williams College (also true). At Williams he acted in plays and seemed likely “to become an artist instead of a business man,” says his wife, Amy Tercek, who has known him since 1973, when they met in high school.
After getting his bachelor’s degree in 1979, Tercek wandered to Japan to learn the language, teach English, and study Aikido, the Japanese martial art. After two years, he talked his way into a low-level data-crunching analyst’s job at Bank of America (BAC) in Tokyo, enjoying it far more than he expected. By 1982 he was at Harvard; he joined Goldman in 1984.
Tercek made partner in 1996, demonstrating a willingness to take on all manner of jobs, including corporate finance and real estate. In 2005 he was named director of Goldman’s relatively new Environmental Strategy Group, working to ramp up investments in sustainable energy. His boss, Goldman CEO Hank Paulson (soon to depart to lead George W. Bush’s Treasury Department), had advised Tercek that it would be a good fit. “The thing about Mark is that he knows how to get things done,” says Paulson, now a senior fellow at the University of Chicago’s Harris School of Public Policy Studies. “He knows how to execute.”
Tercek was in the class of 221 partners who shared in Goldman’s 1999 initial public offering; Bloomberg News reported that partners got stock options worth on average $63.6 million at time of issuance. After much pondering, Tercek tossed his hat into the ring for the Conservancy post. It was curiosity about Tercek’s Goldman credentials that won him an initial interview, but it was his obvious homework on the organization’s mission and vision for where it ought to go that intrigued the search committee. “Choosing Mark was a big step off of the traditional path,” says Gretchen Daily, a Conservancy board member who is director of the Center for Conservation Biology at Stanford University. “But I have to say it’s been tremendous.”
In his spacious, light-filled office behind the glass-and-stone facade of the Conservancy’s building in Arlington, Va., Tercek is totally at ease. Six-foot-four, lean and fit, he wants to make it clear that the Conservancy was a vaunted organization before he arrived—downright Goldman-like, in fact. To date, the Conservancy has acquired more than 117 million acres of environmentally significant land—some of it donated, some of it purchased—which it typically sells to government agencies to be turned into parks or preserves. “Think about it,” Tercek says. “It was global, deal-oriented, entrepreneurial, scrappy, pragmatic. It wanted to get stuff done. It bought things like a merchant bank does. It took principal risks. It felt very familiar to me.” And though it’s not Goldman money, he’s doing fine. The Conservancy pays him $550,000 a year.
Tercek’s biggest bet yet is the Conservancy’s five-year partnership with Dow Chemical (DOW), announced a little more than a year ago. During the project, 20 Conservancy scientists are getting unprecedented access to Dow’s facilities, starting at Dow’s sprawling Freeport (Tex.) plant. The idea is to help the chemical giant do an inventory of its global land and water assets as a way of allowing Dow to put a value on its “natural capital” and to determine how to best protect and enhance it.
“I know there’s a lot of skepticism about these corporate initiatives, but for Dow to agree with us philosophically that it relies on nature for business reasons and to begin to put a business value on its natural assets, that’s huge,” says Tercek.
There’s nothing new about environmental groups aligning with corporations; indeed, core to the Conservancy’s success has been its ability to raise huge sums from Big Business and use the money to buy those millions of acres. But no green group has ventured this far into the weeds with an industrial conglomerate of Dow’s size, reputation, and reach to work on a project of this ambition. Dow has annual sales of $60 billion, and its 5,000 products are manufactured at 197 sites in 36 countries. It frequently finds itself in court over pollution issues. For example, the company is involved in a nine-year-old lawsuit filed by Saginaw County (Mich.) residents alleging Dow is responsible for dioxin contamination of a nearby river. While a state judge denied class-action status to 2,500 plaintiffs last year, individual suits are continuing. Dow says it will continue to “vigorously defend” itself.
In the past, an industrial giant with a plant surrounded by wetlands might have seen the marshes as a cheap place to dump pollutants, laws notwithstanding, or simply as a nuisance that brings constant battles with bird-watchers. But gains in ecological science prove that wetlands are important natural buffers against storm surges, never mind their value as biodiversity havens and natural filters of water. If a company is persuaded to see the marsh as “green infrastructure”—that is, as an asset whose well-being enhances the security of its plant—it changes corporate thinking. Marsh conservation becomes integral to the company’s business strategy.
Dow’s Freeport-area facilities cover 5,000 acres of land and coastal marsh. Dow, increasingly concerned about the vulnerabilities of its facilities to hurricanes, had been thinking about building concrete flood walls through that marsh. Conservancy scientists have persuaded the company to consider marsh enhancement instead, though Dow says it’s premature to speculate on an outcome and Kareiva, the Conservancy’s science chief, says “careful engineering calculations” and modeling studies will determine whether that’s a practical alternative.
If naturally enhancing the wetlands turns out to be the solution, Dow would be putting a business value on its natural infrastructure: It would get a relatively inexpensive barrier against storm surges while fish and bird habitats get restored. And the Conservancy will have scored a major coup if Dow takes this theory and applies it globally to all manner of natural assets—and other big-footprint industrial conglomerates follow suit.
For its efforts, the Conservancy is getting $10 million from Dow to cover its research costs—an eyebrow-raiser for environmental groups such as the Environmental Defense Fund, which won’t take money from its corporate partners to avoid accusations of greenwashing. “There’s no road map for this,” says Neil Hawkins, Dow’s vice president of sustainability, “but unless you start trying to put values on these assets it’s hard to put that value into your global business strategy.”
Dow has agreed that the research will be published in annual progress reports, and significant scientific studies that come out of the collaboration will also be offered to peer-reviewed academic journals, meaning that failures and problems will be published along with successes. The Conservancy won’t work with companies that don’t meet those terms. Even so, “we have to be careful,” Tercek concedes. “We don’t want to appear to be fooling anyone—or that we’re being used.”
You don’t have to go far to find doubters of this strategy. “Oh, come on, Dow is awful,” says Anne Rolfes, head of the Louisiana Bucket Brigade, a watchdog organization in New Orleans that has sparred with the company over alleged pollution. “We would never take money from them or partner with them.”
Kareiva sympathizes: “A community will have a bad experience with a subsidiary and say, ‘Why are you working with them?’ Our measure has to be net benefit on a global scale—a recognition that the earth as a whole will be better off, while recognizing there will be local setbacks.”
On Tercek’s watch, the Conservancy has emerged from the recession in stronger shape than ever. Despite that $321 million loss to its portfolio in 2008-09, nobody panicked. Last year the Conservancy earned $246 million in investment income alone, in part by putting 17 percent of its $1 billion endowment in rebounding hedge funds and an additional 19 percent in private equity. Its nearest conservation rival in funding, the World Wildlife Fund, has total revenue of under $240 million.
One Tercek move that won over the Conservancy’s demoralized scientific staff was promoting Kareiva to the executive level and insisting he be in the room when any major decisions are made. Tercek calls him “my closest intellectual adviser.” The other major staffing change was more startling; Tercek recruited the “wrestling guy.” Hiring Geof Rochester away from World Wrestling Entertainment two years ago to shake up the Conservancy’s approach to membership and marketing is the embodiment of Tercek’s expansive view of what conservation needs to become.
Rochester, a 53-year-old African American who ran the marketing for the WWE’s million-viewer pay-per-view WrestleMania, is trying to apply lessons of relevancy and longevity from the WWE to the Conservancy. “Wrestling started in TV, and now look—they’re in pay-per-view, books, movies, DVDs, video games,” says Rochester. “Ultimately, the conservation movement needs to appeal to its audiences in all those platforms. We need reengagement with the public around the world.” Conservation, he says, “risks becoming irrelevant if it doesn’t change. Look at the demographics—surveys show 30 million people consider themselves ‘engaged’ in conservation in America.” Yet the same surveys count 130 million more who are “concerned” but not yet members of green organizations. Those are the people Rochester wants to reach.
Rochester has launched member initiatives in Hong Kong, Australia, and Latin America with a goal of reaching 5 million dues-paying members. There is also a push to create Conservancy preserves in the heart of major cities, where the organization’s work can be on better display.
When The Lorax opened recently, the Conservancy negotiated a tie-in with its global tree-planting program, an effort the group hopes to repeat. “We’re a brand,” says Rochester, “and there’s no reason we can’t be recognized in almost every country in the world.” Rochester says he’s advocating more “evolution than revolution,” since the Conservancy isn’t about to abandon its core mission of raising money to buy conservation lands.
“That’s still incredibly valuable,” says Tercek, “and we want to remain nimble and opportunistic in that regard. But we now know this approach will never be enough. We just can’t buy everything worth saving.”
Yielding to Panic
Marinate your mind in this for a minute: Long-term U.S. Treasury yields are essentially at a 220-year low, says Barry Ritholtz. Mind you, 1792 was when two dozen brokers met under a buttonwood tree in Lower Manhattan to shake hands on what would ultimately become the New York Stock Exchange. And when George Washington, while test-driving his second set of experimental dentures, cast the nation’s first presidential veto. And France first successfully used its guillotine. Those 220 years traversed at least three panics, two depressions, two world wars, multiple global economic crises, a Great Recession, and “Who Shot J.R.?”
All that history be damned; on Thursday the 10-year Treasury touched a record-low yield of 1.5309 percent. Thirty-year bonds, for their part, fell to a yield of 2.6 percent, which is just above the all-time low they set in the midst of the Panic of 2008. Apparently our times are so fraught with fear and the need to flee to safety that the Treasury market is pricing in historic amounts of misery. As the Wall Street Journal’s Dennis Berman tweeted, “Even in ancient Babylon (4%), Medieval Europe (6%), 1800s America (4%), no one was paying 1.6% for 10-year money.”
Why would anyone loan money to Uncle Sam for so long at so little? After all, it’s not like our fiscal prospects are such great shakes. Surely there must be a price to pay for epic amounts of monetary stimulus—three-plus years of zero-interest-rate policy, two rounds of quantitative easing—and Washington’s inability to balance its books. But the consensus is apparently that we’re less doomed than our cousins across the pond, so much so that the hunger for U.S. debt becomes increasingly rapacious with every new turn of the global financial crisis. “If you look at the global marketplace, we are the supermarket of safety,” says William Larkin, a bond manager at Cabot Money Management. “We’re talking about an elevated level of fear. This is mainly driven by growing uncertainty in Europe. People are saying ‘I can buy the Treasury, and I know my money will be returned to me.’”
By comparison, the Standard & Poor’s 500-stock index offers a 2.18 percent dividend yield. But so what? Outflows from U.S. equity funds are all the rage—especially to fund more purchases of bond funds. Writes Randall Forsyth in Barron’s: “This mindset is sending investors fleeing from risk assets, which by most valuation metrics are relatively cheap, and toward safe-haven government bonds that, by any conventional scale, offer no investment value whatsoever at the lowest yields in history and unprecedented outside of Japan.”
To call Treasuries a crowded trade is to flog the too-obvious. Indeed, yields that seemed impossibly low just months ago manage to keep falling ever lower. Still, you can’t help but wonder if long-term bond investors who accept essentially negative yields after inflation and taxes really understand what they are getting into. And how difficult it could be to get out of.
Consider that in 2007, before the onset of the financial crisis, 10-year Treasury yields were at 5.3 percent; they’ve averaged just less than 5 percent for the past two decades. Investing in the 10-year at today’s record low would entail a 19 percent loss if yields shot up to 5 percent by 2014.
And they call this the risk-free rate.
A Flood of Crude Could Mean Oil Prices Will Drop
Two measures of oil availability have reached their highest levels in decades, according to Michael Shaoul, CEO of broker Oscar Gruss & Son. Demand “has been overwhelmed by supply,” he says.
Are Economics PhDs Learning the Wrong Thing?
“Sure, I’ll be your straight man,” says Gene Grossman. He’s the chair of Princeton’s economics department, which U.S. News & World Report ranks in a four-way tie for first with Harvard, MIT, and the University of Chicago. He has rather reasonably agreed to answer a rather rude question: Are the best graduate programs screwing up their economists?
Last week Bloomberg Businessweek ran a short piece on Varoufakis, the former head of the economics PhD program at the University of Athens. Funding has run out for the program, and Varoufakis is now teaching in Austin, Tex. When it was thriving, however, the PhD program in Athens tried to train economists in a new way: It forced them to understand the math of economic modeling but also taught them philosophy and the history of economics.
Varoufakis wanted his students to understand what economic models couldn’t do. “One of the great problems that economics has as a discipline is that we have a tendency to mathematize our theories,” says Varoufakis, “Physicists have done wonders with this, but the problem is, the moment you try to mathematize an economic hypothesis, you end up with mathematical models that are highly indeterminate.” By “indeterminate,” he means that economic models can produce a range of answers. You can fix this by assuming one of two things to be true: Either everyone has the exact same motivations, or time doesn’t exist. “If you introduce both complexity and time in the same model,” says Varoufakis, “anything goes.”
The Rational Expectations hypothesis, for example, predicts that an increase in money supply from a central bank will necessarily create inflation. It assumes that everyone is the same, omniscient person. Varoufakis points to formulas such as Black-Scholes and Value at Risk, which investors use to price derivatives and assess firm-wide risk. “They’re actually very nice,” he says, “I spent many hours happily studying them; they were like a piece of art. And each and every one of them had the same assumption in it—that everyone knows everything in advance.” The problem, says Varoufakis, was not the models themselves, but the way they were taken as articles of faith. Having mastered a model, he says, “you feel that you are one of the masters of the universe, it gives you a false sense of security when, effectively, [the models] are assuming reality away. ”
Journals and universities prefer economists who can present something that looks like science. Economists who enter the financial sector find themselves committed to assumptions that make them lots of money. Abstract models inform concrete government policy. “My extreme worry,” says Varoufakis, “was that the young PhDs coming through the ranks worldwide were utterly illiterate.”
I e-mailed James K. Galbraith, who holds a chair in government and business at the Lyndon B. Johnson School of Public Affairs at the University of Texas, Austin. He suggested that UT hire Varoufakis, so he’s inclined to be sympathetic, but he shares the same perspective. In an e-mail, he writes about the “mysticism” in models, which he defines in two ways: “(1) models that traffic in concepts with no operational meaning—abstractions that will never be observed or measured—and (2) models that frame (mis-frame) problems in ways that lead to extreme and unreasonable policy conclusions. … These are serious issues in the United States, and they do have something to do with the lack of training in economic history and history of economic thought.”
Galbraith’s and Varoufakis’s worry has been around for 20 years, says Grossman at Princeton. “It comes and goes. It particularly comes when economic times are hard, when it appears that the old way has let us down.” Did the old way let us down? “No,” he answers, “which is very different from saying we know everything. … I don’t think medicine has let us down because there are diseases we don’t know how to cure.”
Grossman agrees that models can be abused. An economist is obliged to spell out assumptions, he says, though “just because you write down your assumptions doesn’t mean they’re good assumptions.” Like Varoufakis, he describes interests in the real world that are neither neutral nor academic. “There’s no question that if you’re a trade economist and you write a model that says protection is great,” he says, “the interests will use your model. And they will hire you.”
What economists talk about, he says, matters to pocketbooks—more so than with physicists. But he doesn’t think this should change the way his department trains economists. He is in the business of teaching people who will graduate and go looking for jobs. “You have to teach graduate students the discipline,” he says, “otherwise you’re doing them a disservice.” Princeton has not altered its approach since the financial crisis, other than changes individual professors have made to their core macroeconomics courses.
Harald Uhlig, chair of the economics department at the University of Chicago, another of the No. 1-rated economics graduate schools in the U.S., offers a kind of a model of his own. In an e-mail, he writes: “Above all, I do not believe in central planning. What is true in private markets is true in PhD education as well: It is good to see different places try different approaches, to let the PhD students decide where they want to be educated, and to let the marketplace for future scientists decide what works and what does not. I am sure that if the new PhD program in Athens is successful and produces the top young economics researchers of the next generation, many other PhD programs will take notice.”
It’s not clear whether Uhlig already knew that the department in Athens is on its last legs, so we’ll take his e-mail at face value. It, too, contains an assumption: that the market for grants and hires at economics departments is driven by quality and value to the public alone.
The Subprime Money Behind a Winning Horse
When his colt I’ll Have Another charged from behind to win the Preakness Stakes on May 19, J. Paul Reddam joined an exclusive club of thoroughbred owners who’ve been one race short of the Triple Crown. Not far from the Baltimore track, Maryland state regulators were probing the consumer loan business that helps fund Reddam’s wildly successful investment in horses.
Reddam, 56, a former philosophy professor, made his fortune with a subprime mortgage firm, DiTech Funding, which he sold to General Motors (GM) in 1999 for more than $240 million. He is now owner and chief executive officer of CashCall, which makes mortgage and short-term loans. The Anaheim (Calif.)-based company has tangled with three states over alleged violations of consumer protection laws.
West Virginia officials, among the company’s most persistent critics, allege in a civil lawsuit that CashCall violated state usury rules by using a front company to charge annual interest as high as 99 percent and engaging in abusive debt-collection practices. “CashCall created a business model intended to fly under the protective radar of West Virginia laws,” Attorney General Darrell McGraw said in a 2008 press release when the suit was filed. The case went to trial in October, and the judge has yet to render a verdict. CashCall said in legal filings that its business in West Virginia was legal under federal law and is making a similar argument in Maryland.
CashCall paid $1 million in August 2009, without admitting or denying wrongdoing, to settle claims by California that its practices included making excessive calls to borrowers demanding repayment at work and at odd hours. Maryland, which last year proposed banning the lender from offering mortgages because of a licensing violation, also brought a 2009 action against CashCall that resulted in a $5.7 million fine from an administrative judge. The fine is on hold pending an appeal in an unrelated case that involves a similar issue of law.
Reddam, whose racing team is preparing I’ll Have Another for the final leg of the Triple Crown, the Belmont Stakes in New York on June 9, has CashCall emblazoned on his jockey’s silks. He blames the firm’s legal problems on the confusing patchwork of state regulations. “Everybody has a different idea of what should and should not be done, and what’s OK in each state,” he says.
Reddam worked for several mortgage lenders before founding DiTech in 1995. He sold DiTech to GMAC Mortgage, a subsidiary of General Motors that became Ally Financial after its parent company’s bankruptcy in 2009. DiTech became part of Ally subsidiary Residential Capital, which because of subprime mortgage losses was “a millstone around the company’s neck,” Ally CEO Michael Carpenter said in 2010. The subsidiary filed for bankruptcy on May 14, days before the Preakness.
Like DiTech, CashCall advertises widely to drive traffic to its website. An early pitchman was the late Gary Coleman, who starred in the 1980s TV series Diff’rent Strokes. CashCall is on pace to originate $9 billion in mortgages this year, Reddam says. Besides mortgages, the firm makes unsecured loans in amounts of as much as $25,000, according to its website. That part of the business amounted to about $180 million in loans last year, he says.
In an example of a loan on its website, CashCall says it could offer a borrower $2,525 to be paid back in 47 installments at an annual interest rate of 184 percent. The high demand for the loans, Reddam says, demonstrates that his businesses are filling an important gap in consumer finance. “The banking industry is missing this entirely,” he says. “There is a tremendous need for people to borrow a few thousand dollars to help them over whatever crisis they are having, and the banks are not serving that need, and they should.”
The bottom line: Reddam has faced regulatory actions in three states over his finance business, which made $180 million in unsecured loans last year.
Chinese Private Equity Firms Flex Their Muscles
Not that long ago, Blackstone Group (BX), TPG Capital, Goldman Sachs Group (GS), and other foreign buyout specialists had little trouble muscling out local rivals for deals in China. Today, Chinese firms dominate the private equity landscape. Investments by Chinese firms in the world’s second-biggest private equity market rose to $7.8 billion last year, overtaking for the first time the $7.4 billion that came in from U.S. and European funds, according to Asian Venture Capital Journal.
The shift coincides with China’s stepped-up efforts to develop homegrown private equity firms such as Beijing-based Hony Capital. Local firms enjoy privileges over foreign rivals when it comes to regulations and access to funding in yuan, also known as renminbi. “Renminbi fund managers have a huge advantage in terms of speed of execution as well as easier exit opportunities within China,” says Chris Meads, Hong Kong-based global head of investment at Pantheon, a London private equity company that has invested $2.7 billion in Asia. “Deal flow is being diverted to renminbi funds because it’s just easier for them.”
The Chinese government treats local businesses that receive capital in U.S. dollars or other foreign currency as foreign-invested enterprises, which means additional layers of required approvals from regulators, even for actions as routine as opening a retail store. “Many Chinese companies realize taking money from any foreign-currency fund will result in more restrictive scrutiny, and they just can’t stand the red tape,” says Jessie Jin, a Shanghai-based partner at venture capital firm GGV Capital in Menlo Park, Calif.
To counter this challenge, Goldman Sachs announced its first yuan fund in China in May, followed by Morgan Stanley (MS) a week later. In February, TPG Capital, the Fort Worth-based buyout firm, said it raised 4 billion yuan ($630 million) in a first round of fundraising for its renminbi fund, 90 percent coming from private investors in China. “For the global players aiming for a large market share in China, without renminbi funds, you probably feel more or less insufficient,” says Eric Zhang, a Beijing-based managing director at Carlyle Group, which runs a private equity fund with the Beijing municipal government.
Whether renminbi investments by foreign managers get the same regulatory treatment as domestic private equity funds is subject to interpretation by local authorities. China hasn’t formulated nationwide rules governing the private equity industry because there is little cooperation among regulators, including the National Development and Reform Commission, the China Securities Regulatory Commission, and the People’s Bank of China, the central bank. Global funds also have been tripped up by currency-conversion restrictions, GGV’s Jin says. Companies receiving investments in foreign currencies can’t exchange them for yuan all at once. They need separate approvals to convert portions of those funds to pay employees or buy equipment, she says.
Domestic private equity firms have an edge over global rivals because they’re more focused on just one market, says Hony Capital Chief Executive Officer John Zhao, who raised 10 billion yuan last year for the firm’s second renminbi fund, doubling the size of a previous one in 2008. “Our decisions will be quicker” than foreign funds, he says.
Executives from Carlyle and Goldman Sachs counter that big Chinese companies still prefer to deal with well-known foreign investors because of the expertise they provide in listing abroad as well as orchestrating cross-border acquisitions. “To stay competitive, we need a local fund and a local team, but we always have to deliver value on top of capital,” says Stephanie Hui, a Hong Kong-based managing director at Goldman Sachs’s private equity unit.
Despite the increased local competition, executives at global private equity firms say they’re still finding opportunities to invest in transactions that give them managerial control. Buyout deals in China more than doubled last year, to the highest level ever, data compiled by consulting firm Bain show. Leveraged buyouts increased to $7.5 billion, from $5.9 billion in 2010, according to Preqin, a London-based data provider.
While global firms face multiple bidders for good businesses in China, the number of target companies also is rising, says Goldman Sachs’s Hui. “There are still attractive deals for foreign investors in China,” Pantheon’s Meads says. “They have to work a lot harder than they have in the past to get them.”
The bottom line: Since 2008 the number of Chinese private equity firms has almost doubled to 129. Foreign firms face regulatory and funding challenges.