Chris Lee is a good man to talk to if you're thinking about investing in China.
Based in Vancouver, Mr. Lee is a former banker who worked in corporate finance and wealth management at Swiss bank UBS in the 80s and 90s. Over the past year, he's racked up the air miles travelling eight times to China, putting together a $200-million private equity fund tailored to interest newly-flush Chinese investors in Beijing and Shanghai.
From Mr. Lee's view, if you're want to invest in China, why not find out what the Chinese are investing in? So prior to his most recent trip to China, I sat down with Mr. Lee to find out what investors in Beijing, Shanghai and Hong Kong are buying into.
Mr. Lee is the president and major shareholder of the fund, which he named Mera Peak, in honour of a Himalayan peak scaled by his wife Barb, a doctor who runs ultramarathons.
To date, Mr. Lee has raised $30-million and says there's another $20-million in sight. The recession caused investors to back off last year, but he notes that business has picked up in the last eight weeks, and now believes the fund will start operating in early 2010.
The fund requires a minimum investment of $5-million for five years. Mr. Lee and his Chinese partners will be governed by the opportunities presented by the market. Sometimes investors' funds will be reinvested; sometimes the interest in companies will be sold and there will be some return on investment "if market conditions warrant," he emphasizes.
A hot sector in China right now is renewable energy or green technology, he says. China is one of the most polluted countries in the world and needs to clean up its act. An emerging entrepreneurial class is doing just that, he says.
Mr. Lee likes a company that builds batteries for electric cars that he believes will be a rival to the Berkshire-Hathaway-backed BYD Auto.
Mr. Buffet's MidAmerican Energy division put $230-million into BYD last year. MidAmerican chairman David Sokol said BYD could become the world's largest car company on the strength of its electric car, which is already selling in China and is scheduled for the U.S. and European markets in 2010-2011. That's about the same time as the Chevy Volt hits the showrooms.
BYD got its start making batteries - if you have an iPod, it probably has a BYD battery in it. In 2003, owner-entrepreneur Wang Chuanfu bought a state-owned car company, and turned it into the $4-billion-plus enterprise it is today.
"China has a need for green, and they are developing technologies applicable elsewhere in the world," says Mr. Lee. "People are innovative and quick to learn. It's a combination of updating or modernizing what exists as well as creating new technologies."
For Mera Peak, he is also looking at LED technology companies and biotech firms.
Mr. Lee is also considering investments in iron-ore, coal and gold properties for the fund. He has some expertise in that area since he has been the president of a Vancouver mining company called Canmark International since the mid-90s and travelled to China looking for opportunities for it.
While it is possible for foreign investors to buy China-focused funds and trade shares on the major Chinese exchanges, Mr. Lee says that if you want to do "direct" business in China, thanks to the unique circumstances of the emerging economy "it usually has to be a foreign joint venture." As a westerner of Chinese ancestry, Mr. Lee feels he is better positioned than most outsiders to understand what is really going on.
He joined up with his China-based partners when, through Canmark, he met with the owners of a specialty pipe company. What started as meetings in coffee shops grew into a partnership. Now he has a network of contacts in business and government, and in China, government is still very much part of business. He values his partnerships as critical - he may look Chinese, but he grew up speaking English in Vancouver, and still uses an interpreter.
Currently, he is talking to a company whose situation is common in China: it's a state enterprise that wants to privatize. The government wants and needs the cash. Typically the government floats off a division yet keeps a core stake so the state can keep its hand in the game. In time, likely these companies will go public, but the state will divest itself slowly, if at all.
But business in China is evolving. Global equity players such as Berkshire-Hathaway, KKR & Co. and The Carlyle Group, which just last month acquired 17.3 per cent of Guangdong Yashili Group Co., one of China's largest infant formula companies, are looking for big deals worth hundreds of millions of dollars. However, there simply aren't that many of them yet.
China's business sector is still figuring out the fundamentals of private enterprise. "Part of the challenge investors face, is how you structure a company, the ownership and assets," Mr. Lee explains. "I'm there because our model is different. We're not targeting an enormous fund - our edge is the relationships we've built over time."
"Business can be done quickly, or it can go very slowly," Mr. Lee says. "I've heard that the word 'no' doesn't exist in the Chinese vocabulary. It's more polite not to respond at all. So it helps to have local partners, or you could be sitting around for nothing for a long time."
Mr. Lee's sense that the boom is back in China is mainly anecdotal. For example, he wasn't able to fly to Beijing one Saturday - his regular flight was full and he had to wait a day. Hotels that just a few weeks ago were empty are full again.
"Confidence is back. Capital is available again," he says. "It's driven by a move by the national government to focus on infrastructure. Also the driving resurgence of the West has led to a shift in sentiment."