In August 2005, SAIF invested $30 million to acquire 15 percent of Shunchi (China). This is the first time that one of the world's top private equity firms has cooperated with a Chinese real estate agent. Shunchi (China) quickly became the industry leader after the capital injection.

Presently, Shunchi (China) has successfully landed in 30 cities, including Tianjin, Beijing, Shanghai, Suzhou and Chongqing. It has 900 chain stores and 6,000 highly qualified employees, forming a broad sales chain. Shunchi (China) continues to grow with improving brand influence and profitability. SAIF's 15 percent stake has doubled each year and the return that its $30 million investment generated has greatly exceeded its original value.

"However, we do not invest in every enterprise that matches our criteria," Yang said. "The key is how much the return will be. For example, a couple of years ago, many service providers (SPs) with 300 million yuan in revenue and tens of millions in profit came to me for financing. But after we did our research, I came to the conclusion that SPs were only a transition in the chain of value. There is the content provider at the top and the telecommunication operator at the bottom. Once these two ends connect, SPs will be squashed."

Therefore, SP business models are unsustainable and do not have core competitiveness and SP companies will experience slow, and in some cases, negative growth, according to Yang.

"Maybe my focus on value keeps me away from this type of company," Yang said. "I wouldn't bother with companies that cannot deliver a profit within the first few years."

High-profit mid-to-large companies

At the end of March, SAIF completed its third phase of financing, raising $1.1 billion. The funds came mainly from investment institutions in the United States and Europe, family enterprises, college funds and superannuation funds, including the Princeton University fund, JPMorgan, the Carnegie Mellon fund and the Rockefeller fund. Almost all investors in the second phase have continued their investment.

With regard to the new round of investment plans, Yang stated that there are no strict parameters as of yet, but there will likely be a stricter approach on the development stage of enterprises.

It is known that SAIF is not particularly picky about which sector to invest in. For instance, in the first phase, they focused on IT, Internet and related sectors. In the second phase, there was no obvious dividing line between their preferred sectors. Therefore, in the upcoming third phase of investment, there will be no sector-based restrictions.

Despite this, Yang revealed that the focus would still be on traditional industries, i.e. industries that are closely related to clothing, food, accommodation and travel, and the extended industries such as logistics, manufacturing and medical. The scale of investment, however, will be more defined.

"In China, we only invest in mid-to-large enterprises which are experiencing fast growth," Yang said. "Two conditions must be met. One is the annual profit should be over 30 million yuan; and the other is that they must possess a simple business model, a mature team and strong sustainable growth." Yang continued to say that although 30 million yuan in profit sounds great, in fact, there are many such enterprises in China and they cannot be counted on to be successful. Real successful companies, such as the China National Petroleum Corp., generate over 100 billion yuan in profit each year.

Yang explained they created the two conditions following thorough study and research.

"Another reason is that SAIF's fund in this round is quite large; if a single investment is too small, it will affect the overall investment plan," he added.

SAIF's investment plan is created based on the life cycle of the fund: a total of 11 years from the beginning to exit. The investment period will be the first four to five years, when $1.1 billion will be fully invested. The following three to four years will be the growth stage. After that, it is expected to generate a profit. It takes two years for companies to be publicly listed or acquired before venture capitalists can exit.

Companies need confidence

"SAIF is a long-existing investment institution with a well developed investing team," said Yang. "Personally I am an investor purely focused on value, and will never gamble. Therefore, I expect to see some real value in the companies we invest in, such as an annual profit of 30 million yuan and an annual profit growth of 30 percent."

"We expect to see instant results for our invested companies and it is a requirement that the entrepreneur is very mature and realistic," Yang explained. "We don't want to waste time in educating and training entrepreneurs, and entrepreneurs do not need to make a lot of effort to figure out how to tell a better story before we are able to finalize the investment."

"It is very important for venture capitalists to judge if the story told by a company is exciting or not," Yang stated. Venture capitalists with over three years' experience can easily tell whether a company has a sound business model. The hardest parts to judge are where the company's core competitiveness lies, whether it is sustainable and whether its management is mature.

"Sometimes, the first five minutes at a company is enough for a decision to be made," Yang said. "For example, a lot about a company can be determined if the receptionist is professional, if the other employees are concentrating on their work and if the employees' faces show confidence."

Until today, most of the companies that SAIF has invested in are leaders in their respective fields. After receiving the investment funds, the companies have generally experienced further elevation on a large scale.

(Xinhua Finance)