China Jianyin Investment hosted the JIC Investment Forum themed “The Direction of Equity Investment in the Era of Capital Challenges" in Qingdao on June 17. The forum focused on the directions and the broad prospects of equity investments in the era of capital challenges. It aims to provide more feasible options for the development of domestic equity investment, and to open up a broader vision and horizon for the healthy growth of domestic capital markets.
Participants discussed on such topics as the role of equity investment in serving the real economy; and the role of wealth management agencies in matching the mid-to-long-term financial needs of customers with the transformation and upgrading of the real economy, in an attempt to boost the growth of new players, new business types, and new impetus.
It has come to a time for equity investment in China to become more responsible, accountable and visionary for the development of the real economy. The development of this era and the changes in the external environment have prompted equity investors to seek a better combination of the investment and the real economy for long-term development. In the past two decades, Chinese equity investment made gains mainly from the natural growth of enterprises, capital market arbitrage and benefits of policy reforms, etc.. However, profound changes have now taken place in the external environment.
The world economy, despite its modest recovery, still lacks growth momentum. Short-term policy stimulus failed to generate positive results, while deep-seated structural problems remain unsolved. In China, the economy is facing downward pressure. The mismatch between excess capacity and an upgrading demand structure is acute, and the economic growth lacks endogenous drivers.
From the industry point of view, the transformation and upgrading of traditional industries and the cultivation and strengthening of new industries require capital to provide additional value, including strategic guidance, operational upgrading, and resource network. At the regulation level, regulators have made both efforts to reform the financial regulatory framework to fit into the development of modern financial market, and regulate financial practitioners, which indicate regulators’ determination to purify the capital market and shift the focus from the virtual to real economy.
This means that as the global and China’s real economy are confronted with multiple challenges and the arbitrage opportunities and policy dividends have disappeared, the previous short-sighted profit model is no longer sustainable. Without the healthy development of the real economy, equity investment will lose the foundation for making profits.
The indiscriminate short-term-profit-driven approach could not help in establishing effective barriers to entry, and it is technologically backward. Only by making investment from an industry point of view with a cool head and self-control can we ensure survival and sustainable development.
Equity investment enterprises should see their role as one that integrates and synergizes industry and promotes industrial development. Vision creates future. The self-positioning of equity investors determines how far they can go and how much value they can create. If they simply pursue equity participation or co-investment, they would end up with short-term return from policy benefits, corporate natural growth and price differences, with little decision power on portfolio companies.
If they aim to become a share-holding company, and promote industrial integration and optimization, they will stand a chance to benefit from growing the industry and gaining continuous return. At this point, the return is not only from the capital market and the company's own cash flow, and more importantly, it is the value-added equities, and the power to decide the financial and operational policy for the portfolio company. Therefore, in order to make the equity investment into a long-term, sustainable, and valuable business, a more proactive and aggressive approach should be taken when entering the real economy.
In fact, whether given the inherent nature of equity investment or the characteristics of the times, China's equity investment should and must be more responsible, accountable and visionary for the development of the real economy. Equity investment should be dynamically and deeply integrated with the country's industrial restructuring as well as economic and social development.
In this process, investors should move from passive support and assistance to proactive guidance, optimization and upgrading. The previous investment model primarily focused on IPOs or assets restructuring for public listing. Now, investors should take the initiative to create opportunities.
Investment should be made on promising industries to improve the operating efficiency, business condition, and cash flow of portfolio companies and then to understand their growth and profit models. By investing in outstanding enterprises at home and abroad, one could possess the strategic resources of key industries and areas and become a leader in a particular segment. Moreover, investors should closely follow and promote industrial upgrading and transformation through a deep understanding of the global resource network and industries. This is the way to follow for current equity investors.
Hoping to "make a fast buck", some clamor that the market is undergoing "assets shortage". However, if investors could utilize equity investment properly to plan for industry layout, they will find that many companies are waiting for those well-prepared and visionary investors. Therefore, it puts forward even higher requirements for investors. Based on the resources from shareholders, in order to improve the fundamentals of portfolio enterprises, and further achieve the goal of industrial layout, the investor needs to become the industry expert.
Firstly, as stated above, the priority is to jump out of the short-term arbitrage mindset from the previous financial investments. This requires creating a philosophy of long-term holding for business growth, and integrating industry mindset into each step of investment. Secondly, the perception to the industry is built on the massive amount of practices. Only with conscientious learning of industry knowledge and a large amount of practical research can one address the gap between investment decision-making and post-investment management.
We have our own principles on how to handle the equity investment business. At first, the only source was from the government. The market value of China's state-owned assets stands at $ 7 trillion. In the past few decades, we have not only helped China's state-owned enterprises go global, but also assisted them in becoming the cornerstones and pillars of China's economy. But now, the figure represents 2/3 of China's GDP. In comparison, the total US companies' market value is 200% of GDP.
In the first quarter of this year, there were 73 IPOs in China, amounting to $ 6 billion in total. Although these IPOs are not very substantial, these companies are at least able to access equity investment. Now that the market is being liberalized little by little, it is important for investors to study how equity forms and how stock is priced. Part of the problems is that even though large institutional investors have clear demands, they are not comfortable with buying more equities in China. Another concern we also saw in 2015 is the investment made by individuals. At first, it accounted for 80%. But suddenly the market was seized by panic, which was followed by a safety net and subsequent problems. If China wants to create a stronger and more mature market, it must cultivate the more mature investors.
In China’s market, the biggest obstacle is market liquidity, followed by corporate debt. Let’s revisit the IPO issue. If more shares are issued with better corporate liquidity, the leverage ratio will drop. Meanwhile, with rapid economic growth and lower non-performing loan ratio, the systematic risk brought by corporate liabilities will also be reduced.
Finally, equity has its own features, which can be changed and diversified incessantly. Equity is also very simple. For instance, it’s not good for fixed assets to become too complicated. The investing companies should have more equities and establish pension funds. With China entering the age of globalization of wealth management, I believe that the development of the Chinese equity market will certainly support the growth of China’s economy.
(Executive Vice President of JIC)
(Vice President of JIC Investment)
(Chairman of Galileo Global Advisors, former Managing Director of Morgan Stanley, former Vice President of New York Stock Exchange)