Good afternoon. It is a great honor to be here in Tianjin with so many friends who set out in 2006 to create the China International Private Equity Forum. An idea and dream became an event which is now on the path to be a tradition for private equity in China.
I am here today as a member and representative of 13,000 members of the Association for Corporate Growth all over the globe. Over 200 of my colleagues are participating in CIPEF and our most senior leadership is here as the official delegation of ACG.
I became a member of ACG more than half my lifetime ago in 1982 during a terrible recession in the United States when I was put in charge of a medical products distribution business that had just defaulted on its bank loans and was paying 21% interest on its debt. Twenty five years later I became the Chairman of ACG and led the effort to bring ACG to China. Later today, Tianjin and ACG will announce the formation of ACG in China registered in Tianjin and I’m very proud of that.
My message to you is that promoting the growth of strong private enterprise empowers very capable people and results in improved standard of living for all. The most successful investors from around the world allocate capital to private equity because the return on investment outperforms the public market.
People are the greatest resource on earth. Business is driven by people with vision who can anticipate markets, adjust to changing conditions and lead others to achieve success. Most enterprises require capital to fulfill growth plans. The capital that is needed is equity capital. It comes in two basic forms, investors of private capital in unlisted companies and from investors in public markets. Successful businesses create jobs, pay taxes and support the communities where they operate.
The essence of a market is the mechanism for participants to enter and exit with reasonable predictability. Whether the goods are food or fuel or steel or computers…or ownership positions in the businesses that produce the goods and services, buyers and sellers must have a method for participating.
Investors who provide capital to private equity investment firms commit their capital for10 years, much longer than public market participants. They understand that to sell their interest in private equity funds to a secondary fund before full term usually requires a discount, particularly in today’s market. Investors like Temasek profit handsomely when forced sellers like AIG come to market in these difficult times.
Western private equity funds generally hold their investment position in individual companies for three to seven years and then seek to sell the investments. It is essential to have a supply of buyers to create demandso the investments can be sold in order to return capital to the original investors who will then be encouraged to recycle capital for new similar investment.
Most successful private companies are not likely to ever become public companies. Even the most favorable market conditions worldwide would not absorb more than 1,000 initial public offerings each year and even if half of those were Chinese companies, the public market can not accommodate the exit requirements of private equity investment funds. The result is that mergers and acquisitions are and will continue to be the most common exit strategy for private equity investments. There is a tremendous build-up of potential sellers who will enter the market as conditions improve.
Companies like Chery Automotive will probably become public companies and provide rich rewards for private equity investors Bohai Industrial Fund and CDH Investments. Others such as Liaoning ZhongWang Aluminum invited private equity firm Olympus Capital as a final step leading to a successful initial public offering this year. Just as Simcere Pharmaceuticals and Solarfun Power had done with Hony Capital. There are many examples included in the Tianjin Report on Private Equity in China.
Many wise business leaders recognize that the value of a professional investor is much more than capital. The expertise in helping successful businesses become even better and stronger is powerful. Private equity firms often have industry expertise and critically important resources that meaningfully increase the value of the enterprise.
Small and medium size are more likely to be sold to larger enterprises than to become independent public companies. They are positioned to become attractive acquisition candidates for companies like Alibaba which has recently announced plans for increased acquisitions.
It is the private sector that provides the majority of jobs in North America, Europe and Asia. Recent developments in the United States with government investment in General Motors and banking giants have been extraordinary. They do not accurately reflect American industry.
The members of ACG do reflect American industry in all the major cities across the United States. Our members work with the private companies that make up the most important sectors of the economy. We own or serve over 100,000 companies.
The past year has been very challenging. More pain will be experienced as the credit facilities made in 2006 and 2007 come due later this year and next. While the pain is real, the underlying resolve is unshakeable. Organizational muscle and toughness are being strengthened and most in the United States will be better prepared because of this experience.
In closing, I suggest that the passion and drive for business growth and the need for capital to fuel the expansion are universal. No wise man would underestimate the potential of the United States or China. Those with wisdom and perseverance to combine that potential will be richly rewarded. Thank you very much.