Pinetree Capital Partners, the late-stage private equity firm with a primary focus on China, has just completed a roadshow of Europe under what it says are improved market conditions.
The firm is currently fundraising for Pinetree Fund II, which will pursue the same exit-centric strategy and deal-sourcing techniques its predecessor used across four main sectors: agriculture, healthcare, services and consumer-related industries.
“We faced a lot of competition in 2009 and 2010 because there were many PE funds offering entrepreneurs ridiculous valuations for their companies, which spoiled the market for us,” Leong told Agri Investor. “But now this fervour has died down and the PE firms in China are not as over-zealous as before. This is good for us because we come across more ‘overlooked’ opportunities and are able to get good valuations for them.”
Pinetree II is targeting S$150 million ($120 million; €87.5 million) in total and is currently on S$20 million after gaining repeat commitments from investors in Fund I. The fund launched in December 2012.
The firm’s main deal-sourcing strategy is to target small and medium-sized companies in China, according to Stuart Pang, managing partner at Pinetree.
“We do not specifically look to invest into agribusiness but it is a result of our method,” said Pang. “Most SMEs in China struggle to access capital through commercial banks so we leverage on this weakness and lead them to IPO or facilitate the entry of bigger foreign institutional money. Agribusiness is an increasingly important sector in China so there are many relevant companies for us in this space.”
Pinetree sources deals through its network in China — including IPO lawyers, IPO auditors, investment bankers, or even entrepreneurs that the firm has worked with before — and pursues an approach it believes to be unique in the country by aligning the interests of the entrepreneur with the investors. The firm does not take any positions on the boards of the companies it invests in or try to influence how the company itself works.
“The entrepreneurs know what they want; they want capital and they feel they understand the local market and operations better than any advisor or PE firm, so for now they just need trusted guidance towards the capital market,” said Pang. “That is the only thing they cherish at the moment. Yes this has put off other PE firms, but we have heard that there are certain funds that have tried to twist the arm of the entrepreneurs and it does not end nicely for either party.”
Instead of directing the investee companies in their day-to-day business like other PE firms might, Pinetree’s “value-add” is helping the companies prepare for an IPO. This usually happens within a three-year time frame, although the firm has been known to lead a company to IPO in just four months.
“We are not investment bankers anymore but we have the know-how and the entrepreneurs can clearly see the role that we play,” said Pang. “If they are only after our capital we will not engage with them. By controlling the IPO process, we can control the deal overall.”
“When the interests of the investor and entrepreneur diverge, this is where you get risk,” added Pang.
Pinetree engages in extensive due diligence of a company’s management, which can get very personal.
“The main focus of our due diligence process is on the entrepreneur of the company himself,” said Pang. “We assess his capabilities but more importantly how honourable he is as a person. There is a saying in China that you must first become friends and then become business partners, and we spend much time interacting socially with potential investees to find out what motivates them before we commit to invest in them and their business.”
“Due to our extensive network we have a fair amount of friends in China across different industries. So, depending on which industry someone is from, we will try to touch base with a relevant contact to find out what someone is like to do business with, such as their shrewdness to how good they are at repaying debts,” added Leong.
In the agri sector Pinetree Fund I has invested in an animal vaccine producer, China Animal Healthcare and fertiliser manufacturer Shangdong Kingenta Ecological Engineering Co; both in 2007.
Fund II is a five-year fund with two one-year extensions, targeting an IRR of 25 percent. Pinetree charges a 2 percent management fee and 20 percent performance fee over an 8 percent hurdle rate. Pinetree is committing 2 percent to the fund itself. It will invest no more than 20 percent of the fund’s value into one company.