The Road to China: BPE Highlights China Growth Opportunity On Limited Partner Survey Trip

February 1, 2010
In November, BPE hosted a group of Limited Partners on its annual China Survey Trip for a closer look at China’s economy, infrastructure and position in the world market. The trip – with stops in Beijing, Shanghai, Shenzhen and Hong Kong – included more than 30 meetings with over 50 companies. They also met with members of the Baird Asia team of approximately 15 dedicated operating professionals who help Baird Private Equity portfolio companies capture the value potential of Asia.

“For the last five years, we have toured China with our top partners, showcasing the challenges and opportunities of investing and building businesses there,” said Paul Carbone, Director of Baird Private Equity. “This year’s trip provided insight into how China has remained strong in the face of the global economic downturn. The Chinese government took swift action to implement aggressive fiscal policies and stimulus plans to boost lending activity. The economic stimulus was effective and although there is some risk it has created a short-term economic bubble in China, the long-term dynamics of the region are exceptional.”

A Robust Itinerary
The one week trip began in Beijing and ended in Hong Kong. Throughout the trip, attendees met with entrepreneurs, government officials, intermediaries, economists and private equity investors and heard about the challenges and opportunities facing China. The first-hand accounts provided attendees with helpful information for evaluating future portfolio asset allocation decisions in the region.
The itinerary included meetings with the former Chairmen of Ford Motor Company China, Novartis China and Roche China, a visit to a leading cancer hospital in China, an analysis of China vs. India by a leading global fund-of-funds manager, and a dinner with representatives from leading consumer brands who sell products to the growing Chinese consumer market. Attendees also received an overview of the laws regulating funds and direct investments in China as well as the process for taking a Chinese company public on Chinese and international exchanges. RMB currency revaluation, and its impact on global markets, was also discussed.

Challenges and Opportunities
Despite the global economic downturn, the International Monetary Fund in October raised its 2009 Gross Domestic Product forecast for China from 7.5% to 8.5%. This stands in stark contrast to the contraction of GDP in many developed countries, and lower growth rates in other emerging economies. While the Chinese economy has remained strong during the global downturn, certain sectors of the market have superior investment characteristics.
  • Healthcare – In China, the growth of the healthcare product and service industry is beginning to emerge. Fifty-four percent of Chinese living in urban areas and 79% living in rural areas are currently not covered by any medical insurance. The government has recently announced a health care reform plan that will provide all of China’s 1.3 billion citizens with medical insurance. In addition, according to a recent BCG study, China will grow to be the fifth largest pharmaceutical drug market and the second largest OTC market in the world by 2010.
  • Business Services – The services sector in China currently accounts for approximately 40% of GDP. In 2006, China implemented the 1000-100-10 Project, which seeks to establish 1,000 Chinese outsourcing enterprises with international qualifications, encourage 100 MNCs to shift their outsourcing businesses to China, and develop a base of 10 internationally competitive cities for service outsourcing. The plan aims to double the export value of the outsourcing industry and has more than US$1 billion in funding.
  • Manufacturing – The manufacturing sector in China currently accounts for approximately 45% of GDP. Manufacturing companies in China have a significant opportunity to serve the growing domestic consumption and the commercial market. The continuing transition from an export oriented economy to one focused on domestic consumer provides significant opportunity for companies that can service the demand with products for the rich urban coast as well as in the rural parts of the country.
“Our Limited Partners saw first-hand our operations and expertise in Asia and how uniquely positioned we are in the region,” said Paul Carbone. “We believe the considerable time and effort we have put into our Asia resources and strategy will benefit our Limited Partners and Baird Private Equity for many years to come.”