Dinghui Sandwich Huning: 10 Years Of Innovation Based On Through Cycle

On December 17, under the guidance of Zhuhai Municipal People's government and Nanfang finance and economics all media group, the 10th China Innovation Capital Annual Conference was held in Zhuhai, sponsored by 21st century economic report and 21 finance app. At the meeting, Hu Ning, managing director of CDH investment and founding partner of mezzanine fund, delivered a wonderful speech on the theme of "innovation and value investment".

CDH originated from PE investment. After 18 years of development, CDH has become a comprehensive alternative investment platform with a total asset management scale of nearly 160 billion. From innovation and growth (VGC), PE, mezzanine and secondary market, CDH's investment covers the whole growth cycle of enterprises, and can provide long-term cooperation and support for enterprises.

At the same time, as an investment institution pursuing innovation, CDH mezzanine investment has been continuously exploring and practicing in the past 10 years, and has successively created several "firsts" in the industry: the first domestic mezzanine fund with successful fund exit experience, the first domestic mezzanine fund introducing insurance capital as LP, the first domestic mezzanine fund to realize the full institutionalization of LP, and 8 billion yuan of domestic mezzanine fund The fund-raising amount of RMB yuan has become the largest domestic mezzanine fund and the first IDC mezzanine RMB fund in China.

At the meeting, Hu Ning shared the international and domestic mezzanine investment situation and CDH's innovation and practice in mezzanine investment.

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The global international mezzanine fund grew rapidly, with a compound growth of 11.7% in 9 years

Hu Ning said that the concept of private debt is usually mentioned when talking about PE, which belongs to the category of equity investment, but the investment mode combines the characteristics of equity and creditor's rights. From the data, in recent years, the asset management scale of global private placement mezzanine funds shows a trend of rapid growth, and the amount of fund-raising has reached new highs. In the international market, the scale of private equity debt increased from US $315 billion in 2010 to US $854.8 billion in 2019, with an annual compound growth rate of 11.7%; the scale of private equity debt increased from US $41.8 billion to US $119.8 billion, with a compound annual growth rate of 12.4%. It is estimated that the scale of private bond asset management will increase to $1.4 trillion by 2023.

Private placement debt can be subdivided into direct loans, mezzanine investment, venture capital bonds, special opportunities, distressed debt and other fields. From the perspective of risk return, mezzanine investment is a product with low risk and high return. Hu Ning concluded that the international mezzanine fund market is also booming in the process of continuous change, originated from leveraged M & A, prospered in real estate investment, and based on the stable nature of the cycle. There are four stages in the development of international mezzanine fund market. The first stage is in the 1980s. During the global oil crisis after the Iran Iraq war, private equity funds led by KKR seized the opportunity and used bank loans and mezzanine to carry out leveraged M & A, that is, LBO model

In the second stage, in the 1990s, Blackstone acquired a lot of real estate assets by using the mode of equity + creditor's rights + mezzanine, and obtained high returns; in the third stage, from 2003 to 2007, the boom of leveraged M & a rose again, and Blackstone also brought high returns to investors; in the fourth stage, during the subprime mortgage crisis in 2008, private placement debt represented by mezzanine investment showed strong resistance In the subsequent economic recovery process, private debt assets also provided a steady return, and the development continued to accelerate.

In the domestic market, mezzanine investment is still a relatively new investment product. China's mezzanine investment fund began to sprout in 2005, and the concept of mezzanine appeared in the mezzanine financial products of China Development Bank. By 2010, CDH and CITIC Industrial Fund began to set up mezzanine funds, followed by Everbright and Hony, etc. After nearly 10 years of development, foreign investment institutions, global investment banks and domestic professional investment institutions have been active in the market.

"At present, the proportion of private equity debt in China's private equity funds is single digit, but in the international market, the proportion of private equity debt in private equity funds is basically between 20% and 30%. For example, for Apollo, KKR and other institutions, the proportion of private debt is relatively large. Therefore, compared with the development of private debt in China, there are still many opportunities. " Hu Ning said.

The evolution to Multi Strategy Fund coincides with international experience

CDH has explored an innovative path in the field of mezzanine investment. From the initial single investment strategy in 2011 to the comprehensive investment strategy today, CDH mezzanine fund has gradually expanded and extended from non real estate to growth-oriented enterprises, mergers and acquisitions, and non-performing assets. The development track coincides with international experience, and leads China's sandwich industry into rapid development with continuous innovation Exhibition period.

"The innovation and practice of mezzanine have made us gain a lot in the choice of investors." Hu Ning said. In 2014, CDH mezzanine took the lead in obtaining investment from insurance companies in China. In 2015 and 2017, when the team raised CDH mezzanine phase 4 and phase 5 funds, the investor structure was also greatly optimized, all of them were institutional investors. It is understood that CDH mezzanine phase 5 fund has raised more than 8 billion yuan, which is the largest domestic mezzanine fund.

According to Hu Ning, from the perspective of mezzanine fund innovation, the team first started investing in real estate, and later began to invest in growth enterprises. The reason behind this is that in the past, entrepreneurs and investment institutions will encounter a pain point when they do minority equity financing. Before listing, entrepreneurs are very reluctant to sell their equity at a relatively low valuation, and investment institutions often dare not invest in large amounts of equity.

At this time, the mode of convertible bonds is used to provide financing for entrepreneurs, which solves the problem of entrepreneurs' pre IPO pain points. In this way, entrepreneurs can choose less dilution and no dilution of equity to gain recognition and investment from brand organizations. This is the biggest difference between mezzanine investment and minority equity investment.

"We also do mergers and acquisitions. In order to expand the upstream and downstream industrial chain, listed companies do positive mergers and acquisitions or good enterprises go public through reverse mergers and acquisitions. At this time, there are investment opportunities for mezzanine. At the same time, we also do real estate investment in China, especially focusing on urban renewal. We also do special opportunity investments, which are non-performing asset investments, focusing on asset packages or individual assets, as well as NPAs. " Hu Ning said.

Investment strategy keeps pace with the times, focusing on technological innovation, urban renewal, non-performing assets and other fields

On the investment strategy of mezzanine fund in the subdivision field, Hu Ning said, "we are keeping pace with the times, and currently we mainly focus on four directions."

First of all, there are opportunities brought about by technological innovation and technological innovation. The CDH mezzanine team has laid out a 5g driven IDC industry track. At the same time, the team also pays special attention to the just in demand investment opportunities brought about by China's demographic change, that is, anti cyclical investment opportunities, including pension, education, health, etc., which are opportunities brought by economic upward.

"On the other hand, we also value some opportunities brought about by the economic downturn, namely special opportunity investment." Hu Ning said. Because in the economic downturn cycle, non-performing assets are a very good hedging tool, which is very effective for risk hedging. So the team also values the investment opportunities of non-performing assets. At the same time, urban renewal and the return of China capital stocks also provide many opportunities for mezzanine investment.

In the structure of mezzanine fund, CDH has designed the priority distribution plus circular investment, which solves the pain point of institutional investors investing in equity funds: there is no cash flow distribution for a long time after investment. Therefore, in recent years, CDH has obtained more than 9.1 billion RMB investment from 27 insurance companies. There are the top state-owned enterprises, state-owned insurance institutions and private insurance institutions in China. In addition, CDH mezzanine has also obtained investment from many financial institutions as well as from the well-known Alumni Foundation in China.

In the direction of innovation and value investment, CDH has carried out the layout of IDC industry earlier. "From the perspective of the trend, we believe that the demand for data centers will increase greatly under the background of new infrastructure and driven by 5g and cloud computing. Therefore, we invest in IDC projects in first tier cities in the form of convertible bonds. From the perspective of underlying assets, the return on assets of IDC projects is very high, and the payback period of project investment is relatively short, usually 5-8 years. " Hu Ning said.

The second direction of innovation and value investment is special opportunity investment, which Hu Ning believes is actually the best investment tool to fight against business cycle risks. Because when the economy is bad, it is the best time to invest in non-performing assets. In the process of investment, CDH mezzanine usually grasps three principles: first, seizing such strategic market opportunities; second, it should have a good risk pricing for the whole non-performing assets, and must judge its own value; third, it should cooperate with service providers to enable it to achieve multi win.