Elton tells us about HosenCare Brothers, an influential VC firm in China that is expanding internationally. It is an interesting discussion about Elton’s firm with many insights on the VC market in China.

Script of Interview

Interviewee                                   Mr Elton Xu (EX)

Position                                         Executive Director

Company name                            HosenCare Brothers

Company website URL                http://www.hosencare.com

Interviewer                                    John D. Evans, CFA (JE)

Interview conducted on              10 June 2021

JE  Okay, good afternoon to the viewers of this Ventures episode with Mr. Elton Xu, who is the Executive Director and Head of the Suzhou office for the HosenCare Brothers, a very large venture capital company here in China and part of an even larger conglomerate, which Elton will be talking about in the following time. Just as always, as this is our first discussion with Elton, we’ll look at four different aspects. Firstly, focus and get a bit about himself and his background. Then we’ll turn and talk about the company, HosenCare Brothers, and particularly the Suzhou office, which he has set up and is running. And then thirdly, we’ll talk a little bit about the venture capital industry here in China, which is a very topical matter these days and something of great interest, I think, to viewers almost anywhere. Then we’ll close off with Elton concluding with what his near-term goals and major objectives are for the year. We should cover that in just a little bit under one hour. So, with that as a brief introduction, I’ll introduce Elton now. Good afternoon, Elton. Nice to have you here.

EX  Good afternoon John, definitely a pleasure to join this conversation.

About Elton Xu

JE  So, let’s just kick things off. Why don’t you tell the viewers a little bit about yourself, we’ll combine the first two bullet points, give a little bit of personal background, where you grew up where you studied, and also a bit about your professional career before setting up the Suzhou office of HosenCare Brothers.

EX  Of course, thank you, John. So, my name is Elton Xu, I am born and raised in Suzhou, so I am Suzhounese. So, after my high school, I go to Nanjing for my undergrad then I go to New York for my Master of Finance, all my career, I mean only for learning, I majored in finance. After that I go to an internship at UBS. I see that John and  I go to the same company, it’s our first connection from the beginning of my career. After a year and a half working as an intern and working at UBS, I landed into a company called Wilshire Associates, the private owned asset management company in the States which invents the Wilshire 5000 indices for the US, for the first time to cover the total indices in that space. So, I’m actually their first Chinese sales.  So, I did an OK job, so my boss brought me from the New York branch to the headquarter in Santa Monica, not a usual place for the financial company’s headquarters.  But, since my boss is first a rocket man by interest himself, I think maybe that’s why they picked Santa Monica as a very good place for the headquarters. But after about six years I was working for the Wilshire, I convinced my boss to open their first Mainland China Office in Suzhou. So, after two years working here, I think I did a good job, I grow the company actually.  I’ve met John when I was with in Wilshire in Suzhou office and we have a lot of collaboration with university he was working for, we did a lot of industry research jobs. So, I get some good sales with Suzhou. I grew the team to 25 persons within two years, then I go to the PE industry with two partners. So, I founded the Huiyang Capital and still the shareholder of that fund management company focusing on the consumption investments, a hot topic in China. After two and a half years I landed here for HosenCare Brothers to help them to do both fund raising and investment in the East China area as well as leading into the USD fund raising for opening our first new USD fund as well. So, I think that’s everything for myself. Thank you, John.

About Hosen Care Brothers

JE  I think the viewers can probably tell that we were at UBS at slightly different times. I was a little bit before you, but I’m sure they can tell that by looking at the two screens. So just touch on this last point and to get us into the second category. You mentioned a geographic focus, as you head up the Suzhou office, is this focus going to be on Jiangsu initially and is that all? You mentioned the East China focus?

EX  Yeah.  Since it’s also need to bring our, our say focus sector for the HosenCare Brothers. We are the east bound fund and the parent fund has 3 billion RMB and it’s quickly going to be 5 billion RMB AUM.  In China it’s going to be considered as midsize and growing size of the fund, for the PE/VC fund. So actually, we don’t we don’t want to spread our portfolios, because we not only want to invest as financial investors, or I would say that 30% of our portfolio we actually taking control. So, for more running efficiently, we only focus in the we can say, east China.  Or you can easily say from Nanjing there’s a highway, the G-2 highway, we’re basically putting more than 60% of our portfolio into G-2 highway, which is easy to travel. And if you’re highly concentrated, if you look into the biotech, nowadays in China, you’re not going to miss the G-2 highway. So, I would say more than 80% of the targets we are focused on is on the G-2 highways. So basically, including major city as Shanghai, Suzhou, Hangzhou, and Nanjing. As that’s the four cities we have more than 50 percent of our portfolio in here.

JE  That’s what they refer to as the Yangtze River Delta area, isn’t it? Yeah, which is a huge economic zone, even though it’s only a small percentage of the total China landmass. Okay, now, that’s interesting. So, give us a bit more of a broader history of the company, when it was founded, by whom, and its relationship to any other sectors, any other companies industrial or likewise, I think there’s an interesting story there.

EX  Sure, the HosenCare Brothers, are independent and have been around since 2007, founded by my two bosses, Mr. Tang and Mr. Yang, and both of them actually, that they spin off from another company called Hosen Capital. So, you can see we both shared the first words of Hosen Capital and Hosen Care. So, it’s basically to the origin. Actually, before these two private market companies were founded, they all have the same origin, a parent company called New Hope Group.  The New Hope group was actually in China running the business over the globe for over 30 years. It’s one of the first private owned groups happened in China. So, you see 30 years ago, we just opened our market. So, right now, it’s the world’s second largest, would say, animal husbandry business – as well as the China number one – and for the animal feeding for chicken and ducks it is China’s number four for feed. So basically, we do a lot of animal related works. So, actually, that’s why when Hosen Capital and HosenCare were founded, New Hope actually was our major investor, or angel investor, as well as our shareholders for our GP company.  That is a little background about how the company happened. So, the company right now is basically investing in the area we call ‘one health over 100-year life with a wonderful one’, which means, it’s actually the WHO that says that if you want to have humans live longer, you need to have the plants and animals and environment with us to live healthier, right? It’s one world. So that is our philosophy or investment, as well.

JE  That’s interesting, because as an aside, I know some of the healthcare units I work with, they broaden their definition to healthy living. So, it’s not just medical attention, it’s the food you eat, your environment, your lifestyle. So, it looks like you’re taking the same holistic approach to a healthy life from an investment point of view. That’s very interesting.

EX  Yeah, that’s the one health, one life area. But why we bring this is also we want to show New Hope as our anchor investor that also can be our potential exit, a way for our investments other than IPOs.  I think the group itself has more than 300 billion values of assets. They are not only our LPs but also can be the asset owners when we end our portfolios. If a portfolio item were to exit from our fund, it can also go to the group to help each other. That’s also one point.

JE  That’s very interesting, because I know in some industries, that the strategic partner can often be a more common exit than an IPO. So, I can see the connect now to your venture capital business with New Hope. And that’s a very interesting combination. And you said that New Hope was a totally private enterprise, as opposed to a government owned entity?

EX  It is private owned, so that’s actually helping us stay in business quietly right now in the 30 countries. Since we don’t have any backing from government shareholders here. I mean, we are running on our own, but I would say that we are 100% private owned.

JE  Okay, that’s interesting, because in the trade talks these days, that’s a very important point. So, you’re a pure private enterprise, just like most of the other global enterprises that you’re probably dealing with. Let’s talk a little bit more about the structure of your venture capital business:  offices, number of staff. You’ve already mentioned the healthcare focus, but maybe you just want to get into that in a little more detail. Either overall, or from your focus here in Suzhou.

EX  Okay.  Sounds good. So, actually, we have six offices around the world. We have a headquarters in Beijing, and we have Suzhou and Nanjing as well as at Boston, Tokyo and one more in Taiwan, as well. There are six offices around the world. Right now we have 30 people, but we keep hiring to expand since we are just adding more and more to our AUM.  We plan to double our AUM by the end of this year in the RMB and also start having our USD fund by the end of the year as well. Regarding for the business focus, as I mentioned that because we are for the one for one, which is for the one health for 100-year life focus, so we actually are looking to extend our investment arena from the pure healthcare into the biotech, food technology, as well as environmental protection arenas. So, that’s the four arenas right now we are exploring, although I think more most of the portfolio allocations are facing the healthcare but as our shareholder’s background, all these four arenas linking very tightly with healthcare, so I think we can do a good job in this.

JE  Okay, and just a follow up, the three offices outside of China, Boston, Taiwan and Tokyo, they are part of your specific firm HosenCare, as opposed to Hosen Capital or New Hope is that correct?

EX  I would say, for these three offices outside of mainland China, our Taiwan we wholly own, for the Tokyo as well as Boston it is the shared office we have. We have the biotech as well scientific labs here as well as in Tokyo. Tokyo is also the frontier for the consumption focus – Hosen Capital’s arenas as well. So, we share these two offices with the other entities.

JE  Okay, but with just six offices, you already have a sizable international presence. I know speaking with other medium and large sized venture capital companies in China, they don’t have that.  That strikes me as a differentiating factor for you versus some of the other firms.

EX  Yeah, I think one, well, this says to our CEO, Mr. Tang, because he was working in Japan before, so Japan has also a lot of business with the States. I think that’s why he grew in Taiwan as well. So as that says, that’s the origin as he had a scope of international ideas to do so. I said he hired me also want to enhance the performance and to train this office as well as link the countries and the area together.

JE  Okay, that’s a very interesting story. What about the people within HosenCare, the members of the management team, whether it’s Beijing, Nanjing, your office? Is there a centralized investment committee?  Who are the key people in the in the three offices in China?

EX  Everything is in the two-tier reference.  Regarding administration, our headquarter is in Beijing and our two partners sit in Beijing, but they travel a lot. So physically, our management teams’ home, as well as the mid and back offices are located in Beijing. Then we run other offices in more like partnership ways.  We have just use mainland China office as an example, it is that is Nanjing and Suzhou, we all have Head of Office role, which is having the role of administration as well. So, we are not only covering on raising the local investments, as well as doing the local PR and GR jobs as well, because we have to follow the philosophy that we don’t have the most, I would say, number of people regarding for the investment firms. But we want to penetrate the deepest, so basically we have a philosophy that we don’t want to miss any new or early investment opportunities in the local market.  If we lost it, this will be our local Head of Office fault. That requires us to not only find the new investment opportunities but also on the fund-raising opportunities from the newspapers or website.  We also need reference from the governments, the other financial institutions, personal networks, I mean, I get referred of the good opportunities from you as well. So, I think that is the way we are doing the work, I mean, it’s investment work, but also it’s the people’s work. My boss Mr. Tao is always saying that for everything that happens, it starts with people, right? If you don’t have people to trust, people can be your biggest risk factor as well.

JE  Okay, so it sounds like you have a fair degree of autonomy. So, that gives you a lot of control over your direction and your future success. And that’s a nice thing that ,when you’re outside of the head office, not all companies have that and that’s to be commended. You’ve talked about the healthcare focus, the 100-year focus, let’s get into some of the technical details of exactly your approach and what sort of investments.  So, is it for example, just Renminbi, or can you do foreign currency, US dollar investment?

EX  The quick answer is both. But we currently we have all in Renminbi. If we invest in the target outside, we already have ODI structures, we use ODI to go through. So that’s why also we have the good relationship with government as well, because that is government with let’s say window guidance required investment tools. So yes, I would say both, yes we can do both.

JE  So ODI I understand, stands for ‘offshore direct investment’. Now you explained that to me the other day, give us a little bit more detail about how that works, because I’m sure a lot of the viewers outside of China won’t know the details of that process. For example, you want to make a $10 million investment to someone in Hong Kong or Singapore. How does that actually work, what is the process?

EX  So, basically it is the pool which is controlled by our SAFE.  SAFE stands for State Administration of Foreign Exchange. So, they are the watchdog for the government who controls the money flowing in the blocks. So, they have their own budget.   Specifically in Suzhou, actually because the different regional SAFE has its own SAFE policy preference in things. The ODI approval is from SAFE, but the different SAFE bureaus have different guidance.  We call this ‘window guidance’, I should say you go to the window and they give the guidance. So, a little different, it depends on how you understand the local government or government’s preference.  For example, in Suzhou, if you want to go and say, I go out to buy, say, a football team or real estate. It’s a no-no, do not do that. But if you want to buy some entity, which has potential for supporting local groups, for example, if there’s say, we look into the biotech companies, which is going to be approved by the FDA, which also can sort of come through here, it is helpful for this event. Let’s say, it’s for pet’s healthcare, or it’s for, I don’t know, eye surgery instruments, which we happen to need, so then you have a good chance to get approval. That’s it for the type of sector, but also you need to look into the amounts, for example, my understanding is that Suzhou arena, Suzhou SAFE, has the approval for single investments below 300 million USD, with over the size, you’re not going to get approval, so you’re going to have a quota. But any, but they the approval based on the I would say the characteristic of investment but not on size. I mean, investment 2 million will not be easier than the investment of 200 million. So, maybe keep in mind but understanding the local SAFE bureau’s preference as well as its monthly budget is important because their headquarters accounts the money flows are saved by frequency, let’s say by month. So, if they already end up used up for the quota for the half year, you’re not going to be approved for anytime soon, right. So that’s two angles, you might want to understand.  But I mean, having a conversation or fluent conversation with the SAFE is key for the ODI, that is my understanding.

JE:  And there is a local SAFE office in Suzhou, the regional one would be in Suzhou.

EX:  Yes, we deal with Suzhou because Suzhou’s approval level is also at the state or the province level, so they have similar to Nanjing’s. So, I think it’s also easy way for Suzhou to introduce the foreign investors here, since Suzhou deals with foreign investors a lot. I mean, if you go to some SAFE local offices, where they don’t deal with foreigners a lot, it may cause a lot, I would say, the time to get past each other,

JE  More difficult. So, my last technical question on ODI because this is very interesting to me. You mentioned the amount and limit of US dollars but you’re an equity investor. So, you’re potentially a very long-term investor. Do they place any restriction on you on the number of years before you have to exit a foreign firm?

EX  Yes, actually you have to submit your fund information right? Because our fund has a duration, has a life, let’s say, seven or 12 years. Afterwards, how to solve that you need to give the opposite of that but in theory after the investment time finished, you have to bring all the money come back. That’s the reality of ODI.

JE  Okay. But they don’t say it has to be in two years. It’s whatever the portfolio constraints are in terms of the life of the fund that drive the application.

EX  You’re right and there are people who verify that.

JE  So, you’ve already touched on the third point, they’re obviously closed-end funds that you work with. And what is the life? You mentioned both seven and 12 years? So, do you have the two types of funds in terms of duration?

EX  Yeah, because we have the extension time. So normally we do the ‘four-plus-four’ and have extension time. So, I would say it’s like four-to-four years of the typical investor report number four for us in my four years of investment time, adding four years we are having, we’re waiting for them to exit me. But some, if the LP’s it’s a bit depending on the terms for how many percent of LPs agreement we have, we can extend for a few years to wait for the fund to close.

JE  Okay, so eight years is your initial target duration, but it might go out to maybe as far as 12 years in exceptional circumstances. Okay, that’s very interesting. Now, you mentioned the dollar limit to the ODI that SAFE  has, what about your typical investment size is in terms of minimum or maximum? Do you have any real constraints there?

EX  It also depends on the state of companies. I mean, we are a company who are focused on the two ends. So basically, we have two type of funds we’re running. One is focused on the early stage, it’s more we would say A-round type of company. Another type is that we do the investment into the pre-IPOs. And why we do two ends is that the investment into the early-stage targets is helping us to do two things. First is that we control some of the targets and helping them to work well.  That is one point. The second one is that it’s also helping our LPs because some of our LPs in some funds are government. Governments LPs would not only want to have the cash back on the financial investments, but also they would like to introduce some business and growing them in this area. So that’s why we are getting to that part. It’s more for our IRR perspective if you say the financial returns. Another part is that we also invest in some pre-IPOs projects for two reasons. First, apparently is helping our DPS or the cash come back to our investor as possible to make them happy. But then another time is ways that it can also show our capability to enter into the popular investments targets, which is also the show our ability to our LPs as well. Okay, so the question for the dollar numbers. We, our comfortable zone for investment is around about 50 million to our say 150 million RMB. That’s a size we are most of the weeks. But if we have exceptional opportunities, we talk with our investment committee, depends on the situation.

JE  So, let’s just take two and tell us about the typical investment size constraints that you may have in terms of minimum of maximum in the Renminbi market.

EX  Okay. Yeah, I would say, our most comfortable investment size, just throw out a number is about 50 million to 150 million RMB. But we can have exceptions, if the opportunity is very special, then we can change.  But it’s the size, I’ve mentioned, just the most common size we are investing. Why that is because we are always focused on the investment in a two stage. One is early stage, as well as pre-IPO size. In short for early stage, we are helping our investors earn IRR but for the pre-IPO size is most for the DPI, or the cash back. So, if we dive deeper, it’s that for the earliest stage, some of the opportunities that we actually pursuing are for control.  For example, we have control over one of the brain surgery hospitals we own, then finally we sell it back to the group, the New Hope Group has more weight.  As well we buy one of the most advanced, we call it the model animal company in China, to helping a lot of cosmetic company to testing their cosmetic product, which is just required by the government, it’s mandatory to do so. So, some of the investment targets we want to control at the early stage and grow them and we are entering our sources for them to grow. That’s one way. Another way is that, why we focus on to the later stage, is that it’s not only can give our investment out some more certain and quickly cash back, but also can show our power to enter in this kind of star opportunities right and we because sometimes when the company go pre IPO, you can get it it’s not only you have money, but you also have to have the network’s or you have you have to have your social status. That is things we also want to appeal to our LPs that is, I don’t want to take too long to answer these questions.

JE  But I infer from your comment you look at companies in all stages: startup, revenue generation, profitability, pre-IPO, all stages of development.  Or do you have a preference for one?

EX  Actually, what we mostly looking to the company either around A-round or earlier or then straight go to the to the pre-IPOs. In mid-stage we are not take too much time to look into that, especially in the healthcare it’s in the money is go to the sky right now.

JE  Okay, very interesting. And how do you do your fundraising?  You’ve got a fair amount of money, you’ve got a new fund coming up, you do that directly yourself or do you use agents or other parties to find your partners?

EX  Yes, it’s also two types of questions, I would say I’ve divided into two, one is for RMB, one is for the USD. I’m having to be the leading person to do the fundraising. Other than that, my day-to-day job in Suzhou after I’m leading the whole every new fundraising in my company, so regarding for the RMB we do direct fundraising. So, our major LPs, one is a government owned agency, is actually, they have some historical reasons, because before 2018 most of LPs in China markets they were banks.  But after around 2017, the government said okay, the banks stop using the shorter duration money to invest into longer one because for the banking they are basically using the six month or a year financial instruments and investing into the 8 years, so it is wrong. So, government cut it. However, when it cut it, see it cut at least 50% of the water from the money flow into the PE market. So, you can see obviously a major player in this market for the volunteer raising money:  one is governments they go through governments let’s say governments direct fund or governments managed by the company’s money. Another part is wealth management. I happen to raise both sides of money. I raise the institutional money basically through my old job, my fund with Everbright. I also raised the Wealth Management Money when I was working for Gopher, which is Gopher’s parent company Noah Holdings, which is the largest investment company in China. So, I have experience for that. So, I think that I said I delivered the jobs for the first month.  When I was coming here we have collaboration with Suzhou Securities, we are building a target 2 billion authority for a RMB fund for the early-stage investments. And also just last weekend, is that we have we roll out a new plan for another 2 billion RMB fund which is both more focus on growth and mature companies, also fund raising led by me as well. Both of those funds supported by the government owned fund, with government owned companies with SOE’s support, as well as with the wealth management, let’s say the owners of the enterprise and just under some high-net-worth individuals we know well. That is for the RMB side.  For the USD part is that since we are running the USD fund raising by the end of the year, it’s going to be our first USD fund. Here in China we have five fund track records. So, if you have six or seven funds, easier to go direct ways.  But for the USD fund, we’ve been viewed as a first time USD fund. So, there’s three ways I plan to do.  First, a few direct fund raisings and since I was working for Wilshire and I can show the intro I’m leading the great China area workings to my old funds, they are some of the world’s largest pension funds around like CALPERs,  like NYPD, and OIPD retirement fund, TIAA, is the kind of long-term investor we know before and I can go directly to them. That’s number one. Number two is that we’re also going to talk about another investment consulting company. Like Wilshire, we already have started to reach out. It’s taken time to get into their investment pool because as my understanding for the US or other Western countries pension fund every year they have a quota to invest into the first-time USD fund and if they want to get us to into their pool as well, it may take a little bit of time. Is normally the rolling time is about six months, that’s what I learned from Wilshire.  Then the third way is more, I would say a more common way, as you mentioned, that we have a placement agent. There are two kinds of placement agents. One is focusing to the institutional investors. Second is focusing to the Wealth Management business. So, we really do both. So, I think for just for conclusion is that all in China, I am directly leading the fund raising, reporting to our management teams.  In USD funds we use other ways direct as the well as investment agent as well as investments funds.

JE  So, that’s a lot of things you’re doing. That’s a lot of new initiatives you’ve got on the plate. So how many people are there in Suzhou supporting you in all these activities? Or how many will there be?

EX  I think, unto last month, I’m the only one here for full time working. I don’t need sleep right, as you know.

JE  Wait till you get to my age.

EX  And then I get a lot of support from headquarters for sure. I like to do my pitchbook on my own, I don’t know why, I just love to do so. And it’s easier to convince LPs if you just show your own jobs, although it’s time consuming. But yeah, I still find I need some fund to go out as well as for the for the other initiatives. So, I hire great people here right now with me. So right now we have four people. We have two full time and actually two interns and we give them, interns to have return offers if they are doing a good job. So actually right now four of us are running as a team. And we are running fast.

JE  That’s great. Now I visited your office, you’re in central Suzhou by the Suzhou Center, but you’re moving to a new permanent office in August. Tell us about that and the Sand Lake Area, what is that?

EX  It’s interesting, it is called Sand Lake. I always thought because it sounds like Sand Hill, right?  But then I go to the map the actually still the original name is that is Sand Lake, but it’s one of the causes of those.  Sand Lake is, actually I’ve been there many years ago when I was in the States when I had a summer to go back. Then there’s a company there, well known in China, very famous:  ‘Oriza’. Oriza is one of the largest government fund-of-funds in China. At that time their name is Suzhou Investment Corp, which was two funds. Actually, my dad is very good friend of their old chairman. So, at that time I was getting interested in the PPP funds, but when I was still doing the secondary market for the software, for the stocks in fixed income, so I know that that place is I think it’s had some characteristics. First is that the designers actually go to Sand Hill so there are not the tall buildings, the highest building there is fourth floor, I think. So, the place is big, like a park. So, you go there seeing people, go there feeling like either in Silicon Valley or in the, I would say the which is the name in the UK, which is Waterbridge there or called Cambridge, or something I forget. So basically it’s like you are a fund manager, you have a work and life balance. Actually, it looks like that.  They have about 300 different investment agencies there, so it’s easier to connect to each other. Why we are actually having two offices as I realize that they need a very strict preapproval.  Process is taking about two to three months to get approval to get in there. So basic government helping to do some prescreening, you go there to do to make sure you’ll go there and not going to do some financial crossings. Right.

About the Venture Capital Industry in China

JE  I got the feeling that you won’t have any issues there. Okay, that’s a very interesting overview about the company and there’s obviously a lot happening. Let’s turn now and talk a little bit about the venture capital industry here in China. Now, you’ve talked about the changes that occurred in funding in 2018. So how would you characterize the industry now? Is it more being driven by government investment or are private venture capital firms such as yourself still a very important part of the market?

EX  OK, first thing, I’m talking about is in two ways. First, after the banking industry, the rollout of the of the players, I think the trend is for the bigger companies or going to be bigger.  Second, the small companies actually being pushed out of market very quickly. Third thing in my views, if the company’s investment company, AUM, cannot get over 1 billion RMB, it will be very, very hard to keep raising money. That’s one thing is that we’re seeing for the players. As right now we have more than 20,000 registered players in the market, but I expect the numbers will see a significant drop as the big ones can grow bigger. So we are, I would say mid or mid higher level, but we want to grow faster. So that does work for the size part of players up. Regarding your question about the players characteristics, I would say both are important, both government-owned as well as private-owned. I don’t see that right now it’s as too much difference for the portfolios. For companies, they always say that, okay, we want some money from the government people. We also want to have some private GPs or having the GPs with industry background helping us because you can see right on in the market. It’s not lacking of the money, but for the companies is that we want both money and resources. Having government background GP is resources, having private company with industry background is resources. So, everyone in the market trying to be the good companies having the resources other than the money. So that’s why I say everyone has the ways to live with that. But yes, I would say, for the percentage, right now you can see the government’s money is very active, obviously, and both to the macro economy. That’s because of the competition between countries.  China is very focused on our internal consumption markets. So as the foreign investors are getting interested in, so I would say in our sectors of healthcare, biotech, food, as well as environment, the environment protection is both China and other countries are emphasized. So that’s why we are seeing the money from central government, they’re having some guidance to go through these areas. So, there’s also some recent news that there are lots of new healthcare funds being built in China.  Highfields Capital just built about a new 5 billion RMB. There’s another company just launched about 10 billion RMB. So that’s why we are thinking it’s good to have competition here. And first of all, I like competition.

JE  I mean, you touched upon the international firms. And the third bullet point here, we’ve been hearing lots of news about the foreign financial institutions, more the investment banks getting licenses to operate in China.  What about in the venture capital industry? Do you expect to see more foreign VCs entering into China? Will that be allowed? Will that be an increasing source of competition for you?

EX  Of course, I think regarding for the strict license, for example, like in the investment banking, like asset management, I feel VC/PE they were the first tier to come to China.  Because for the VC/PE related to the bank or CBD companies, the regulation is relative looser to them. So, actually, they were always there, like GGV, IDG always doing good here, but they also meeting the issues how to combine their investment philosophy to China.  Give you an example, as I was working for Citibank before, my job was to grab for our Citi security companies as well as for investment arm. Before, I will say the years before, they always follow the headquarter rules, but then they found that’s an issue.  The investment procedure and timing can be very harmful for ourselves, such as they also need to be more localized in China.  But for sure, because in the China economic world we have the largest number people to consume, we don’t have too many people as India, but for the people in the middle class is growing fast. I would say for the healthcare, consumption, which is people related, for that production, because of this consumer benefits, it would be very, very good opportunities.  I was talking with some of my old colleagues, right now in some other foreign investors and they are actually adding the money in China.  Then, if I use it another angle to offer you that is also related to the stock markets.  As you can see, MSCI/FTSE, Wilshire are adding more and more China companies, literally companies into their benchmarks, where you have benchmarks is actually pushed back to this global large pension funds to allocate money to China to make sure you don’t have too much too many too big tracking error to the benchmark. So, they invest into China stock markets and China is actually helping to a make our security laws to let companies make it easier to list into the market. So, the foreign investors, sometimes they have both mutual funds as well, as well as private markets, then their private market team can also enter into China to capture to capture the profits before them. So that actually, that is the stock markets, the benchmarks things will also benefit for the venture capital business in China for the foreign investors.

JE  It’s very interesting what you mentioned about the indices in equity markets. I spent more time in debt when I was in the markets, and I realized how much the credit rating agencies affected investment decisions.  But the indices are to the equity markets what the CRAs are to the bond markets, they have a really big impact on who’s investing into what. It’s very interesting to hear your point about the increase in companies going into the indices from China, that will certainly have a big impact for you. Let me revisit, come back to one point you’ve already raised, because we were talking about international. The US dollar fund that you want to start by the end of this year, will that be for US dollar lending to Chinese entities? Or are you going to start becoming an investor looking for good investment opportunities in America? What’s your strategy and using that USD as a follow up?

EX  So, this one we have the scope but still needs to be finalized. But I would say both, because if you look into the healthcare sectors, you can see the most active countries actually are China and the US, although we know there are some risks. But it’s still also having some, having risk I am always looking to the other side. Why have the restrictions because they are the most active ones. So yes, the answer is yes, because for the fund-raising parties, we want to have as many foreign investors’ money versus China money for this USD funds. I mentioned that a Chinese investor can also use money to go to ODI to an enter into our USD fund. But for this fund, LPs deposits, I expect more foreign investors. But I think for them, our fund is not only for the assets in this part in China, but we also look into the globally.  In US is good, but also regarding for the politics, think that we can also look into the Europe as well. So, if there is some huge healthcare or food technology, we want to look at and what I mean, by the way, I know the best cheese is in the Europe, right, which we could not see when I was in the States for like seven years. I always go with Europe cheese other than American cheese.

JE  Okay, so the healthcare industry is getting global, it’s going to be dominated by China and America. So as a healthcare investor, you really need a presence in both of those countries, because it’s becoming a more integrated industry.  That makes a lot of sense as industries evolve. Let me go to the last point in the industry, and this is a deviation and this comes from my time as teaching students investments at universities. I still come across my former students and some of them want to get into the venture capital industry. What advice would you give to a new grad or a recent grad about what to study, what skills, what experience they need to have, if they want to get into the venture capital industry, maybe be an intern in your office.

EX  I just want to mention that actually, two of my interns are from XJTLU.

JE  Okay, after my time, though, after my time, but I’m pleased to hear that.

EX  So, I will say, it seems also in the these situations, because I was finding jobs when I was in New York, is that if a student looked into this video, they will find something to think about. At my time, if I received message from LinkedIn, there’s also websites called the Breaking into Wall Street or Oasis.  There is a traditional way to go:  to the IBD first, and after a few years for training around your age of 30 years or 35, he goes to the VC/PE. Then you’re basically go from sell-side to buy-side, right, that’s a one traditional way we read through it in the US websites. But in China, because we have so many PE firms, the PE firms in China are also hiring the fresh graduates as well. Because I think the internal reason for that is that in general PE/VC funds have much less people than financial institutions. So, if you are in the mature markets, the open positions would be relatively smaller. That’s also the reason people tend to be hiring the experienced people here in China.  If you have good solid skills or you have good resources to bring for the company then that can also be a good opportunity just to break into the industry as well. But just make sure you enter into a company which has a good future, because in China it’s still too many institutions in VC/PE to fight to survive. So that’s a situation look into that.  Regarding for the skills, I can only give my personal views about that. It’s actually similar to my philosophy in that we are looking to the companies that can be listed one day, which is also we want to hire the people when they can become the partners to keep helping the company to organic growth  because we invest money to the company still at a very early stage. So, there’s three criteria, I think.  I think the first off is your person, ‘person’ means is that you have to be an honest person, everybody needs that. But, also, it’s very important that you can ‘read’ the people, the people are to you and to the other. If you are honest people, but you are being lied to every time, we don’t want to give money to mess up, right? When people, second, is that you want to have your research capability to at least be able to talk to the expert, right? For example, we are in the healthcare investment arena and I’m not this background.  We have our investment manager who are learning the mechanicals, which is different, but you have to learn to at least to understand your business model to make sure the investment product works in future years, say five years.  But, also, you have to have the similar number of levels to be able to communicate with your research capability. And the third way is to understand markets, because in our area, or in VC/PE areas, a lot of companies don’t even have the good balance sheets or even don’t have it right, lots just have a good idea.  We already have the medicine stream of pipeline stage, which it still needs getting the FDA, CFDA to get approval, which is long time to go and most of time the hit rate is about only about eight or 7% or 8% or 9%. So, and most of them are by PhDs and in a big pharma for years. They don’t, some of them, don’t even like to talk to people. So, they do a lot of research for years. So, we need to understand the potential for the person as well as to the markets or servicing. People we look to find are similar to the investment target to find – is that the obviously people understand yourself, understand product and have a good research capability as well as understanding markets. So, people, product, market is our investment philosophy as we as we want people to have enjoyed.

JE  Perfect. I’ll put in that slide to the HR department at XJTLU to you as part of your career guidance assessment, I think that’s probably very valuable. Okay, let’s turn to the final thing, which is a bit of a wrap up and just say you know, it’s a new office, what is your one or two important goals for 2021? What are the key priorities?

Key Objectives for 2021

EX  OK, I joined the company at actually this February. So, we are closing the first fund. So, as my first priority, my first KPI is getting the fund-raising closing. That’s number one. Second one is that I want to have a great team here. Other than money, it’s also inline with the expectations from my boss as well as for my LPs is that we have strong team here. Not only can get money, but also can spend the money well.  We always say that we want to show, that is also in my pitchbook, is that we want to buy right, grow right and sell right. So, if you’re going to do that in, say, the next eight or 10 years, you need to have a good stable team and the willing to grow with it. I would say the team building is even more important than the money raising. So those are the two things, money and people.

JE  I mean, you did your closing remarks of what your objectives were and a real people focus, which I guess makes sense. I mean you need the money but you need people to make good investment decisions if it’s going to work out. So, I think that that covers everything for today. Thank you very much Elton. It’s been a very interesting talk and the venture capital industry in China is very, very interesting point in time.

End.