BHR Partners was set up as an extension of Bohai Industrial Investment Fund to support Chinese companies going overseas. CEO Jonathan Li and Managing Partner Xin Wang explain the strategy

Q: Bohai Industrial Investment Fund (Bohai Capital) has been in existence for 10 years. How did BHR come together?

JONATHAN LI: I became the CEO in Bohai Capital in 2009 and conceived the idea for BHR two years later, anticipating a big wave of cross-border M&A by Chinese enterprises. It took me almost three years to get it set up. I wanted diversified ownership, including both Chinese and foreign partners, to make the firm more international. On the foreign side, I spent two years talking to large financial institutions before we ended up with RST, which includes Rosemont, a boutique real estate and TMT private equity firm and Thornton Advisory, a US advisory firm specializing in Sino-US relations. On the Chinese side, in addition to keeping the Bohai Capital lineage, we lined up a subsidiary of Harvest Fund as our second partner. One element of our business model is that we go abroad with industrial players from China. As one of the largest mutual fund companies here, Harvest is able to reach those different industrial players. Meanwhile, Bohai itself has connections with large Chinese financial institutions.

Q: How do you feel the firm is differentiated from other PE investors looking at cross-border opportunities?

XIN WANG: As early birds in cross-border M&A, we have first-mover advantage. In addition to that, BHR offers the best of both the Chinese private equity world and the Western private equity world. Bohai Capital has a state-owned background, with the likes of Bank of China - which is still the largest indirect shareholder in BHR - and China Development Bank Capital, and then we have a global network. The combination of Sino-US mixed ownership, a diversified, market-oriented team and global resources brings a multi-dimensional approach to our investment decision making.

Q: There are two main investment angles - cross-border and state-owned enterprise (SOE) reform. What led to the introduction of the latter angle?

LI: BHR was originally set up solely for cross-border investment, but then the Sinopec Marketing transaction came along and we thought it was a good business opportunity. I approached them as Bohai Capital but they advised me to use BHR because in their eyes BHR represents a mixture of private enterprise and SOE - essentially the kind of mixed-ownership structure advocated by the government's reform initiatives. Given that BHR was not designated to invest in SOE reform, we set up a special vehicle for that transaction. We feel the strategy makes a lot of commercial sense and so we are now looking at new transactions from the same angle. Many SOEs need to be reformed and by introducing the correct incentive schemes performance can be improved.

Q: So there doesn't have to be a cross-border element to SOE investments?

WANG: Not necessarily, but we do try to cross-fertilize our different investment units. For example, as we continue to invest in SOEs with private capital we envisage opportunities to work with companies in their overseas endeavors. This fits our investment approach.

LI: Henniges [an automotive equipment manufacturer acquired last year] is our typical business model. We set up a joint venture with AVIC - they own 51% and we own 49% - and did the acquisition together. AVIC has industry experience, operations in China, and it knew Henniges well. As a financial investor, we use our international network and our professionalism. While the AVIC is very experienced in international acquisitions, some Chinese companies don't have the same cross-border experience and so may appreciate what we can offer in this domain.

WANG: A lot of it is optics as well. Just by virtue of being an SOE there is the perception - rightly or wrongly - that there will be some cross-cultural issues. Having us and our global resources there as a financial investor, and serving as a conduit, can facilitate the transaction.

Q: To what extent is Henniges typical of the sectors BHR is targeting?

LI: Industrial technology is one area we are interested in. We want to buy companies with good technology and a strong international sales network and management team. Working with our strategic partners, we can help them tap into the Chinese market

Q: You set up dedicated funds for the Sinopec Marketing and Henniges investments. Is this BHR's standard approach?

WANG: As of the end of 2015 we have achieved aggregate assets under management of $1.75 billion and much of that has been invested through dedicated funds. We also operate blind pool funds but we find that, for large-sized transactions, setting up dedicated deal funds allows flexibility in funding, execution and exit strategies. This will remain our approach for the foreseeable future but one of the key objectives for 2016 is to diversify our LP base. With that in mind we are hoping to build a US fund and an European fund in the coming year.

Q: Where do investments in internet-related companies like Didi Kuaidi and Tuniu come in?

WANG: We have two key themes and of the $1.75 billion we have invested, 60% has been in cross-border and 30% in SOE reform. The remaining 10% is in a third bucket, which operates more on an opportunistic basis. That is for growth-stage investments in the likes of Didi Kuaidi. We are looking to do more of these deals this year. I believe there is a change in consumption mentality taking place in China - a movement away from product-based to experience-based consumption. Didi Kuaidi is part of that because it enhances an experience that facilitates our everyday life.

Q: Are valuations a concern in these investments and do you get downside protection?

LI: Downside protection is not an imperative as we focus on the fundamentals of the investment target. Neither is valuation the biggest concern because we focus more on the target's potential for organic growth and its synergistic potential with our Chinese strategic partners. However, we do ask for downside protection, and depending on the investment at hand, we may or may not get it. If there is no downside protection and we like the company then we will still invest.

http://www.avcj.com/avcj/interview/2449210/q-a-bhr-partners-jonathan-li-xin-wang