3i set to be first European pe firm to launch yuan-denominated offering

Robert Stefanowski says 3i has invested $300 million in 11 companies in China. [Nick J B Moore / for China Daily]

Robert Stefanowski is a leading European private equity player who is set to get unprecedented access to the China market.

The 49-year-old is chairman and managing partner, North America and Asia, for 3i, one of Europe's leading private equity companies. He will soon have 640 million yuan (69 million euros) at his disposal to invest in Chinese companies.

The London-based operation is set to be the first European private equity company to be given the right to launch a yuan-denominated fund. An announcement is expected by the financial authorities in September.

"We are actually pretty proud we are the first non- US firm to get this allocation. They wanted a European firm to balance out the access to the market," says Stefanowski.

The first foreign firm to be granted approval to launch an RMB fund was the US giant Blackstone Group in 2009. It has been followed by other American players Carlyle Group, Morgan Stanley and Goldman Sachs. 3i is likely to get a $100 million allocation, although this is yet to be confirmed.

Having an RMB fund enables a foreign company in the China private equity market to compete on an equal footing with Chinese local based funds.

Previously, the likes of 3i have had to get exchange control approval (since currency conversion is controlled in China) before making any investment.

This process could often take months, meaning they could often miss out to local private equity companies who could complete deals quicker.

"When the management of a company asks us when we can do the deal, we can say we can do it straight away rather than in six months time when we have got the money. That is the essential difference," he says.

Stefanowski, who was speaking in 3i's expansive offices in Palace Street, near London's Victoria area, is a veteran of the private equity industry.

An American from Connecticut, he ran GE Capital's European finance business, which included private equity investment, before joining 3i three years ago.

He is an acknowledged expert in the field and lectures on mergers and acquisitions at both Cambridge University and the London Business School.

He made his first ever visit to China in 2005 and now goes there once or twice every three months.

"I love the culture. The pace of growth is amazing. Every time I go there I learn tons of stuff. To me it is the most interesting part of the world," he says.

3i, which was originally formed by the Bank of England to provide funding for small- and medium-sized businesses in the UK after World War II but was later floated, was one of the first foreign private equity companies to enter China in 2001.

Over the past decade it has invested some $300 million in 11 companies in what is now the world's second largest economy. Its primary focus is businesses in consumer-orientated sectors as well as in business services and general industrial areas.

"When we went out there, we set up a local team, people who knew the language and the geography, which I think is pretty important. We were in there pretty early. I wouldn't say there was no market then but it has expanded a lot over the last 10 years," he says.

One of 3i's most high profile investments was in Little Sheep, a Mongolian-style hot pot restaurant chain, which was originally founded in 1999.

3i invested $20 million in the company in 2006 and remained on board when it floated on the Hong Kong Stock Exchange two years later, valuing the company at $420 million. 3i eventually sold its minority stake to Yum! Brands, which operates the Kentucky Fried Chicken franchise in China in 2009.

"We didn't just import capital into the business; we brought our professionalism and improved the company's corporate governance so it was ready for its IPO," he says. "It was an investment that fitted into one of those sweet spots of rising consumer demand and people wanting to eat something different. It grew organically and it was an ideal scenario for us."

With the imminent allocation of an RMB fund, 3i is stepping up its efforts in China. It has recently hired Paul Su, who was previously managing director and vice-chairman of Greater China for Credit Suisse's investment banking division, to spearhead operations in the country. He will report directly to Stefanowski.

The company has 13 employees, including three partners, in three offices in Beijing, Shanghai and Hong Kong.

Stefanowski says the private equity market, despite rapidly expanding, is still relatively undeveloped compared to the major markets in Europe and the United States.

"Here in the UK, private equity accounts for around 4 percent of GDP, while in China it is around 1.5 percent, although that is ahead of the 0.4 percent of Brazil, which is another market we are involved in," he says.

The American, who has an MBA from Cornell University in New York and who spent his early career in public accounting with Price Waterhouse, says the China market remains intensely competitive.

"The competition from local firms is often quite a challenge. We are often up against a local firm that wants to do something after two days of due diligence. We, however, refuse to invest in a company that we don't fully understand and we are fully prepared in those circumstances to move on to the next deal," he says.

Stefanowski says many Chinese SME owners still want an internationally-respected investor like 3i on board, particularly if they want to go public through an IPO.

"What you see in China is a lot of family-run operations that don't quite have the sophistication needed to do an IPO. We can help them with compliance and guide them through the process. The company gets the credibility of having 3i on board and so it makes it easier for it to float," he says.

The private equity boss says when making an investment it is important there is an understanding between the investor and the company about the duration of the investment and the exit routes from the deal, whether that is an IPO or a trade sale to another company.

"Our primary objective is to help the company grow but what we like to do is have some understanding with management about having our interests aligned," he says.

"We don't want a situation where our view is that we should exit in three years and the management view is that it should be 10 years."

Stefanowski adds 3i often takes a long-term position in a company since its finance is often off its own balance sheet rather than that of a fund which is required to deliver a return.

"We don't rush it. We may have a company in which we may be sitting on a big gain but we won't want to exit if we think the business can be developed further. We will be patient," he says.

Stefanowski says there is a significant funding gap for small- and medium-sized enterprises in China, which has been made worse by the government's credit-tightening measures that has restricted the amount of available loan finance from the banks.

He estimates the gap could be as large as $100 billion and could be partly filled by private equity companies playing a greater role in the economy.

"We estimate the need for capital is growing at 20 percent a year and is now around $200 billion, half of which is unsatisfied," he says.

"In China the banks think it is ok to lend to the big institutions (larger State-owned enterprises) but feel lending to the smaller ones is risky. They will lend to some and not to others and this creates an opportunity for the private equity market. We can offer finance not in the form of loans but in equity," he says.

Stefanowski says 3i is hoping to play a greater role in helping Chinese companies expand internationally, particularly into Europe.

"As an investor we can provide guidance on expansion overseas. We also have a whole portfolio of European businesses, which could be attractive to Chinese buyers. Many of these businesses have expertise in branding which Chinese companies often lack and could learn from," he says.

The American investor believes private equity could play a major role in giving Chinese businesses more of a presence on the international stage.

"To bring a Chinese company over to Europe would be fantastic and who is better placed than us to do this since we have invested in 14,000 businesses over 60 years," he says.