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[Media Focus] Investment Opportunity of PIPE Fund under Circle?

Date: 2016-06-29
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“The time to be greedy is when others are afraid, and the time to be afraid is when others are greedy.” -- Warren Buffett

In foreign countries, PIPE investment is an important business for PE companies; in China, although PIPE hasn’t reached a big scale, there was a huge explosion of the power of PIPE investment early in 2009, when the entire A share market was valuated at a low level. In the recent one year, despite the wide consolidation of stock market, PIPE is becoming active again. According to a set of data released by Zero2IPO Research, there was an obvious growth of PIPE investment in the first quarter of 2016, with as many as 95 investment cases; in terms of the investment amount, it increased by 411.45% year on year and by 44.94% in link relative ratio.
Why PIPE is so favored when the capital market is undergoing a small-range fluctuation? How do these private equity investment agencies rely on PIPE fund to increase the value of their listed companies? Follow the story to learn TTGG’s PIPE fund, which will help you find out the value and secret of outstanding PIPE fund. 
What is PIPE investment?
PIPE (private investment in public equity) refers to the direct or indirect investment of private fund in the stock right of listed companies, which are also among the best performers in the industry. Compared with the investment in stock right of non-listed companies, PIPE investment has the advantages of strong liquidity, short period and confirmed way of exit.

What are the features of TTGG’s PIPE fund?
Domestically, Zhejiang Silicon Paradise Asset Management Group Co., Ltd. (hereinafter referred to as TTGG) is among those earliest private offering institutions engaged in PIPE investment. As one of the first managers of China’s stock equity investment, it transitioned to the business of industrial merger early in 2011, and set the first example in the industry with its original “PE + listed company” mode. By creating, changing and improving the value of listed company and sharing incremental value, it has become a role model in China’s PIPE fund investment.

Advantages of TTGG PIPE fund:
    Ø Core targets of investment:
      The stock rights of listed companies which TTGG cooperates to perform industrial merger and integration.
      Ø Multi-market:
      Allocate the high-quality targets of listed companies of A share and H share in a decentralized manner to seize both the growth opportunities of high-growth financial markets of emerging economies and the value investment opportunities of mature financial markets of advanced economies, and reduce systematic risks by reasonable allocation of international and domestic financial markets.
      Ø Methods of multivariate investment:
      Choose the methods with the most controllable risks and most predictive profits for investors to acquire stock rights of the listed companies, including transfer on agreement, private placement, and cornerstone investment.
      Ø Multi-industry:
      Select the leading targets of high-growth and explosive industries, such as community consumption, new-energy automobile, intelligent manufacturing and environmental protection, and reduce industrial risks by decentralized industrial investments.
      Ø Diversified allocation of periods:
      Achieve both favorable cash flow and mid-to-long-term profit sharing by different combinations of investment periods and withdrawal timing.
     Methods of TTGG’s PIPE fund investment 
 According to statistics, TTGG’s PIPE fund has a wonderful past performance. So far, all of its completed projects have an average return of more than 56%, and the average floating profit of remaining projects has doubled. The listed companies which TTGG invested in have high-quality targets have produced higher value by industrial integration; therefore, the investors of PIPE fund are able to share the incremental value of listed companies which are more definite and have more controllable risks.
      Then what are the factors that have contributed to the performance of PIPE fund of TTGG?
      First, TTGG selects listed companies it works with based on three considerations – “the track, the racing auto, and the racing driver”. First, the track indicates the industry, which should be encouraged by national policies to create social values and should have a huge market space and opportunities of explosive growth. Monopoly should not have developed and the industry should have a high degree of decentralization. And TTGG should be able to integrate resources and provide added values. Second, the racing auto indicates the enterprise, which should be an outstanding performer in the industry with a target compound growth rate higher than 30%, and should produce the multiplier effect of synergy values after integration. Third, the racing driver indicates the entrepreneur, who should be aspiring, passionate, responsible, and tolerant.
      After selecting the partner, TTGG will help the listed company to adjust strategic orientation, find its most suitable development path, and determine the acquisition and integration strategy. In the entire process of acquisition, TTGG will create values for the listed company on all levels, including selecting the target, designing the transaction architecture, balancing interests of different stakeholders and providing financial services. Most importantly, TTGG will focus on connecting various upstream and downstream resources in the industrial chain after acquisition; for example, it will open downstream sales market, reduce upstream costs, and coordinate its original business with new direction and resources (including mutually complemented market and technology) to enhance operation efficiency and profit level.
      Therefore, the profit model of TTGG’s PIPE fund not only includes the discounts of private placement or transfer on agreement, but also enables effective sharing of incremental value. Because such cooperation brings about actual improvement for listed companies, the fund has a higher certainty of profiting and more controllable risks.
      For example, in May 2014, TTGG indirectly purchased the private placement of GEM (002340) with an investment price of RMB 10.3 Yuan/share, and the company’s current market value was RMB 15.04 billion Yuan. In June 2014, GEM announced its added investment in Tianjin Urban Mining, Wuhan Urban Mining, and Jingmen GEM. In July 2014, GEM announced its purchase of 60% of stock rights of Yangzhou Ningda Precious Metal Co., Ltd. In February 2015, GEM purchased 65%, 49%, and 49% of stock rights from Zhejiang Dewei Hard Alloy Manufacturing Co., Ltd., Jiangsu Cobalt Nickel Metal Co., Ltd., and Jingmen Dewei GEM Tungsten Resource Recycling Co., Ltd., respectively. Since May 2015, TTGG started withdrawal at selected timing with an average withdrawal price of RMB 18.3 Yuan/share, and GME’s market value reached RMB 26.72 billion Yuan.

      From the above examples, we can see that ordinary private placement funds are basically a type of financial investment which places no control on the target. Their profit mainly depends on the discount at the time of entrance and the differential prices at dealings in the secondary market. Such investment is not capable of changing the value of the target company during the lock-up period. And Yangguang private fund is largely influenced by the secondary market and policies and cannot produce incremental value for investors. PIPE fund of TTGG centers on “PE + listed company” model and emphasizes effective enhancement of the company’s profiting capability and market valuation level through industrial integration. It enables the investors to become responsible small shareholders and makes the “big cake” so that investors can effectively share the incremental values.

      The stock right investment logic of listed companies during market downturn

      During market downturn, TTGG’s confidence in its investment in the stock rights of listed companies results from its following understandings of the current market situation.
      First, in the new normal state, industrial transformation became companies’ spontaneous pursuits. In 2015, listed companies accelerated their investment and acquisition in new industries.
      In the beginning of 2016, fixed asset investment stopped its downward trend and put an end to 20 months’ continuous decline. In January to April, fixed asset investment in cities and towns had grown by 10.6% compared to last year, among which the investment in high-tech and new-type products consistent with the upgrade trend is growing rapidly. Industrial structure optimization brought about by supply-side reforms has created the prospect of 2-3 years’ economic development in future. And listed companies are generally the outstanding performers in the market and have the foundation for transformation, upgrade, strengthening, and expansion, and are thus worthy of institutional investors’ participation. 
      Second, China’s capital market is in a gradual maturing process. Valuations of different companies may vary even in the same industry or the same sector, and profiting companies with advanced technology, service or ideology will become the targets of professional investors, while bad companies face the risk of losing liquidity. So the phenomenon of a sector’s pursuance of hotspots will become less obvious and only by discovering and investing in values can one occupy the market. So the market will gradually become the world of institutional investors, and it will be harder and harder for individual investors to make a profit.
      Therefore, the institutions capable of discovering values are brave enough to invest in listed companies through PIPE fund during market downturn.

      How do investors participate in PIPE fund investment?

      Only qualified investors who meet one of the following conditions can participate in private fund investment: An entity with a net asset not less than RMB 10 million Yuan; an individual with a financial asset not less than RMB 3 million Yuan or an annual average income not less than RMB 0.5 million Yuan for the past 3 years. The threshold of PIPE fund investment is RMB 1 million Yuan at the minimum, and varies depending on the project.

(Reprinted from: Zheshang Financier No.6 2016; date; June 29, 2016; reported by CAI Xiaomeng)

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