The Global Economic Impact of Private Equity Report 2008 - World ...

Executive Summary: 3i Group plc and Little SheepIn 2006, a large, well‐established global private equity firminvested in a rapidly growing Chinese restaurant chain thatoriginated in Inner Mongolia. This case describes why andhow a productive, though unlikely, relationship was forgedbetween these two firms, and the result of their collaboration.3i, a highly respected global private equity firm, firstestablished a presence in Asia in 2001. Three years later,the firm became aware of a rapidly growing restaurant chaincalled Little Sheep. Due to its meteoric growth and nationalbrand name recognition, the founder of Little Sheep hadbeen approached by prestigious investors with attractiveoffers of financing. As the founder later explained, hefavoured 3i over other prospective investors because of astrong belief that 3i had the expertise and commitment toadd value on a number of fronts, from corporate governanceto helping revamp the firm’s franchising strategy.Executive Summary: Hony Capital and China Glass HoldingsThis case traces the 2004 buyout of a state‐owned flat glassmanufacturer, Jiangsu Glass, by Hony Capital, a recentlycreated Chinese private equity fund, and the value creationthat resulted from the transaction. Once in control, Honyrapidly orchestrated a major growth‐oriented restructuringof the company, a successful IPO on the Hong Kong StockExchange (with a new name, China Glass), and the acquisitionof seven Chinese glass manufacturing companies. As a result,in the time span of about three years China Glass wastransformed from a relatively obscure, mid‐size glassmanufacturing company to one of the largest, most efficientproducers in China.A striking feature of this transaction was the close,collaborative working relationship between the Hony dealteam and the senior management of China Glass from thevery beginning, even during the due diligence phase. Thisearly and sustained bond between the key stakeholdersfacilitated and accelerated the major changes required totake the company to a new, higher level. An active, engagedboard of directors was established, revamped governancepractices were put in place and internationally acceptableaccounting and financial reporting standards wereimplemented. These reforms enhanced the company’scredibility with investors, attracted one of the world’s largestglass manufacturers as a strategic partner and investor, andcreated a solid foundation for rapid growth. Today, ChinaGlass is one of the few Chinese glass manufacturers listedoverseas and is trading at an estimated forward P/E ratio ofabout 23, twice the industry average. Since the buyout, dailyproduction capacity has increased more than five‐fold from900 tons in 2003 to 5,230 tons in September 2007.Revenues have grown from $44.5 million to more than$250 million. 2 The transformation has also positioned ChinaGlass to be more competitive in global markets by shifting itsproduct mix towards high value‐add, high margin varieties.2All US dollar figures are approximate, converted from local currency at an exchange rate of $1USD = RMB 7.5.114 Case studies: Chinese private equity cases: introductionThe Global Economic Impact of Private Equity Report 2008