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

investment banking, Lu was very sophisticated and aheadof the curve.” It turned out that earlier in his career, Lu hadworked on the senior management team of Meng Niu whenit received a widely publicized investment from MorganStanley and CDH, a well‐known Chinese private equity fund.Based on this previous experience, he was predisposed toworking with a private equity investor.Winning the mandateAfter the initial meeting in August, 3i engaged in afour‐month competition with other private equity suitors,including Goldman Sachs and Morgan Stanley, before finallybeing awarded the Little Sheep mandate. During this period,Anna Cheung, a 3i partner based in Hong Kong, wasassigned as the senior member on the team working withWang to secure the mandate. The investment team flewto Baotou frequently, getting to know Little Sheep’s seniormanagement team, and explaining 3i’s investmentphilosophy. At the same time, they spoke with a numberof research analysts covering the Hong Kong and Chineserestaurant sector to learn more about the sector, and sharedtheir findings with Little Sheep senior management. Theteam also tapped into 3i’s network of industry experts – thePeople Programmes – and identified Nish Kankiwala, formerpresident of Burger King International, as a suitable advisorfor Little Sheep. As the top executive at one of the world’slargest fast food restaurant chains, Kankiwala would bringa wealth of sorely needed knowledge about the franchisebusiness. At the request of the 3i team, Kankiwala flewto Beijing and spent a number of days meeting with LittleSheep’s entire senior management team, learning theups and downs of the company’s performance anddiscussing the relevance of his own experience to LittleSheep’s future strategy. This was the first time that LittleSheep management had direct access to a world‐classexpert with a deep understanding of their business andthey were impressed by 3i’s commitment and ready accessto this calibre of expertise.But the spectre of Goldman Sachs continued to lurk inthe background. Wang heard that his former Goldmancolleagues were visiting Little Sheep in Baotou in late 2005,so he immediately flew there and was “prepared to sit thereuntil we signed the term sheet”. His persistence paid off andfour months after Wang’s August cold call, 3i signed a termsheet with Little Sheep, agreeing to a $25 million equityinvestment for a minority stake in the company. (Prax Capital,a private equity fund focused on Chinese investments,invested $5 million as a co‐investor.) The transaction closedsix months later, in June 2006, and 3i’s real value‐add to thecompany began to take shape.Post‐investment Value‐creationForming a strategic blueprintDuring the six‐month period between the signing of themandate in late 2005 and the final closing in June 2006,3i worked closely with Little Sheep management to clarifya number of strategic questions that the company neededto address, and an agreement was reached to engageRoland Berger, a strategic consulting company, to providefact‐based analysis as a basis for resolving some of themost pressing issues.Based on extensive data collection and analysis, theconsultants made a number of specific recommendations,such as optimal store size and location in differentsub‐markets, 6 and how the company should overhaulits existing franchises (as described in the next section).These findings and recommendations became the basis ofa blueprint that outlined a step‐by‐step effort to professionalizeand improve the company’s operations. When the analysisand recommendations were presented to the Little Sheepboard, the response was highly favourable.Mapping strategy to operations: the 180‐day planAided by the strategic insights gained from the RolandBerger report, 3i’s Wang drafted a “180‐day plan”, a detailedwork plan of tasks that the company needed to address inthe following six months, including specific financial, legal,operational and HR issues. (See Exhibit 6 for an excerptfrom Little Sheep’s 180‐day plan.) After discussing the planwith the management and obtaining their full commitment toexecuting it, it was then continuously tracked and updated.3i partner Anna Cheung explained: “The 180‐day plan helpedto provide structure and a time frame that gave all partiesinvolved a goal to work towards.”This detailed level of post‐investment involvement isstandard for all 3i investments, and it confirmed for LittleSheep management that 3i was willing and able to providethe non‐financial benefits that they had been seeking fromtheir private equity investor.Strengthening the management team and the boardBoth 3i and Little Sheep understood clearly that a criticaltask for the company prior to a public listing wasstrengthening the management team and board structure.Little Sheep’s management team had a high level of integrityand drive, but lacked depth: the entire top managementteam consisted of founder and CEO, Zhang, a senior vicepresident of finance, and three regional vice presidents. (SeeExhibit 6A for an organizational chart for Little Sheep before3i’s investment.) Even more significantly, as Wang remarked,“the company lacked systems such as centralized operationmanagement, new store development and marketing teams,which were crucial for the company to continue to grow in acoordinated manner”. Through the years, the company hadbeen carried forward almost entirely by a small team ofmanagers united and motivated by the founder’s sheerpersonal strength and charm. “The founder, Mr Zhang, isan inspirational person,” remarked Cheung; and as one ofZhang’s lieutenants would confirm, he was “the heart and6For example, based on profitability analysis, it found that the optimal store size for tier‐1, tier‐2, and tier‐3 cites are 1200m 2 , 600m 2 , and 600m 2 ,respectively, and that the reason for most under‐performing stores (profitability < 5% of sales) was due to wrong store location.134 Case studies: 3i Group plc and Little SheepThe Global Economic Impact of Private Equity Report 2008