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In little more than a year this new proactive strategytransformed the profile of Little Sheep’s franchise system.The company moved from having 40 directly owned storesversus over 500 franchises before the 3i investment to amore balanced mix of 101 to 260 by late 2007. Even with adramatically decreased total store count, these fundamentalchanges resulted in year‐on‐year revenue growth of closeto 40%, double the industry average of about 20%.Shelving the international expansion planPrior to 3i’s investment, Little Sheep had an ambitious planfor international expansion. With successful restaurantsalready operating in Toronto and Hong Kong, managementwas eager to accelerate the pace of overseas growth andestablish the Little Sheep brand name globally. Each regionalVP was designated to lead expansion efforts in differentoverseas regions – North America, North Asia and SouthEast Asia – even though they were already stretched thinmanaging their domestic operations.Little Sheep’s overseas ambitions were quite commonamong the new generation of Chinese private enterprises.On this issue, however, 3i and Little Sheep management haddifferent views. Even though 3i was well placed to provideintroductions and on‐the‐ground support for an overseasexpansion, it strongly recommended that Little Sheep initiallyfocus on strengthening domestic operations rather thanrushing into overseas expansion. “Given the vast and yetuntapped opportunities in China’s restaurant industry, it isstrategically important for Little Sheep to leverage the leadingmarket share and brand name it has already established tosecure a dominant market position at home beforeexpanding its operations overseas,” Cheung explained.ConclusionsAt first glance the pairing of 3i, a global private equity groupwith almost no track record in China, and a restaurant chainwith origins in remote Mongolia, might seem like an odd andunlikely match. But the story of their relationship conforms tomany of the fundamental characteristics of successful privateequity transactions, especially in emerging markets. First, theinitial driver that allowed 3i to win the mandate after an intensecontest with better‐known competitors was chemistry, or theability to make the founder comfortable with its industryexpertise, commitment to the company and approach topost‐investment value-creation. Money was secondary.Second, Little Sheep’s founder had the foresight and selfconfidenceto recognize the value of accepting an activeinvestor into his company. Even though he had never heardof 3i before meeting Daizong Wang, he and his seniormanagement team exhibited an openness and eagerness tolearn from outsiders, which is not always the case, especiallywith closely held family‐run firms in emerging market countries.And third, this is a textbook case of the positive results thatstem from closely aligned interests between a private equityinvestor and the management of a portfolio company. Fromthe beginning, the 3i team was exceptionally hands‐on,working closely with the company’s senior management teamon a continuous basis to make significant changes in thecompany, always with an eye to building value and movingcloser to the day when Little Sheep would be positioned tosuccessfully execute an IPO. The combination of these threefactors goes far to explain the ingredients required forsuccessful private equity transactions in emerging markets,or anywhere.Although management initially resisted this 3i recommendation,Zhang later conceded that this was a sensible approach.Looking back on the incident, one of the independent directorsviewed the outcome as one more example of the company’sfundamental strength: “They [Little Sheep management] areopen‐minded, and very willing to listen,” remarked Yuka Yeung,“which is really remarkable. It is a learning company.”Early resultsFrom the time of 3i’s investment in mid‐2006 until the endof 2007, Little Sheep opened 37 new stores and achievedyear‐on‐year revenue growth of 40%, far in excess of the15%‐20% average growth in China’s food sector. The strongrevenue growth was also fueled by the evolution of LittleSheep from a pure restaurant business into a more diversifiedfood and beverages group with two meat processingfacilities, a packaged‐seasoning plant, a logistics companyand a number of regional subsidiary companies. Thecompany also completed its search for new senior executivetalent: Daizong Wang validated his confidence in Little Sheepby resigning from 3i in October 2007 to become LittleSheep’s new CFO, and Yuka Yeung, one of the independentdirectors and the former CEO of KFC’s Hong Kong franchise,became the new COO.136 Case studies: 3i Group plc and Little SheepThe Global Economic Impact of Private Equity Report 2008
Exhibit 1: Summary information on 3i’s business linesFigures in £ millionGrowth Venture QuotedBuyouts Capital Capital Infrastructure Private Equity Total3i’s own capital 1,281 1,460 741 469 20 3,971Third‐party funds 2,129 227 15 385 0 2,756Total 3,410 1,687 756 854 20 6,727Source: 3i Annual Report 2007.Exhibit 2: Major events in Little Sheep’s corporate historyDateAug-99Oct-99May-01Jan-02Jan-02Aug-02Jan-03Jan-04May-04Nov-04Nov-04EventFirst Little Sheep restaurant openedSecond and third Little Sheep restaurantsopened, making it a chainLittle Sheep set up subsidiary company in ShanghaiLittle Sheep set up subsidiary company in BeijingLittle Sheep set up subsidiary company in ShenzhenLittle Sheep passed ISO9001 certification andChina national “Green Food” certificationLittle Sheep set up R&D and production facilityfor seasoningsLittle Sheep set up subsidiary company inHong KongLittle Sheep opened its first restaurant inHong KongLittle Sheep became the only restaurantbusiness to enter the “China Top 500 Businesses”list, ranking #451Little Sheep obtained the “Prestigious Brand”designation in ChinaDate EventMay-05 Little Sheep entered the “Inner Mongolia Top 50Private Businesses”, ranking #2Aug-05 Little Sheep’s brand was evaluated at 5.5 billionRMB, and entered “China Top 500 Most ValuableBrands” list, ranking #95Aug-05 Little Sheep entered “China Top 500 ServiceBusinesses” list, ranking #160, (#1 among foodcompanies)Sep-05 Little Sheep obtained the “China Top 100 FoodBusinesses” title for the third time, ranking #2Oct-05 Little Sheep opened its first overseasdirect‐ownership restaurant in Toronto, CanadaDec-05 Little Sheep entered the “China Top 500 Quality”list and “China Food and Beverages Top 10Quality” listMay-06 Little Sheep was named one of “Inner Mongolia’s50 Most Respected Businesses”Jun-06 Little Sheep’s trademark was formally awardedSource: Compiled from company documents.Exhibit 3: Little Sheep’s footprint in China (as of the end of 2005)In addition, Little Sheep had about 550 affiliate stores in operation by the year end of 2005,mainly in the Northern and Northwest China.Provinces with more than 20 storesHebei 74Henan 61HeilongjiangXinjiang 53XinjiangInner MongoliaBeijingTianjingLiaoningJininInner Mongolia 52Shangdong 42TibetQinghaiHebeiNingxia ShanxiShandongGansuShaanxi Henan JiangsuAnhuiSichuanHubeiChongqingZhejianShanghaiGansu 41Guangdong 33Shanxi 33Beijing 22>20 StoresGuizhouHunanJiangxiFujian10-20 StoresYunnanGuangxiGuangdong5-10 StoresTaiwan
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The Globalization of Alternative In
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ContributorsCo-editorsAnuradha Guru
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PrefaceKevin SteinbergChief Operati
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Letter on behalf of the Advisory Bo
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Executive summaryJosh lernerHarvard
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• Private equity-backed companies
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C. Indian casesThe two India cases,
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Part 1Large-sample studiesThe Globa
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The new demography of private equit
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among US publicly traded firms, it
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should be fairly complete. While th
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according to Moody’s (Hamilton et
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draining public markets of firms. I
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FIguresFigure 1A: LBO transactions
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TablesTable 1: Capital IQ 1980s cov
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Table 2: Magnitude and growth of LB
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Table 4: Exits of individual LBO tr
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Table 6: Determinants of exit succe
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Table 7: Ultimate staying power of
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Appendix 1: Imputed enterprise valu
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Private equity and long-run investm
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alternative names associated with t
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4. Finally, we explore whether firm
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When we estimate these regressions,
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cutting back on the number of filin
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Table 1: Summary statisticsPanel D:
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Table 4: Relative citation intensit
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figuresFigure 1: Number of private
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Private equity and employment*steve
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Especially when taken together, our
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centred on the transaction year ide
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and Vartia 1985.) Aggregate employm
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sectors. In Retail Trade, the cumul
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employment-weighted acquisition rat
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FIguresFigure 1: Matches of private
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Figure 6:Figure 6A: Comparison of n
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Figure 8:Figure 8A: Comparison of j
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Figure 11: Variation in impact in e
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Figure 12: Differences in impact on
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Private equity and corporate govern
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et al (2007) track the evolution of
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groups aim to improve firm performa
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distribution of the LBO sponsors, m
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the most difficult cases. This stor
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to see whether these changes of CEO
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Figure 3:This figure represents the
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TablesTable 1: Company size descrip
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Table 5: Changes in the board size,
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Table 7: Board turnoverPanel A: Siz
Page 103 and 104: Part 2Case studiesThe Global Econom
Page 105 and 106: European private equity cases: intr
Page 107 and 108: Exhibit 1: Private equity fund size
Page 109 and 110: Messer Griesheimann-kristin achleit
Page 111 and 112: ealized it was not possible to grow
Page 113 and 114: The deal with Allianz Capital partn
Page 115 and 116: the deal, the private equity invest
Page 117 and 118: Exhibit 1: The Messer Griesheim dea
Page 119 and 120: Exhibit 5: Post buyout structureMes
Page 121 and 122: New Lookann-kristin achleitnerTechn
Page 123 and 124: feet. This restricted store space w
Page 125 and 126: institutional investors why this in
Page 127 and 128: Although a public listing did not a
Page 129 and 130: Exhibit 5: Employment development a
Page 131 and 132: Chinese private equity cases: intro
Page 133 and 134: Hony Capital and China Glass Holdin
Page 135 and 136: Hony’s Chinese name means ambitio
Page 137 and 138: Establishing early agreement on pos
Page 139 and 140: Executing the IPOEach of the initia
Page 141 and 142: Exhibit 1A: Summary of Hony Capital
Page 143 and 144: Exhibit 4: Members of the China Gla
Page 145 and 146: Exhibit 6A: China Glass post‐acqu
Page 147 and 148: Exhibit 8: China Glass stock price
Page 149 and 150: 3i Group plc and Little Sheep*Lily
Page 151 and 152: y an aggressive franchise strategy,
Page 153: soul” of the business. But there
Page 157 and 158: Exhibit 6: An excerpt from the 180-
Page 159 and 160: Indian private equity cases: introd
Page 161 and 162: ICICI Venture and Subhiksha *Lily F
Page 163 and 164: investment,” recalled Deshpande.
Page 165 and 166: 2005 - 2007: Moderator, protector a
Page 167 and 168: Exhibit 3: Subhiksha’s board comp
Page 169 and 170: Warburg Pincus and Bharti Tele‐Ve
Page 171 and 172: founded two companies at this time
Page 173 and 174: By 2003 this restructuring task was
Page 175 and 176: Exhibit 1C: Private equity investme
Page 177 and 178: Exhibit 4B: Bharti cellular footpri
Page 179 and 180: Exhibit 6: Summary of Bharti’s fi
Page 181 and 182: Exhibit 7: Bharti’s board structu
Page 183 and 184: In the 1993‐94 academic year, he
Page 185 and 186: consumer products. She was also a R
Page 187 and 188: AcknowledgementsJosh LernerHarvard
Page 189: The World Economic Forum is an inde
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