New Horizon Capital is one of the most influential and successful participants in China’s fledgling private equity industry. It has billions of dollars under management and a stable of investors that includes Deutsche Bank, JPMorgan Chase, UBS and Temasek, Singapore’s sovereign wealth fund. But you would not guess any of that from its central Beijing headquarters.
The company has no nameplate in the lobby of the Golden Treasure Tower, a nondescript building near the Forbidden City, the traditional seat of imperial power. Its simple 12th floor offices are identified only by a small sign inside the door that reads, in Chinese, “New Horizon Growth Investment Advisory Limited”.
The company does not need flashy suites as it has one of the most valuable assets in China. He is Winston Wen, an MBA from Northwestern University’s Kellogg business school in the US who keeps a low profile and bears a striking resemblance to his father – Wen Jiabao, premier of the People’s Republic of China.
The younger Mr Wen and New Horizon are in the vanguard of a more aggressive generation of taizidang (“princelings”) – offspring of senior Communist party officials – who dominate the burgeoning home-grown private equity industry, where huge profits are to be made from restructuring state assets and financing private companies.
In 2009 private equity deals in China totalled $3.6bn, accounting for one-third of all such transactions in the Asia-Pacific region, according to Thomson Reuters. But industry participants say the potential market is far larger.
According to those working in the sector, the princelings’ ascendance is squeezing out less well connected operators, including foreign firms, which might have important consequences for two reasons. First, private equity could play an important role in modernising the economy, channelling funds to promising but capital-starved companies – but those benefits will be felt only if the industry is run in a professional and competitive manner.
Second, some in the political establishment fear that princeling dominance of private equity could exacerbate public perception of nepotism and misrule at the top of the Communist party. In an opaque authoritarian system lacking the popular legitimacy of a democracy, such fears are hard to dismiss. A recent online opinion poll by the People’s Daily, the party’s official mouthpiece, found that 91 per cent of respondents believe all rich families have political backgrounds.
In an interview with the same newspaper, the former auditor-general said the fast-growing wealth of officials’ children and relatives “is what the public is most dissatisfied about”. Li Jinhua, widely respected as the senior graft-busting official between 1998 and 2008, told the paper this month: “From the numerous cases currently coming to light, we can see that many corruption problems are transacted through sons and daughters.”
Many of the elite’s children are western educated and, over the past 15 years, dozens have been recruited by western companies and banks hoping to secure an entry into the Chinese market and win mandates to take state-owned companies public in New York or Hong Kong. As most foreign investors know, employing the relative of a senior party leader as an adviser or employee can help cut through bureaucratic obstruction and resistance from local interest groups.
But today those institutions and investors are scrambling to invest in the private equity funds of princelings who would once have been on their payroll. “In the past, the best option for these people with ‘background’ was to go to the high-paying western investment banks but now the economic strength has shifted,” says one person in the private equity industry, asking not to be named because of the sensitivity of the topic. “Now they’re saying to the foreigners, ‘Hey, I’m in the driving seat, I have all the deals – so you give me your money and I’ll invest it myself and take a big cut’.”
Prominent private equity princelings include George Li, a former banker at Merrill Lynch and UBS with an MBA from the Sloan School of Management at the Massachusetts Institute of Technology, whose father, Li Ruihuan, was one of the country’s senior leaders from the late 1980s until 2003. Another son, Jeffrey Li, recently resigned as China head of Novartis, the pharmaceuticals group, to go into private equity, according to people familiar with the matter.
Wilson Feng, who bankers and private equity investors say is the son-in-law of Wu Bangguo – officially second in the party hierarchy – left Merrill Lynch two years ago to launch a fund with ties to the state-owned nuclear energy conglomerate, according to media reports and people familiar with the matter. Mr Feng was key to securing Merrill’s mandate to take Industrial and Commercial Bank of China public in Hong Kong in 2006 in the biggest initial public offering in history.
Other private equity princelings include Li Tong, daughter of Li Changchun, the member of the nine-strong ruling Politburo standing committee in charge of propaganda and the media. Ms Li now runs a private equity fund at Hong Kong-based Bank of China International focusing on the media sector, according to three people familiar with the matter. Stanford-educated Jeffrey Zeng, son of Zeng Peiyan, former vice-premier, has also set up a fund affiliated with state-owned financial institutions.
“This is turning into a crucial moment for the financial industry in China,” says the head of a foreign bank in Beijing.“But we are very worried that foreigners and other skilled Chinese are being shut out by a string of princelings and other very well-connected people trying to dominate [the private equity] market.”
The government has been encouraging the creation of a home-grown private equity industry in recent years but approvals to set up funds are tightly controlled and investments often require them from numerous state agencies. Having the relative of a top leader in its management team can help fledgling funds overcome these hurdles.
Princelings have long been suspected of leveraging parental political power for personal gain; the topic was a source of public anger during the 1989 Tiananmen Square student protests that ended in a bloody military crackdown. But Beijing political insiders say two men led the way for the ambitious new generation, fostering the modern perception of close ties between money and political power.
Levin Zhu, son of former premier Zhu Rongji, and Jiang Mianheng, son of former president Jiang Zemin, are familiar to many foreign investors, having worked for or set up joint ventures with several large western companies. Their fathers helped push through some of the past two decades’ most important market-based reforms, including World Trade Organisation membership.
Mr Zhu has a PhD in meteorology from the University of Wisconsin-Madison. Following a stint at Credit Suisse First Boston in New York, he returned to China in the late 1990s and orchestrated a virtual takeover of China International Capital Corp, a joint venture in which Morgan Stanley holds about 34 per cent.
Mr Jiang boasts a PhD in electrical engineering from Drexel University in Philadelphia. Returning to Shanghai in the early 1990s he was courted by foreign investors who saw him as the country’s most valuable joint venture partner. Today, he controls Shanghai Alliance Investment Limited, a government investment company operating much like a private equity firm.
With their parents both out of formal office since 2003, the influence of Mr Jiang and Mr Zhu has waned. But as children of the “third generation” of technocratic leaders, they are seen to have paved the way for the current wave of princelings. “Those two really helped create the image of Red families running this country for their own benefit,” according to one person who deals closely with many princeling families. “Their actions have given all the younger generation a green light to go out and aggressively build their own buckets of gold, no matter what the consequences for the image of the party or the leadership.”
By squeezing out foreigners and other competition, dominance of the private equity sector by princelings will bring few benefits in terms of management skills or financial discipline, some analysts and industry participants say.
“Private equity is a very good area for princelings because with these sorts of connections you can get into companies ahead of their IPOs and make a lot of money in a short space of time,” says Professor Victor Shih of Northwestern University. “It is an easy way to make money because everyone will be willing to back them because of their connections. Everyone will do it willingly in order to potentially get favours from senior leaders in return.”
People close to several private equity princelings say they often feel they are victims of reverse discrimination; that no matter how smart or hard-working they are, the public will assume their success relies purely on nepotism. However, some important operators in the Chinese sector, while benefiting from family links, are seen in the industry as well qualified in their own right. One such person is Liu Lefei, son of Liu Yunshan, head of the party’s central propaganda department. The younger Mr Liu previously managed Rmb1,000bn ($147bn; €109bn; £98bn) as chief investment officer for state-owned China Life Insurance and has taken over the reins of the state-controlled Citic private equity fund.
The Financial Times was unable to reach some of the individuals named in this article or their companies, and those who were contacted refused to comment.
Because it can prompt public dissatisfaction and accusations of nepotism, information about the private lives and business dealings of leaders and their offspring often falls within the scope of vague and wide-ranging state secrecy laws, regularly used to silence critics of the regime. Even the existence of leaders’ relatives is usually a well-guarded secret. Internet searches on princelings and their activities are usually blocked in China.
Most live in luxurious gated communities around Beijing and maintain holiday homes around the country and the world. Spouses are almost never seen in public. Younger, less discreet, princelings can be identified in Beijing by their luxury sports cars with military or paramilitary licence plates, which allow them to ignore traffic regulations and avoid being stopped by the police.
But the princelings themselves face a dilemma. If their business activities are too successful or high profile they may damage the political fortunes of their powerful parents, even without specific allegations of inappropriate dealings or special privileges.
Some analysts and industry insiders foresee a situation where the scions of powerful political families use the private equity industry to carve up parts of the economy at the expense not only of foreign investors but also of the older generations of princelings with direct bloodlines to China’s revolutionary Communist party founders.
But the constant jockeying for position within the party behind closed doors in Beijing is set to intensify as the next big leadership transition approaches in 2012. Some analysts say the private equity activities of the more aggressive younger princelings could be used by political enemies as a weapon against their parents.
In the case of Winston Wen, “You have to wonder if this will leave Wen [Jiabao] open to some sort of blackmail if his son has such a high-profile position in the financial sector, where all sorts of favours might be offered”, says Mr Shih. “What if someone gets some dirt on Winston Wen?”
PRIVATE EQUITY PRINCELINGS
‘Red-blooded ‘veterans versus ruthless arrivistes
The term “princeling” was coined to refer specifically to the children of senior leaders of China’s Communist revolution – the veterans who joined Mao Zedong on the fabled Long March of the mid-1930s or were members of the inner circle at the time of the 1949 Communist victory.
Today it is used more broadly to include the offspring of later generations of technocratic leaders – but a distinction remains between them and the truly “Red-blooded” revolutionary families.
Beijing political insiders say that distinction is made sharper today by the aggressive business dealings of the newer generation of princelings and their moves into the hot new field of private equity.
None of the most prominent players in the burgeoning domestic private equity sector is from the revolutionary dynasties that include the offspring of such Communist icons as Deng Xiaoping, the late paramount leader, and the children of the “eight immortal” party elders who supported his rule through the 1980s and 1990s.
“The old revolutionary royalty, like the family of Deng Xiaoping, are still untouchable and they regard this country as belonging to them in a very real sense,” says one such insider. “They see the newer generation of princelings as more ruthless, and some even go as far as saying that when the eunuchs become powerful it means the end of the dynasty is near.”
Some analysts see the private equity activities of princelings as a potential political problem as the government prepares for a leadership transition in 2012, especially since there is a recent precedent of senior leaders cracking down on the business activities of their predecessors’ children.
When he was consolidating his power in the early 1990s, Jiang Zemin, former president, shut down companies and arrested a number of business executives with close ties to Deng’s children.
After Hu Jintao, the current president, came to power in 2003 he launched a similar high-level crackdown that brought down the party secretary in Mr Jiang’s power base of Shanghai and netted prominent real estate developers and businessmen with close ties to his son.
In the jockeying for power and influence that is sure to dominate the Beijing political scene for the next two years and beyond, the new generation of princelings may become pawns in a high-stakes game, just as their predecessors did before them.
