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Lunar Capital Update: Achievements in 2014

Our achievements in 2014 continue to serve as a validation of our thesis, strategy and commitment to consumer-focused, operationally-intensive, control-oriented investments in China. Our most recent fund, Lunar Capital Partners-III, is now fully invested with strong prospects for further valuation gains and distributions.

Our apparel investment, Yeehoo, ended 2014 with revenue and earnings up significantly, positive margin improvement and e-commerce growth driven by channel expansion, product upgrades, marketing and premiumization, all of which are hallmarks of Lunar’s investment approach. Most of our businesses in the portfolio are benefiting from the application of Lunar’s strategy and approach, including Yonghong (snack foods), I Pinco Pallino (kids clothing), Soho Baby (baby goods) and Joysun (healthy beverages), which all delivered similar or higher levels of growth for the year. This strong operating performance continues to drive steadily increasing multiples of invested capital and distributions well ahead of our peer group. 

As the performance of our portfolio companies improve, our industry-insider approach to sourcing has resulted in a strong pipeline of deal flow. New opportunities have been sourced from direct and indirect stakeholders in our businesses, which provides a unique and growing pipeline of consumer buyout opportunities. The Firm is currently in negotiations with businesses in our target sectors, including snack foods, beverages, seasonings, apparel and accessories, and is in later stages with several targets. Consistent with Lunar’s strategy, these businesses are leading brands in fragmented markets with potential for strong revenue growth, margin expansion and premiumization. Targeted opportunities are being driven by the desire of first-generation owners to manage succession and retain a significant minority stake while benefiting from Lunar professionalizing management, operations and governance. Collectively, our later stage pipeline today represents potential investment of over US$ 1 billion, which will likely grow as sectors are continuously mapped and screened. Given its size and depth, Lunar anticipates offering attractive co-investment opportunities to LPs, as it has consistently done in previous funds.

2014 was a breakthrough year for Chinese private equity. New investments reached record volumes and aggregate transaction value doubled year over year. Growth was strong across nearly all sub-sectors, with consumer and technology transactions accounting for more than half of all private equity activities. Key drivers for this trend include SOE reform, increased M&A activity, and Chinese GPs setting sights on overseas businesses. That being said, a majority of private equity still focused on TMT, and most activities were in minority investments. At the same time, M&A activity and sector consolidation trends, particularly amongst strategics, have accelerated. We believe that this gives our firm a very unique positioning. We have carved out clear leadership as a control investor in branded consumer businesses, in a sector where succession challenges are clearly growing and exit opportunities are expanding.

Further, we believe that there is a nascent rise overall in buyout activity as LPs demand more from traditionally growth capital-oriented GPs. We regard this as a further validation of our investment thesis. Lastly, private equity penetration remains very low compared with developed economies, accounting for less than 0.50% of GDP in China, compared to 2% in the USA and 1% in Europe.

As we close out the year, we believe that our investment thesis is robust, strategy is working and opportunity is compelling. Moreover, we are committed to both “eating what we cook” (by continuing to promote alignment of interest with our LPs) and “lather, rinse, repeat” (by remaining consistent to what we have proven works and what we can do best repeatedly and scalably). We look forward to acquiring more attractive consumer businesses in the world’s most dynamic economy, and to welcoming the Year of the Goat.

Lunar | January 30, 2015