For the past 35 years, Chinese private businesses have been growing at full tilt, and now account for more than 75% of total gross industrial output. Many of these private companies originated from OEM manufacturing, and thrived in the export-driven economy of yesterday. Cheap labor, low entry costs, and a supportive currency allowed homogeneous competition to grow without check, and the pace of growth often raised environmental, social and governance issues, such as pollution and product quality scandals. These issues have inhibited the growth of domestic businesses in China, limited tax revenue payable to local governments and curtailed quality job growth.
Control-oriented investment managers can offer solutions to these challenges, by not only providing capital, but also serving as business partners, adding value by improving operations, professionalizing management, and stabilizing governance. Seasoned professionals at private equity firms, with experience across top finance, operations and consulting firms, offer a level of professionalism and quality of work that is of immense value to China’s private enterprises at this stage of their economic development. Most importantly, private equity firms concentrate and scale professional resources to create value.
“Smart” equity investment in any business is in large part a validation of the business itself and the merits of its potential growth. At Lunar, we build better businesses by professionalizing management, driving growth and improving profitability, through our focus on eight key success factors at every stage of our investment: vision, product, sales, branding and marketing, e-commerce, growth and profitability, team and work ethic. Pre-investment, Yonghong boasted a well-known brand with a 30-year heritage in a beef jerky market poised to grow by more than 10% annually in the following five years. Under Lunar’s leadership, Yonghong introduced a new line of beef jerky products to meet the needs of a younger demographic, with updated design and packaging. The company also expanded its distribution network, building a partnership with Walmart, new distributors and chain convenience stores, such as RT-Mart and FamilyMart. Further, Lunar helped Yonghong establish an e-commerce channel on Tmall.com, which has attracted eighty thousand customer views per day since December 2014. This growth in sales has meant increased local tax revenue and more workers employed to fulfill an increasingly large number of orders.
Chinese consumers demand better quality products in the wake of a relentless stream of high-profile food safety scandals and quality concerns. Lunar focuses on operational improvements to deliver increased quality, such as with Joysun, which sells walnut beverages nutritional for customers. Post investment, Joysun established a processing operation and procurement center in Shanxi, ensuring a stable upstream supply of high quality walnuts. Yonghong has also strengthened its supply chain management practices, sourcing raw material from self-owned cattle farms, and only selecting the best quality materials from long-term suppliers. Our businesses deliver safer and higher quality products, which in turn has a positive social impact in our communities.
As China’s priorities shift to environmental, social and corporate governance issues such as environmental protection, product safety standards, corruption and transparency, domestic companies must leverage professional guidance and financial resources to be adaptive. Operational improvements within our portfolio clearly highlight the tangible benefits that control investment managers can deliver, with positive externalities for China as a whole. We believe that the Lunar Way of building better business not only delivers compelling risk-adjusted returns on our investing partner’s capital, but also builds a stronger and healthier private business sector in China.
Lunar | June 30, 2015