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 Alvin Jiang has a knack for landing lucrative deals in China, the
world's biggest emerging market for private equity. He is a founding
partner at Hong Kong-based Boyu Capital, now one of the hottest
firms in China. Boyu has attracted high-profile investors such as
Asia's richest man, Li Ka-shing, and Singapore's sovereign wealth
fund, Temasek Holdings Private Limited.
Founded in 2010, Boyu Capital is poised to earn big paydays from two
of the most notable initial public offerings to emerge from China in
the last 18 months — e-commerce giant Alibaba Group Holding Ltd, and
state-backed debt trader China Cinda Asset Management Co. No other
China-focused firm with such a short history has found its way into
both deals.
Boyu is regarded as among the most professional operators in China
private equity, with seasoned executives at its helm. But according
to multiple investors, Alibaba and Cinda are not only what lures
them to Boyu.
Investors were also impressed with Boyu's 2011 purchase of a
controlling stake in Sunrise Duty Free — which runs all the
duty-free stores at Shanghai and Beijing's international airports.
That deal, they believe, provided evidence that Jiang Zemin's
grandson could gain access to a strictly controlled state sector and
convert those assets into a highly profitable investment.
The Sunrise investment is expected to earn a substantial exit payout
for Jiang, his Boyu colleagues and investors in the firm's first $1
billion fund, people in the private equity industry say.
Whether the young private equity executive actually uses his
personal connections in the way investors attribute to him remains
unclear. There is no evidence that Jiang Zemin had a role in helping
Boyu win a part in the Sunrise deal or in any other transaction.
That hasn't stopped the belief from spreading that Alvin Jiang is
tapping his family connections.
Alvin Jiang and Boyu Capital declined to comment for this story.
PRINCELING INFLUENCE
Alvin Jiang's Chinese given name is Zhicheng, which means, "with
ambition, you can achieve." He is a "princeling," the relatives of
current or former senior Chinese Communist Party leaders. His
father, Jiang Mianheng, is also a princeling. He is the CEO of one
of Shanghai's largest state-owned enterprises and is in charge of
China's push into alternative nuclear energy sources.
The extensive control of China's Communist Party over almost all
aspects of China's economy and society has often allowed princelings
to leverage their political connections to amass wealth. Conflict of
interest laws in China are weak and coverage of the business
dealings of the political elite is heavily censored in the largely
state-controlled media.
Princelings have played central roles in businesses involved in
finance, energy, domestic security, telecommunications and the
media. Private equity, featuring deals that are often by their
nature opaque, has proven to be a natural haven for them.
Within China's private equity realm, 15 firms identified by Reuters
were either founded by a princeling, or have employed princelings in
senior roles. Between them, these funds have raised at least $17.5
billion for investment since 1999.
The most powerful investors in private equity funds, known as
limited partners, include giant U.S. pension funds and insurance
companies; sovereign wealth funds; university endowments; and
ultra-high net worth individuals. For some of these big investors,
the China game is straightforward: "You just have to know the right
people," said one veteran limited partner. "It's why you invest with
a princeling fund."
Several limited partners told Reuters that their firms assess
princelings on their political connections and ability to convert
those ties into business deals.
Alvin Jiang and Boyu Capital, these investors say, rank high on
those lists.
AN OUTSTANDING RETURN
In mid-2011, Boyu agreed to pay around $80 million for a 40 percent
stake in Sunrise Duty Free, according to three sources with direct
knowledge of the deal, valuing Sunrise at $200 million.
The ownership of the remaining 60 per cent of Sunrise has not been
made public. Boyu, however, has told investors it has a controlling
stake, sources with knowledge of the matter said.
At the time of Boyu's investment, Sunrise ranked 15th among the top
25 travel retailers in the world, with annual revenue of around $670
million, according to the Moodie Report, which tracks the duty free
industry.
By early 2013, Boyu had marked the Sunrise business on its books at
a value of around $800 million, two of the sources with direct
knowledge of the valuation said. Bankers, however, value Sunrise at
twice that amount — at around $1.6 billion — based on 2012 sales
figures the company filed with Chinese authorities, which Reuters
reviewed.
Based on Boyu's more conservative valuation of $800 million for
Sunrise, Boyu could be sitting on a paper gain of around four times
its money in just under three years — an outstanding return in an
industry where earning a multiple of two times over five years is
considered a success. Boyu has already recovered much of its Sunrise
investment through dividend payments, according to three people with
knowledge of the matter.
BEHOLD THE SUNRISE
The man who founded, built and then sold Sunrise to Boyu is Fred
Kiang, a Chinese-American businessman with close ties to the Jiang
family, according to Alvin Jiang's friends and business associates.
Kiang founded Sunrise in 1999. That was the year the central
government under Jiang Zemin opened up the operation of duty free
shops to international bidders at the new Pudong International
Airport in Shanghai — Jiang's political power base.
Previously, duty free operations had been a monopoly controlled by
state-owned China Duty Free, and foreign firms like Kiang's were
excluded from the business.
Three international companies were selected to operate at Pudong
airport, including two established duty free firms: World Duty Free,
owned at the time by the British Airport Authority, and Orient King
Power, a subsidiary of Hong Kong's King Power Group. The third
tender went to Kiang's newly formed Sunrise Duty Free, a
foreign-owned company with no previous experience in the industry.
Sunrise won a 10-year contract to sell tobacco and alcohol at
Shanghai's Pudong Airport, World Duty Free won a five-year contract
to sell perfume and cosmetics, and Orient King Power won the
concession to sell luxury goods.
SPECIAL APPROVAL
In 2000, China's State Council approved a measure that handed
control of all duty free businesses — except those in Shanghai — from local governments to state-owned China Duty Free. Foreign
companies were banned from setting up joint ventures or directly
owning duty free businesses in China.
Yet in 2001 Sunrise Duty Free took over the perfume and cosmetics
duty free concession at Pudong airport when World Duty Free pulled
out of its contract. Published reports at the time quoted World Duty
Free as calling it a "strategic withdrawal" because passenger
traffic had not reached forecast levels. Sunrise in time would also
take over luxury goods at the airport.
In 2005, Sunrise won a 10-year concession at Beijing International
Airport, outbidding China Duty Free and Orient King Power. In 2009,
its contract at Pudong was renewed for another decade.
Sunrise was granted "special approval" to operate duty free shops by
China's cabinet, the State Council, despite restrictions against
foreign ownership, according to a 2009 report by China Business
News, a state-owned media outlet. No other details were given on the
Sunrise exemption.
Today, business at Sunrise is booming. According to the company
documents seen by Reuters, Sunrise had revenue of $1.08 billion in
2012. The Moodie Report ranks Sunrise just behind state-owned China
Duty Free, which controls nearly all of China's other duty free
shops.
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KIANG AND THE JIANGS
Why Fred Kiang would sell 40 per cent of a thriving company at what
appears to be a discount remains the central puzzle surrounding the
Sunrise deal. Apart from Sunrise, Kiang's mainland business remains
unknown. Friends and associates note his taste in expensive cigars,
and the little publicity he has received is largely devoted to that
passion. In 2009, he hosted an event in Shanghai to smoke the 40th
anniversary Cohiba Behike, a limited edition Cuban cigar that sold
for $500 apiece.
Kiang, who is in his late 60s, shuttles between Shanghai, Hong Kong
and Tucson, Arizona, where he owns properties in areas ranging from
gated communities to low-end rentals. Alvin Jiang and Jiang Mianheng
have used a Kiang residence address in Arizona for small personal
business transactions.
Kiang declined to respond to e-mails and phone calls from Reuters.
Born in China, Kiang claims Shanghai roots, but was raised in the
United States. He received his undergraduate and MBA degrees at
Massachusetts' Babson College in 1970 and 1975, respectively, and
now sits on the college's board of trustees.
Kiang first met Jiang Zemin in 1986, when Kiang served as
vice-chairman of the San Francisco-Shanghai Sister City Committee,
led by then city mayor and now U.S. Senator Dianne Feinstein,
according to a person close to Kiang. Kiang and Jiang noted their
common surname, which though spelled differently in English, is the
same character in Chinese, said the source who is Alvin's friend and
business acquaintance.
In 1989, Jiang Zemin became Communist Party General Secretary; in
1990 Kiang established his base in Shanghai. Kiang was a senior
executive at Newbridge, the former name of TPG Capital in Asia, one
of the world's biggest private equity firms, three people with
direct knowledge told Reuters.
From the late 1990s to the 2000s, Kiang was an advisor to U.S.-based
insurer MetLife Inc as it looked for a joint venture partner to
build its business in China, said a source with knowledge of the
matter. Kiang negotiated on MetLife's first mainland license in
2004, the source said, one of the first major Sino-foreign ventures
created after China's 2001 entry into the World Trade Organization.
TPG and MetLife declined to comment.
BOYU'S RISE
In 2010, Alvin Jiang, newly graduated from Harvard with a bachelor's
degree, was just another newbie banker in Hong Kong, working as an
analyst at Goldman Sachs private equity unit. Nine months later, he
left to launch Boyu. On September 21, 2010, he filed incorporation
documents in Hong Kong, listing himself as the company's sole
director.
When Boyu first made news in 2011, it was private equity veteran
Mary Ma whose name captured headlines, not Alvin's.
Ma, the former CFO at Lenovo Group, left a senior role at TPG to
help set up Boyu. Additional co-founders soon followed: Louis
Cheung, former executive director of Ping An Insurance Group of
China, credited with its turnaround from 2000; and Sean Tong, a
veteran of U.S. private equity firms Providence Equity Partners and
General Atlantic, where he was Alvin Jiang's boss during a summer
internship in 2008.
Ma and Cheung were known in the private equity industry for turning
around struggling companies; Tong was a noted dealmaker. Combined,
they had 50 years of industry experience.
DILIGENT AND FOCUSED
Two subsequent investments cemented Boyu's reputation for having the
influence to find its way into profitable, high-profile assets.
Alvin Jiang played a role negotiating both deals.
In 2012, Alibaba founder Jack Ma found himself face-to-face with
Jiang Zemin's grandson. Boyu had joined a consortium led by China
Investment Corp (CIC) to raise some of the $7.1 billion that Ma
needed to buy back half of Yahoo! Inc's 40 percent stake in Alibaba.
Some high profile departures had left CIC, China's giant sovereign
wealth fund, short of personnel. That left it up to Boyu to lead the
negotiations, with Alvin on Sean Tong's team, according to two
sources directly involved in the negotiations.
Alibaba and CIC declined to comment.
The CIC consortium received a 5.6 percent stake in Alibaba in
exchange for raising capital to help buy half of Yahoo!'s shares in
China's giant e-commerce company. Alibaba was valued at around $38
billion then.
Analysts estimate Alibaba is worth at least $140 billion today,
which means Boyu's investment as part of the CIC consortium has
increased more than three and a half times in value in 18 months.
The e-commerce giant has announced it will list shares on one of the
New York exchanges in the third quarter of this year, a deal
expected to exceed Facebook's $16 billion offering in 2012.
Alvin Jiang also brought in Boyu to invest around $50 million in
Cinda, created in 1999 to buy bad debts from state-owned banks, said
two sources familiar with the deal. Banks and private equity firms
were jockeying to get a piece of the $1.6 billion stake that Cinda
was offering to strategic investors ahead of its initial public
offering.
The consortium of investors that were allowed to make a pre-IPO
investment in Cinda included China's social security fund NSSF, UBS
AG, CITIC Capital, Standard Chartered Bank — and two private equity
funds, the powerhouse Carlyle Group and Boyu Capital.
Some of Jiang's friends stress he is more than just a well-connected
face. He works through a company's numbers when negotiating, a skill
he picked up during his brief time at Goldman, said one friend and
business acquaintance. "Many people from his background would not
bother to do that," the friend said.
"HEADLINE RISK"
Princeling privilege isn't necessarily permanent in China, even for
the grandson of a living former President. The extraordinary fall of
former Chongqing governor Bo Xilai in 2012 reinforced that notion
for many private equity investors.
Because they work for companies governed by Western laws, some have
turned cautious about investing in princeling firms. In private,
investors discuss "headline risk," the fear that a business deal
will end up on the front pages of newspapers.
Those worries have risen with President Xi Jinping's anti-corruption
campaign, and the U.S. Securities and Exchange Commission's
investigation into Wall Street's hiring practices in China.
"Our firm is pretty equally divided on investing with princelings,"
said one European investor. "I oppose it, but many of my colleagues
are for it. I see princeling funds as a double-edged sword."
For Boyu, profit and prospects have so far trumped any such anxiety:
Alvin Jiang's firm has swiftly raised $1.5 billion from investors
for its second fund, 50 per cent more than its first fund, people
with knowledge of the matter said.
(Reporting by Stephen Aldred and Irene Jay Liu.
additional reporting
by Xinqi Su and Jean Lin; editing by Bill Tarrant.)
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