A recent news article indicated that a Chinese investment firm is coming to Wisconsin, looking to place $100 million, and that the Wisconsin Economic Development Corp. (WEDC) will be helping to vet and coordinate their activities.
WEDC is working with PiYi (Pee-Yee) Investment Management Co. Ltd, a private investment management fund that manages private equity and venture capital funds for high-net worth Chinese investors. PiYi has expressed interest in deploying an initial investment of $100 million in Wisconsin companies across a broad range of industries including agriculture (with emphasis on food production, food transportation or food safety); energy production, storage, controls, distribution; clean-technology or environmental remediation; infrastructure; information technology; biotechnology; manufacturing or medical devices.
While this sounds good, there are a number of things you may want to know, and do, before you start sharing your business plans, intellectual property or company information with a Chinese investment firm. If you keep in mind how Checkpoint Charlie worked – verification before exchange – you will have a better chance of getting what you are looking for.
Chinese outbound direct investment (ODI) increased dramatically from the 1982-89 period, when the total cumulative ODI was $500 million, to over $1 trillion as of 2011. Know that much of the early investment involved “roundtrip investments” (money shipped overseas and then back into China to take advantage of China’s domestic direct investment policies), and you will understand that ODI is a new industry in China.
Today, because of declining foreign investment incentives and increased scrutiny “roundtrip investments” are on the decline. But other investment considerations are taking their place, including, diversifying personal investment portfolios, obtaining Green Cards, acquiring natural resources, finding new technology and/or access to distribution.
Historically, other parts of Asia, especially Hong Kong, have received the largest share of Chinese ODI. Part of this is due to the flexibility of Hong Kong investment vehicles and physical proximity. Today, the Chinese are looking everywhere, and there has been a surge in interest in the United States and Europe, in part because of the economic conditions.
In 2004, China Ministry of Commerce (MOFCOM) published China’s first Guiding Catalogue of Countries and Industries for Overseas Investment, which listed 67 industries – mostly types of manufacturing – in which Chinese companies would receive preferential treatment if they invested abroad. In 2009, the rules and regulations governing ODI were revised, bringing significant change to outbound investment procedures. These included expedited reviews, allowing investments of between 10 million and 100 million to be reviewed at the provincial level and relaxed Forex restrictions. The new rules applied to large Chinese and SME companies making investments and acquisitions abroad.
The rules for ODI Funds are a little less clear, as the area is dominated by large state licensed investment entities, either associated with large State Owned Enterprises (SOEs) or directly under the control of the government. What is clear is that to raise money for these funds requires specific licenses, permissions and minimum capital requirements.
So if a Chinese ODI Firm shows up and wants to audition you, here are some things you may want to consider:
- Where are they incorporated?
- When were they incorporated?
- In China different businesses require different minimum capital. What is it and has it been paid or is it in the process of being paid?
- What licenses do they have?
- Are the licenses the ones required to do this kind of business in China and the United States (remember we have our own SEC)?
- Are there other related entities with similar licenses (can be a red flag)?
- What is their experience, as a firm and as individuals?
- Have they made their deal book available, showing previous deals, amounts, role and references?
- If you get to this point, do some due diligence. If they are not willing to disclose, or your due diligence turns up with more questions than answers, you should seriously review whether you are interested and how much information you are willing to share.
- Keep in mind a non-disclosure/confidentiality agreement is only good if it is enforceable.
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to firstname.lastname@example.org.