Ep. 24: The Man and the Firm behind China’s Tech Renaissance

Transcript

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network.
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of Pandaily.com, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-Ying Lu; R: Rui Ma)

[0:00] Y: A few years back, China’s top internet companies saw a series of stunning mergers. Today’s ride-hailing giant Didi, for example, was born out of a merger between #1 and #2 players at the time Didi and Kuaidi, as was the dominant classifieds platform a merger between 58 and Ganji, and of course, the newly IPO’ed Meituan was really formed from a merger between two food delivery giants Meituan and Dianping, the story for which we replayed for you recently.
R: It almost became a playbook of sorts, find a large addressable market, raise a ton of money, fight bitterly for market share, get to #1 or #2 in the market, and then, boom! merge with your nemesis, you know the rival you’ve spent all your energy to crush, but then you become the overwhelming leader for that category.

[0:55] Y: These are deals that may make business sense, but are difficult to execute. I mean, these are pretty sensitive conversations. How do you even start the conversation? And how to get all the parties on board? You have celebrity CEOs, you have the issue of Tencent vs. Alibaba, because usually one is backed by Tencent, and the other is backed by Alibaba, and then of course there are always a lot of greedy VCs.
R: And yet one man has been able to do all of this. All those mega deals we mentioned above? Done by the same person. He’s like the Merger Whisperer. A true master investment banker.
Y: And not just in mergers & acquisitions, either, because Bao Fan and his firm, China Renaissance, have been doing IPOs for a while now and are also leaning into it in a big way.

[1:45] R: Yup. Remember Pinduoduo? One of the better-performing Chinese IPOs this year, even though controversial. The Bookrunners for the IPO were Credit Suisse, Goldman Sachs, CICC, and listed below as an underwriter … yup you guessed it, China Renaissance.
Y: But why talk about the firm today? That’s because this tech-focused boutique investment bank actually went public itself on the Hong Kong Stock Exchange a few weeks ago, on September 27. Unfortunately though it promptly dropped 19% to a market cap of about $1.7Bn, where it continues to hover today.
R: As many reporters have noted, it’s kind of ironic that Bao Fan got the demand for his own company so wrong even though advising on IPOs is part of his core business. But actually, today’s episode is less about that deal and more about the man himself, because Bao Fan’s career basically IS the China tech industry. Everyone who is anyone in China tech is connected to him or has done business with him. Seriously. Without further ado then, we present to you, Bao Fan and his 华兴资本, China Renaissance.

[4:02] R: We wanted to say a special thanks today to Carol Yin, who was our producer for the past few months and who was instrumental in helping us get to where we are today — best of luck, Carol, in your new endeavors!
Y: And to our new listeners over DealStreetAsia, hello and do tweet at us for Techbuzz swag! We just made some new stuff!
R: If you enjoy listening to us, please take the time to leave us a rating or review on iTunes, Facebook or wherever you get your podcast!

[4:37] Y: OK Rui, who is this guy, Bao Fan?
R: Well, if you asked Bao Fan to describe himself in a few words … it would probably be “short bald Shanghainese dude who loves F1 and MMA.”
Y: Wait, what? What does that have to do with anything?
R: It has to do with everything! And I’m only half kidding. Because that is basically what he has on his Weibo profile. I did made one modification. I added the word “short.” But the rest really is his actual reputation and how he’s described in the media, and also as you now know how he refers to himself! I mean the guy loves F1 and MMA. What does that tell you listeners? He loves speed and he likes to fight. And he fights to win. His entire persona is all about being fierce and fearless. Even the baldness honestly is kind of synonymous with badassery in Chinese culture.

[5:35] Y: OK, I do remember you saying before that he is shorter than you. And for our listeners who don’t know you, you are … ?
R: Ummmm 5’1 and a half inches. That’s 157cm for those of you on the metric system. So, yeah …I’m short. Well, maybe Bao Lao Da and I aren’t the same height. I might have been on heels when I met him. But even by Shanghainese standards, he is kind of small.
Y: And yet he has been a towering figure in China tech.
R: Exactly right. Whatever he lacks in size he has more than made up for in ambition and aggression. And you know what happens if you’re that petite? You stand out. You are memorable. Obviously, being diminutive in stature doesn’t prevent you from succeeding, I mean, we only have to look at Masayoshi Son for a counterexample, but hey, I do think it matters.

[6:30] Y: Probably. Although it definitely never stopped 47-year old Bao Fan, because even from very young, he was a leader. According to his own account, he was born into a diplomatic family, and sent to boarding school early. He also got to travel abroad alongside his parents, something which is unheard of at that time in China.
R: No question about it, he grew up in the upper echelons of society and I’m really sure that helped him in his career later on. After attending high school in the US, he went to top-ranked Fudan University in Shanghai, and then back abroad again to the Norwegian School of Management for further study.

[7:05] Y: Yeah it seems he’s no stranger to moving around because after school, he landed on Wall Street, first at Morgan Stanley in London, Credit Suisse in New York, and back again at Morgan Stanley in Hong Kong, doing investment banking.
R: I’m super curious what that was like, because when Bao Fan left Morgan Stanley in 2000 to become Chief Strategy Officer of Asiainfo, which was a telecom services provider like every other internet company back then, that was right when the internet bubble was bursting.

[7:37] Y: He stayed there until 2004, and then broke out on his own to start China Renaissance. He just loves the word Renaissance, and the Chinese name of the company is a literal translation: 华兴资本. The name is exactly what you think it refers to — the nationalistic ideal that China was on the cusp of a rebirth. And specifically for investment banker Bao Fan, the conviction that China was going to produce its own great investment bank, and since that firm didn’t exist yet … who better to build it than a young thirty something years old bald investment banker …
R: A very, very aggressive one who was educated abroad and had all these Western interests — F1 and MMA and all that — but was deeply Chinese at heart, in a very down-to-earth, grassroots way. Or at least that’s the current narrative. Whether it’s true or not, it is written that Bao Fan was very intentional about building a very 江湖 culture at China Renaissance.

[8:40] Y: Jianghu, for our English-speaking listeners, literally means rivers and lakes, but is the colloquial term for what I’m gonna define as “gangsta.” It’s really hard to translate, and there have been multiple articles on this, with professional translators suggesting “underworld” or “brotherhood” as options.
R: Yeah, I find it hard pressed to give an English equivalent, but jianghu is basically this idea that vaguely connotes lawlessness and aggression, with loyalty and relationships at the core though. It’s a sort of war-like mentality, where you always have to be ready to fight, to do battle, to defend your territory and your honor, and also those of your tribe. Sounds kinda like the Mob right? So no surprise then that it’s often used to describe the setting of most wuxia martial arts fantasy novels, and also to refer to modern day gang culture in China. And why is this important? It’s because if you thought this kind of mentality wouldn’t be all that popular with the entrepreneurs starting China’s internet businesses, you’d be wrong.

[9:47] Y: Well, first of all, don’t forget that not all Chinese internet entrepreneurs were nerdy coders. A good number of them like Alibaba’s Jack Ma and JD’s Richard Liu built their empires in a pretty low-tech or even no-tech way. Thus no surprise that jianghu is also one of Jack Ma’s favorite words as well. He did pick the wuxia theme to be Alibaba’s official corporate culture, after all.
R: The love for jianghu culture is also why Bao Fan is not known by the more conventional Bao Zong 包总, which stands for Executive Bao, and is used in almost all business settings in China, but instead insists that his underlings call him Bao La Da 包老大, which is like Big Boss Bao, more like what you’d call a thuggy gang leader. If you guys are into Hong Kong triad movies, you might recognize these words. And just like a real Lao Da might, Bao Fan is all about taking care of his guys. He’s said more than once that he’s there to serve his employees, and that the key to success is to be generous and make sure his people make real money.

[11:01] Y: I don’t know if my ex China Renaissance friends would all agree with that statement but that Lao Da swagger, the whole “I’ll take care of everything and everyone” attitude. That’s the appeal of jianghu culture, and even more stereotypical engineer founders like Wang Xing of Meituan have a thing for it. If people complain about Silicon Valley being bro-ey, or fratty, or clubby … well just wait until they do business in China. Bao Fan himself has admitted it, that if he were not so … bro-ey, for example, being a huge drinker and very much into using alcohol in his business dealings, he wouldn’t have gotten to where he is today.
R: Is it a problem? I don’t know. But I certainly wouldn’t be able to use those same methods. What I do know is that it’s definitely only helped Bao Fan and not hurt his business. In China, such machismo is very much revered. People love strong leaders. And they consider business to be war. They love the brotherhood, comrade-in-arms metaphor.

[12:07] Y: Didn’t Bao Fan’s wife apparently post on her WeChat that Wang Xing and Bao Fan were such bros that they even filed their IPOs on the same day?
R: Yeah she did. It’s true but it’s a silly comment because the two IPOs are vastly different in scale. Furthermore, unlike Meituan, which priced at the higher end of expectations, China Renaissance, which was originally rumored to be raising $800mm, ended up raising less than half of that and of course as we already mentioned tumbled sharply on its first day of trading.
Y: Perhaps Bao Fan’s expectations were too high. After all, China Renaissance only had $109mm in revenues the first six months of this year and $20mm in operating profit. That’s not a huge business. But definitely improving, because last year, it was still making operating losses.

[13:05] R: Of those revenues, the majority, or about two-thirds, came from its investment banking business, which includes M&A, IPO advisory, and also IPO underwriting.
Y: In M&A, of course, we already know that he’s an amazing negotiator. He doesn’t just get deals done, he does them in record time. Didi and Kuaidi agreed to a merger in 3 weeks, Ganji and 58, the most difficult, took 6 weeks. Meituan and Dianping negotiated their mega-merger in 2 weeks. Without that deal, I think it’s highly unlikely that Meituan would be the $50Bn giant it is today. For one, it wouldn’t even be able to think about growth, it would still be spending most of its energy and capital on fighting Dianping.

[13:53] R:That was the M&A business, the IPO advisory business started in 2011 when Dangdang, a Chinese e-commerce company, went public, and the CEO bitterly complained that bookrunner Morgan Stanley had priced its IPO too low in order to benefit its institutional clients. Now I’m sure it’s not as simple as that, but what happened was that it led other Chinese CEOs who were looking to list in the US to think — I don’t know Wall Street. Who’s going to make sure I don’t get screwed over in my IPO? Who’s going to speak for me, and not the bookrunners? That person, of course, was Bao Fan. He became known as “the spokesperson for Chinese companies on Wall Street.”
Y: Underwriting is a relatively new business for Bao Fan. China Renaissance’s first IPO underwriting gig was in 2014 for crossborder e-commerce company Lightinthebox. Despite having limited experience, he was able to convince Richard Liu to let him help underwrite JD’s IPO as well. Since then, China Renaissance has participated in something like 70% of China’s tech deals. The only marquee deal Bao Fan has missed is Alibaba’s IPO.

[15:10] R:But it may still yet land Jack Ma’s Ant Financial as a future client. China Renaissance’s 3 IPO cornerstone investors are, you guessed it, Ant Financial, LGT, and a fund called Snow Lake.
Y: The firm has also moved into the investment management business. Managing Director Wu Bin once boasted, “if you turn on your phone, we are investors in half the apps you use.” China Renaissance has multiple IPOs this year, including Meituan of course, and also Tongcheng Elong, a travel company that’s going to list on the HKSE next month. With Bao Fan’s rich deal flow, it makes a lot of sense to adopt this merchant banking model where China Renaissance is not just providing financial advisory services, but also investing capital into its best clients, or using investment dollars to turn companies into potential clients. And as the end of Q1, it already manages $4.1Bn.

[16:18] R:And its third and final business unit is its Huajing Securities unit, which works on A-share IPOs. That unit is loss-making. Back in 2016, before the stock market crash and when many of Bao Fan’s good friends, including Qihoo founder Zhong Hongyi, was looking at privatizing from the US to re-list in China, this business seemed like a no-brainer. After the market has gone south however, it is not necessarily seeming like the best idea.
Y: But despite an underperforming IPO, Bao Lao Da is still laughing all the way to the bank. He owns nearly 63% of the listed company, which basically makes him a billionaire, while friend Neil Shen, head of Sequoia China, owns 7.5%. In its fourteen years of history, China Renaissance has advised 700 transactions worth over $100Bn and has 600 employees today.

[17:17] R:Honestly, China Renaissance was the place to work during the late 2000s if you were a tech banker looking to get more exposure to China. Bao Fan was, maybe is, the best bridge between the two completely different capital markets.
Y: “A-share market is like VC, American equities market is more like PE.” That’s what Bao Fan has said before. What does that mean? It means that the companies listing in the US are generally more mature. And they’re less risky.
R: There are other fundamental differences too. The US is disclosure-based system where as China is more what Bao Fan calls, “parental,” meaning that the regulatory bodies do far more to protect retail investors. That makes sense though when 85% of the market, by his estimation at least, are retail. And retail investors are not sophisticated. Here in the US, however, it’s the reverse — we have mostly institutional investors.

[18:23] Y:I did agree with that but I wonder if Bao Fan is regretting his conclusion in 2016 that asset-light platform businesses are more suitable for the US market whereas heavier business models such as SaaS or content will find it easier to go public in China. So far this year at least, regardless of their model, seem to rush to list in the US or Hong Kong.
R: But in other aspects, I think his predictions have turned out to be right. For example, he was famously bearish on crypto, but bullish on blockchain, and that’s pretty consistent with what China government policy stands today. And while the A-share business is tough right now, Bao Fan leaned heavily into biotech and healthcare starting a few years back, and it seems that could really pay off.

[19:13] Y: And on the topic of BAT, Bao Fan had this to say: Alibaba needs traffic as input, whereas both Baidu and Tencent have traffic as output. This fundamental difference determines how the three invest and consider investment opportunities. It also affects how he advises his clients, and he’s always taken the side of the startup entrepreneur.
R: That attitude has taken him to a billionaire banker. Let’s see how much farther it takes him.

TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is a new English language site that tells you “everything about China’s innovation.” You can find us on twitter at @techbuzzchina and @thepandaily, or reach out to Rui and Ying-Ying at @ruima and @ginyginy. Our producers are Bonnie Zhang and Kaiser Kuo. Our intern is Wang Menglu.