on July 14th, 219, when Liao Ming received an email from Preqin and invited him to write an article for the flagship report of PE/VC market in China, he didn't expect that Prospect Avenue Capital (PAC), which he founded in early 218, would become the first China fund to write an article on the Preqin report.
Preqin, as a professional global alternative asset data platform, has interviewed dozens of China funds for this report. Why did you choose a fund that was established less than two years ago to explain their concerns to global LP in detail?
It's time to get to know Liao Ming.
This may be a strange name for you. It's only two years since he founded PAC, but he has deployed eight companies in financial technology, cloud services, logistics and other industries. The well-known names are Tiger Securities, Ronglian Cloud Communication, TalkingData and Fuyou Truck. Five of them can all achieve IPO in the middle and late stage: Tiger Securities has been listed in the United States, and the other four will be listed in 22 and 221. Although PAC is a PE fund, it is not easy to get such a stable investment result in the past two years when black swans are frequent.
this depends on Liao Ming's unique investment philosophy. Before founding PAC, Liao Ming, a graduate of Princeton University, worked for Morgan Stanley, Carlyle, Barclays and UBS Group AG. Except in Carlyle, his previous career path almost followed the typical investment bank career extension. Long-term investment bank training and capital market immersion have laid the foundation for Liao Ming's most critical investment methodology after he joined the primary market: starting from the end and always looking at the primary market investment from the perspective of the secondary market.
Looking back at 219, the suspension of Wework's IPO is undoubtedly the most dramatic business event, and even the silent investment banks can't sit still. Mike Wilson, chief American equity strategist at Morgan Stanley, declared: "Wework's IPO failure marks the end of an era." Of course, this statement is not only aimed at Wework, but also a "summary statement" on the wave of new economic venture capital sweeping the world. In fact, Liao Ming expressed this view earlier.
in September, when Liao Ming wrote the chapter on valuation, he made a "word-for-word statement" of the Wework incident and its historical significance. However, due to the lag of the report, this article was not published until the end of the year. When summing up the historical lessons of Wework, he also pointed out that the reason for this situation is that the real Internet companies are extremely limited. Most companies are traditional industry companies, only using the Internet or technology elements, but using the valuation of Internet companies, resulting in high valuation.
At the end of October, Michael Cembalest, chairman of the strategy department of JPMorgan Asset Management, with assets under management of more than US$ 2 trillion, once again shocked Wall Street with a report, making a very sharp criticism on the valuation system of the primary market, and expressing the same view as Liao Ming: the number of Internet companies is very small, and traditional companies that use Internet tools must use the valuation system of their industries, so as to eliminate the valuation bubble in the primary market and return to normal valuation.
The heavy reports of two heavyweights, Mike Wilson and Michael Cembalest, point directly at the disadvantages of the valuation in the primary market and declare the end of an era valuation system. The turning point has finally come.
However, for Liao Ming, it's lonely to stick to this idea since he was 18 years old. He has been under great pressure to give up the star project several times. But between the hustle and bustle of the market and the sober idea, he chose the latter every time.
In the past ten years, venture capital in China has been in a rush, not to mention that VC itself is a game of probability, which makes a large number of investors and entrepreneurs look forward to explosive growth. Many crazy stories were once passed down as anecdotes: signing TS within 1 minutes of meeting, doubling the valuation and directly making money ... The reason why the past two years were named as the turning point of the venture capital industry in China is that the secondary market with stronger fairness has completed the huge verification of the past ten years in an irrefutable way, and its concrete manifestation is exactly what we constantly see, namely, the valuation upside down or even the IPO collapse.
This highlights the necessity of discussing Liao Ming's investment methodology. The core of the so-called "looking at the first level from the second level" is to look at the first-level market companies with the positioning and valuation system of the second-level market companies. He took Xiaomi as an example: it was positioned as an Internet company in the primary market, with a valuation of $45 billion in 214, but its latest market value is $35 billion, precisely because "9% of its revenue comes from the sales of mobile phones and hardware, which shows that the capital market only recognizes Xiaomi as a hardware company".
from the perspective of the company's growth, startup companies and investment institutions should also pay attention to the "signal significance" transmitted by their peers' listed companies. "The secondary market is rational and objective, profit is the essence of all business models, and continuous loss of money is not the core of any business model".
For example, the online education company where he is the independent director "Who to Learn from" adopted the "only profit model so far" in the whole industry-online large class, and the price-earnings ratio was used in the listing, which was called "terminator" by Wall Street. Because learning from whom is an analogy company, other online education companies must be profitable to go public, so the signal of the capital market is "online large classes, profitability, being accepted by the capital market and realizing IPO". Therefore, last summer, a large number of online education companies focusing on one-on-one and small classes have vigorously developed large class business, hoping to achieve profitability as soon as possible.
IPO has always been the most mainstream exit channel for China funds. Liao Ming believes that since this point is clear, all PE/VC should think about whether the project meets the requirements of the capital market-that is, whether it is possible to IPO, and what kind of valuation it will get if it lands in the secondary market.
"Only companies whose business model is recognized by the capital market, with correct positioning, valuation based on their respective industries, establishment of unit economic model and sustainable profitability are the targets worthy of investment, and can effectively resist the fluctuations in the secondary market after IPO." Liao Ming emphasized in his article.
Liao Ming summed up the above company evaluation criteria as: "We should bow our heads and hoe the ground, but also look up at the sky", which is the so-called "starting with the end".
Even now, there is still an insurmountable gap between the primary and secondary markets for a long time, and it seems difficult for a considerable number of entrepreneurs and early investors to have a secondary vision and thinking. Liao Ming believes that this is precisely the important reason why PAC, as a new fund, can invest (even lead the investment) in many star companies: in understanding the capital market, he not only provides scarce insights, but also includes practical resources. For example, after he invested in Tiger Securities, he quickly arranged for the heads of several investment banks in China to pay a visit to the company, arranged non-trading roadshows and reverse roadshows, recommended senior executives and independent directors, presided over investment bank beauty contests and project kick-off meetings, and even participated in prospectus writing meetings, and provided suggestions and opinions on IPO pricing and order distribution.
as the first letter of Preqin in China, Liao Ming's rational thinking and clear voice have been transmitted to more than 83, institutional investors around the world in mid-December last year.
going back to PAC, Liao Ming said that the scale of the fund is 5 million US dollars, and the single investment is between 1 million and 5 million US dollars. However, he did not clearly lock in the field, because according to the standards of the secondary market, many projects can be screened out by the "exclusion method". For companies that he thinks have investment value, his secondary experience is an important plus item. "What can help, even what others can't help, is the core competitiveness of investment."