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    Confucian PE - The People-Oriented Principles of Co-Stone Capital


    Confucian PE - The People-Oriented Principles of Co-Stone Capital    Zhang Wei, Chairman of Co-Stone

    Zhang Wei, Chairman of Co-Stone Capital


    Author: Su Longfei

    Source: New Fortune, 2017 1st Column ?(WeChat ID: newfortune)?


    With AUM of 35 billion, of the 90 invested projects, only 1 resulted in a capital loss; 52 projects achieved exit or liquidity, among which 25 IPOs, representing a high exit percentage of 48.1%; a total principal of 1.905 billion brought in a total return of 16.05 billion, representing a return of 8.43 times. It’s hard to imagine that Co-Stone Capital, a company that does not follow hot trends nor go after hot projects, could have achieved such amazing investment results, even surpassing some of the best PE funds.

    Lying behind this is the set of methodology created by Co-Stone Capital over its 15-year history: concentrated investment and enhanced services. Co-Stone Capital makes on average 5-6 investments per year, with an average amount of 100 million per project, among which 70% goes beyond 50 million. Compared with other PEs in the same range, Co-Stone Capital is both cautious and audacious. By investing in fewer projects with larger investment amounts, one has to be extremely selective. This is why that Co-Stone Capital emphasizes so much on the growth potential of enterprises and the entrepreneurship of their founders while attributing them both the correspondent value.

    Even for carefully selected projects, a prudent decision must be made to determine whether or not to invest. In order to prevent the decision-making process from becoming a mere formality, in addition to the conventional risk control system, Co-Stone Capital designed two additional mechanisms: the partners follow the company’s investments as LPs and under the supervision of the investment review committee, each partner is guaranteed to have one vote and one vote only, including the Chairman. This makes sure that the GP and LPs are closely tied and restraints the influence of the company founder.

    With concentrated investments, an efficient post-investment management is crucial so that the projects could develop as expected: known as focused services for the company. On the one hand, Co-Stone Capital evaluates the project progress and controls its risks via periodic visits and reviews. On the other hand, Co-Stone Capital also provides their portfolio companies with value-added services such as strategic development, corporate governance optimization, M&A and other advisory services thanks to their in-house professional competence and resource integration capabilities. Meanwhile, based on its network of industrial resources built over the years, Co-Stone Capital is also able to assist portfolio companies as they expand up and down in the industry value chain.

    This systematic approach enables Co-Stone Capital to achieve a high rate of success for invested projects, building a unique image within the domestic PE market. When Co-Stone Capital invests, whether in DD, transaction structuring or considering management earn-outs and incentives, its attention to the human factor is always a priority. Given that private equity investment is becoming increasingly intensive, the investment style of Co-Stone Capital,?planted firmly in the economic and capital market environment of China, has immeasurable values for this industry.

    What do the following companies have in common:OppleLighting (603515), Dezhan Healthcare (000813), Omnijoi (300528), Asymchem (002821), Kexin Technologies (300565), Silkroad Vision (300556) and Kersen Science & Technology (603626)?

    The answer is Co-Stone Capital. All seven of these listed companies or those who have passed the CSRC review in 2016 were portfolio companies of the same fund managed by Shenzhen Co-Stone Assets Management Co., Ltd. (Co-Stone Capital) - Everest Co-Stone. As a result,?Lin Ling and Chen Yanli, Managing Partners of Co-Stone Capital, may very well be the GPs most seen in the bell ringing ceremonies in the Listing Hall on the 8th floor of Shenzhen Stock Exchange in 2016.

    Despite their outstanding investment performance, Co-Stone Capital is not well known to people in or outside the PE industry.?This low-profile?PE?institution has been operating?under the radar?for 15 years and?managing assets of over 35 billion,?it is one of the largest players in the industry.

    Under the current PE fervor in China, other PE are all devoted to chasing after “star-projects”. Not Co-Stone capital, which is barely seen for projects like JD.com, LeTV, Didi, BGI, etc. The partners are unanimous: “Not our cup of tea!”.?

    Zhang Wei, Chairman of Co-Stone Capital explained that: “From the perspective of making profits, I don’t need to invest in such high-profile enterprises. They are like ladies from noble families, demanding high prices that match their status. I prefer girls of a humbler birth and help them increase their value, creating even bigger values and higher returns.”

    Co-Stone Capital’s?numbers are the best footnotes for?Zhang Wei’s statement.

    A Failure Rate of?Only?1%?after?15 Years

    PE funds are measured with three key indicators: the AUM, the number of IPOs and the MOC (Multiple of Capital Contribution). How did Co-Stone Capital do?

    According to disclosed information, from the first fund managed by Zhang Wei’s team in 2000, Co-Stone Capital has managed, till now, a total of over 40 funds ranging from VC/PE investments, M&A funds to private placement funds, etc. The aggregate AUM rounds up to approximately 35 billion, of which almost 25 billion from 20 equity investment funds (Table 1).

    Table 1: Details of equity investment funds under the management of Co-Stone Capital





    Subscription Capital

    ?(100 million)

    Launch date


    Huizhong Co-Stone Fund




    Apr. 2004


    Huashang Co-Stone Fund






    Shenzhen Co-Stone Fund






    Wuhu Co-Stone Fund




    Dec. 2009


    Everest Co-Stone Fund




    Jul. 2011


    CEIBS Co-Stone Fund




    Aug. 2011


    Ocean Co-Stone Fund




    Sep. 2011


    Lake Lithium Investment Special Fund




    Jan. 2012


    Linghang Co-Stone Fund




    Sep. 2012


    Qixinshi Film Fund




    Sep. 2013


    Pioneer Co-Stone Equity Fund




    Jul. 2014


    Lingkang Biology & Medicine Fund




    Jan. 2015


    Co-Stone NEEQ Fund




    Jun. 2015


    OPPLE M&A Fund




    Oct. 2015


    Xiansheng Investment Special Fund




    Dec. 2015


    Xcar Investment Special Fund




    Dec. 2015


    Jinhuayanghang Equity Investment Fund




    Jan. 2016


    Anhui Industry Upgrade Fund




    Feb. 2016


    Lingyu Co-Stone Fund




    Dec. 2016



    Note: Data from Co-Stone Capital, bold font represents primary funds.

    From the perspective of AUM, Co-Stone Capital comes second to Shenzhen Capital Group, in a city where PE investment plays an important role.?Compared?to?nearly 20 PE?institutions?listed on the NEEQ, the AUM of Co-Stone Capital is only outnumbered by two companies: Jiuding Investment and China Science & Merchants Investment Management Group (CSC).

    As of today, Co-Stone Capital has invested in a total of 90 projects and achieved exit/liquidity events in 52, including 17 companies listed via IPO, 5 companies listed via back-door listing or restructuring, 12 companies listed on the NEEQ, 3 share swap transactions and the remaining 15 companies through trade sales (Figure 1).

    Figure 1: Co-Stone Capital exit/liquidity events

    Confucian PE - The People-Oriented Principles of Co-Stone Capital    Zhang Wei, Chairman of Co-Stone


    25 companies were listed (or merged into a listed company), representing an aggregate listing ratio of 27.8%. In other words, one of every four invested projects are able to get listed. Excluding those listed on the NEEQ, 40 companies achieved exit, representing an exit ratio of 44.4%.

    Compared with PE institutions listed on the NEEQ, Co-Stone Capital is ranked at the top in both the listing rate and the project exit rate (Figure 2).

    Figure 2: Exit rate and listing rate of PE institutions

    Confucian PE - The People-Oriented Principles of Co-Stone Capital    Zhang Wei, Chairman of Co-Stone

    New Fortune collected the data disclosed in the equity exchange prospectuses of five of the top PE firms including Jiuding Investment, CSC, Heaven-Sent Capital, Cowin Capital and Legend Capital to investigate the number of projects that they exited via different channels.

    These five PE?firms exited?from?a total of 130 projects, of which 43 were IPO exits, representing?an average listing rate of?33%.?As for Co-Stone Capital, among the 52?exited projects, 25 were IPO exits, representing a high percentage of 48.1%, a rate?significantly higher?than the average level of the?other?five?top?PE?firms.

    Furthermore, among the 130 exited projects of the other five PE firms, at least 48 projects were buyback exits, accounting for 37% and 26 projects were trade sale exits, accounting for 20%, resulting in a total of 57% in buyback and trade sale exits. Among the 52 exit projects of Co-Stone Capital, a total of 15 projects were buyback and trade sale exit, representing only 28.85%, which is even lower than the single ratio of buyback exits of the other five PE firms.

    Generally speaking, the best investment returns?come from IPO exits, followed by M&A/trade sale exits while buyback exits generate the lowest returns. Co-Stone Capital exited projects via IPO at a ratio much higher and via buyback at a ratio much lower than other PE firms, indicating that the investment returns from exited projects would be much higher than average.

    Table 2: Overall rate of return from funds in the exit period of Co-Stone Capital


    Launch time

    Amount (100 million)


    Huizhong Co-Stone Fund

    Apr. 2004



    Huashang Co-Stone Fund




    Shenzhen Co-Stone Fund




    Wuhu Co-Stone

    Dec. 2009



    Everest Co-Stone

    Jul. 2011


    expected 45%

    Source: Co-Stone Capital

    Based on the six funds that are currently in the liquidation stage at Co-Stone Capital, the internal rate of return is between 17% and 70% (Table 2). For now, the total returned capital of 16.05 billion corresponds to the?returned principal of 1.905 billion, resulting in an overall return of 8.43 times, which is much higher than other PE firms listed on the NEEQ (Figure 3).

    Figure 3: AUM and exit amounts of top PE firms

    Confucian PE - The People-Oriented Principles of Co-Stone Capital    Zhang Wei, Chairman of Co-Stone

    It is worth mentioning that, among the 90 projects invested by Co-Stone Capital, Sunward Intelligent (002097) and Everyday Network (300295) achieved returns of over 100 times and many other projects achieved returns of 10 times or higher, including Huitian New Material (300041), New Hope Liuhe (000876), Huazhong Numerical Control (300161), Leking Wellness (300247), Silkroad Vision, Kexin Technologies, Asymchem and others.

    In 2002, Co-Stone Capital invested 15 million in Zhuzhou Cemented Carbide Cutting Tool Co. Ltd.; by 2010 when they exited via buyback, they got back 123 million in cash, producing a high return of 8.2 times. Wang Qiwen, the person in charge of this project and Managing Partner of Co-Stone Capital, said: “This may be one of our projects with the highest non-IPO returns so far.”

    Of all the projects invested by Co-Stone Capital so far, although there were several projects from which only the principal was recovered upon exit, it is incredible that Co-Stone Capital only suffered losses from one project - Xuchang Hengyuan. This is a wig manufacturer located in Xuchang, the largest domestic hair product base and kept pace with Rebecca (600439), the industry leader, for a while. However, after two failed IPO attempts in 2011 and 2014, the company is currently undergoing reorganization and bankruptcy proceedings. 27 investment lived the same experience in the company.

    Only one of?the?90 invested projects can be considered a real failure, resulting in a failure rate as low as 1.1%; the total?return?of 1.905 billion in principal generated a high income of 16.05 billion, producing an overall return of over 8 times.?What is the investment methodology behind such a high success rate? How did Co-Stone Capital come up with such a methodology?


    Co-Stone Capital invests in of 5-6 projects every year, on average, leading to a total number of 90 since 2000. This is considered to be quite low when compared with other PE firms in the industry. PE firms that are established later and of a similar scale, such as Fortune Capital, CSC and Jiuding Investment, have invested in projects 2-3 times more than Co-Stone Capital (Table 3).

    Table 3: Comparison between AUM and total number of investments by selected PE firms

    Name of PE

    AUM (100 million)

    Number of investments

    Co-Stone Capital




    274 (607 subscribed)


    Jiuding Investment

    214 (310 subscribed)


    Fortune Capital



    Cowin Capital



    Heaven-Sent Capital


    Note: The data is collected from public information; the data of CSC, Jiuding Investment, Cowin Capital and Heaven-Sent Capital is as of the date of their respective prospectuses

    Fewer invested projects and a large asset under management signifies a large investment amount per project. Tao Tao, Managing Partner of Co-Stone Capital, once made a calculation in 2012: “We compared the average investment amount for each project made by several large-scale PE firms with that of Co-Stone Capital. Co-Stone Capital would invest an average of 40 million in each one while other PE firms launched at the same time invested about 10 million on average.”?Four years later, in 2016, the average investment amount per project of Co-Stone Capital increased to 100 million,?70%?of?which exceeded 50 million.

    From this perspective, the invest strategy of Co-Stone Capital may be summarized as concentrated investment.

    In the secondary market, concentrated investment and diversified investment are two lasting strategies with their own characteristics and proponents, with Warren Buffett advocating the former and Peter Lynch backing up the latter. However, in the primary market, especially considering the great opportunities in China, only a few PE firms are truly devoted to the idea of and practice of concentrated investment.

    Many PE firms gladly shout out the number of star projects in which they participate. Over the past two years, under the ideological drive of specialized investment, selected and trendy industries are still the preferred when many leading PE firms shift their focus. Within the same industry however, concentrated investments are much less possible. On the contrary, sharing profits tend to be more likely. As for funds who have invested in early stage projects, thus demonstrating VC-like attributes, they are less likely to put all their eggs in fewer baskets. One of the objective reasons is the limited need for financial aid for early-stage projects, since too much capital investment would dilute the shares of the founding team, which is not generally acceptable.?

    So why does Co-Stone Capital prefer concentrated investment instead of following the trend? This can be traced back to when the team members of Co-Stone Capital first started their careers in the PE industry.

    Investment?rationale?stemming from?the domestic environment

    In 1999, after observing the high valuations of dot-com shares listed on the NASDAQ, China was flooded with the idea of launching the Growth Enterprise Market (GEM) board. To do this, as a large number of candidate enterprises seeking to be listed on the GEM board, with the support of the local government, many venture capital institutions were established. For example, Shenzhen Capital Group, a well-known PE firm, was established by the Shenzhen government during that period with a capital contribution of 700 million.

    In this context, successful investment bankers?Zhang Wei, together with his fellows Chen Yanli, Wang Qiwen and Lin Ling,?successively?entered the PE industry around 2001. The partner team of Co-Stone Capital later?expanded to include Tao Tao, Han Zaiwu and Xu Wei, originally investment bankers themselves,?forming?the?current management partner team of Co-Stone Capital.

    The PE industry possesses a natural upstream and downstream relationship with investment banks.

    It is very common to meet PE investors who once were investment bankers and direct investment by securities brokerages, which is currently a booming business in China, also started at a relatively early time. In 1995, China International Capital Corporation Limited (CICC), backed by Morgan Stanley, set up a direct investment department, thus becoming the first brokerage in China to follow overseas investment banks and to institutionalize the “direct investment + sponsorship” model. Wu Shangzhi has been the general manager of CICC direct investment department till July 2001, when the CICC board of directors decided to split the direct investment department, after which Wu Shangzhi and his team left CICC to start their own business by establishing CDH Investments.

    The academic and professional experiences of investors normally have a profound impact on their investment methodologies. Zhang Wei’s team is no exception: their background in investment banking?brought in a unique investment bank perspective.

    The Mainboard Market today generally runs on a registry system, which is about to be replaced by the approval system. Prior to the approval system of the Securities Law promulgated in 1998, the Mainboard Market operated on a quota system, in which a local government official or industry regulator would recommend selected companies for IPO based on the respective quota. This system resulted from planned economies and has long been criticized for its many disadvantages.?

    Zhang Wei entered the investment banking industry in the era of the approval system and made two key observations during this period. To begin with, high-quality companies are very precious. “More than 10 years ago, there were actually only a few high-quality enterprises because the overall size of the economy in China was still quite small and the IPO quota system resulted in a large number of bad enterprises getting listed. As such, since we realized that there were not many high-quality enterprises, we must be prudent in our choices.”

    Secondly, equity investment is a long-distance race. “China’s capital market has been a policy-driven market for a long period of time, but the policies change frequently.?Furthermore, from the second half of 2001, the market went through a 5-year bear market and the IPO market was suspended nine times during this period.?Therefore, a?sprint mentality?is?incompatible with equity investments. Instead, we must help enterprises solve their problems?which arise over?the course of development?with a focus on?growing with the enterprises for an extended?period of time.”

    Based on these two observations, Zhang Wei’s team gradually formed the idea of concentrated investment. Under China’s characteristic economy and the capital market, only a few selected outstanding enterprises can outturn the variable policy market to achieve stable profitability despite the economic shifts and market cycles. “From a long-term perspective, the most important thing is to find an outstanding enterprise. If this outstanding enterprise has sufficient growth abilities, they would be able to withstand uncertainties in the capital market. As such, as we looked for the most outstanding enterprises, we keep our eyes wide open on their growth potential.”

    It is with such beliefs that Zhang Wei’s team started to search for high-quality, high-growth enterprises throughout China. The search helped them find many subject enterprises such as Shandong Liuhe, Huitian New Material, Sunward Intelligent, Huazhong Numerical Control, Zhuzhou Cemented Carbide Cutting Tool and others.?With AUM of nearly 200 million at that time, they invested 67 million in Shandong Liuhe and 24.1 million in Huitian New Material, the total of which counting for nearly half of their whole capital.?In the end,?this strategy was validated as?most of these projects achieved high?returns:?Sunward Intelligent achieved returns over 100 times, while Huazhong Numerical Control, Huitian New Material and Shandong Liuhe achieved returns of 10 to 30 times.

    The high returns further reinforced the concept of?concentrated investment for Zhang Wei’s team. The project that influenced them most is the first project they exited from - Sunward Intelligent.

    In 2004, after completing the due diligence investigation and valuation negotiation, Zhang Wei’s team invited Li Zhida to participate in the investment, the founder of the skincare brand Mini-nurse. As Li had previously sold his brand to L’Oréal, he was in possession of a large amount of cash and he was also in need of investment opportunities. One of his demands however was for Zhang Wei to join him in the game: “Will you invest? If you put your money in, so will I.”

    Under this challenge, Zhang Wei gathered the bulk of his wealth at that time and together with Li Zhida’s funds, invested a total of 36.4 million in Sunward Intelligent. Fortunately, Sunward Intelligent listed on the SME board in 2006 and the expiry of the share lock-up period in 2007 coincided with an unprecedented bull market of the Mainboard Market in which the share index reached 6124. Their shareholding produced returns over 100 times, which allowed Zhang Wei to achieved financial independence. However, he admitted: “The return derived from our investment abilities was 10 times at the most. The remaining returns were an extra bonus given by the great bull market in A-shares?at the time.”

    This 100-time return was a milestone for Zhang Wei’s team. “This enhanced our faith in this industry, enabling us to keep making bold investments.” Chen Yanli, who participated in the due diligence on Sunward Intelligent, recalled that “People can expect 100-times?returns in the Internet industry. This 100-times?return in the engineering machinery industry changed our investment concept.?Therefore, we always said not to search for the hottest or trendiest projects. China provides a lot of room of development for many industries?as?it has a different development path and is in a different development stage?from international markets.”??From that moment on, Zhang Wei’s team fomented their strategy of not pursuing hot markets and not following popular trends and insisting on leading investments?rather than following them.

    Early in their investment careers, Zhang Wei’s operated through a contract fund model of searching for projects prior to calling capital,?as they could earn a certain percentage of the returns by recommending projects to investors. Huashang Media, Everyday Network, Motie Books, Metropolis Media, Eagle Ceramics, Geeya Technology, Zhongli Science and Technology and Yuandong Drive Shaft are among the projects invested under such model.

    Huashang Media was successfully merged into Huawen Media (000793) in 2007 and became an important partner to Zhang Wei’s team. Together with Huashang Media, Zhang Wei’s team invested in a series of projects including Everyday Network, Metropolis Media and Motie Books. It also demonstrates a key characteristic of the LPs of Co-Stone Capital, where the invested projects or their founders invest back into the fund as LPs. Investees such as Huashang Media and founders such as Hu Guanghui from Everyday Network all become LPs of Co-Stone Capital funds.

    In accordance with the?Partnership Enterprise Law?that went into effect on June 1st, 2007, domestic PEs could establish limited partnerships according to international practices. This resulted in the establishment of many private-owned PE firms. On June 26th, Cowin Capital sponsored the first domestic limited partnership PE firm - Shenzhen Nanhai Growth Capital Limited Partnership. After that, many successful PE firms were created. The state-owned PE fund - China Investment Corporation - was also established later in September.?

    In August of that year, Co-Stone Capital was formally founded, with shares held by five (later increased to seven) shareholding managing partners including Zhang Wei. The PE business of Co-Stone Capital entered thus into a new era, in which its idea of concentrated investment continues to improve itself.

    Project selection:?on the relationship between the?growth potential and?valuation?of enterprises

    Highly concentrated investment can achieve returns far above average; but such an arrangement also means that few errors are tolerated. Co-Stone Capital must therefore pick out truly outstanding enterprises with high-growth and devote itself fully to the post-investment management and value-added services, which significantly increases the likelihood of a high success rate, a low failure rate and even high rates of return.?

    The top priority is how to ensure selected outstanding companies with huge growth potential??

    Many people tend to consider PE investment as an art, where subject selection is based primarily on the intuitive perspective from the GP’s rich professional experiences. Co-Stone Capital considers the decision-making as a complex process, the core of which is to accurately grasp of the growth potential and to properly evaluate potential projects. High growth potential is an essential premiss for a successful investment, while proper valuation is a key driver for realizing excess returns. All investment decisions ultimately come back to these two factors. Judging them fairly is the core ability of an investment institution.

    As Zhang Wei explains, “when making an investment, 50% of the decision-making process is to determine the growth potential of a given enterprise, that is, to comprehensively assess all the various factors impacting that enterprise---from the industry trends, the industrial competition and the competitive advantages of the enterprise to its organizational system and entrepreneurship. The other 50% comes from the evaluation of its value. At which price are you going to make investment and in what kind of market can you cash out the investment? Do you expect to exit via independent IPO,?share swap into a listed company?reverse list through a back-door listing or through a trade sale? All these factors determine at which evaluation level an investment shall be carried out.”?

    In the opinion of Co-Stone Capital, the growth potential must be continuous and robust enough to withstand economic cycles and the ability to generate strong cash flow should be demonstrated. Short term growth driven by economic cycles, investment driven growth dependent on continuous investment or growth predominantly derived by continuous merging do not meet this threshold. Among the factors determining the growth potential of enterprises, the most important factor is the stage of the industrial cycle, followed closely by the entrepreneurship of the management team.?

    A significant decision-making factor is to?identify?the beginning and the end of industrial cycles. It’s hard to achieve high returns?on?investment?made?at the end of an industrial cycle.?Therefore, it is important to identify the pattern of industrial changes and the course of economic development, targeting investments in outstanding enterprises in emerging industries.?

    In addition, unlike many investment institutions, Co-Stone Capital pays more attention to the organizational system and entrepreneurship of an enterprise. “When making investments, many people generally look at the financial statements and the industry’s competitive environment. Co-Stone Capital considers the financial figures merely as a superficial presentation, which reflect on the combination of organizational system and entrepreneurship of an enterprise.”

    As with growth potential, the valuation of an enterprise is also subject to a series of factors. Valuation means more than simply applying a valuation theory and plugging it into a model. It requires dynamic and comprehensive considerations. Co-Stone Capital believes that the valuation of an enterprise is jointly decided by three primary factors, namely the stage of the industrial cycle, the quality of the enterprise and the state of the capital markets. For example, when looking at the industrial cycle, artificial intelligence and TMT have totally different valuation characteristics from the steel or the coal industry. In comparing the quality of an enterprise, although Huawei and ZTE have roughly the same scale, their valuation would obviously be different. With regard to the capital market, the different venues and methods of getting listed may result in a huge difference. Taking the venue as an example, the valuation of similar companies listed the Mainboard Market, the NASDAQ and the Hong Kong Stock Exchange would vary significantly. From a global perspective, most shares on the Mainboard Market have a relatively high valuation, due to the composition of investors, the regulatory environment and the liquidity.?On the GEM board featuring the highest?liquidity in the?Mainboard Market, the annual turnover rate may reach 12 times and the turnover rate on the main board?generally reaches?8-9 times. The turnover rate on the Hong Kong stock market is less than 1 time and the US stock?exchanges?are between 1.5 to 2 times. As for the method of getting listed, the return of?an?independent IPO on the Mainboard Market may?be as much as?10 times, while the return of getting listed?through a share swap?is only?about?3 times and the return from?a?buyout by the?majority?shareholder is?usually?less than 1 time.

    Co-Stone Capital has settled on an investment methodology that is relatively mature by now. However, like any successful equity investment institutions, this is a result of experience and lessons learned.?

    Two major events occurred in 2001 when Zhang Wei’s team first entered the PE industry. One is the dot-com collapse on the NASDAQ when many dot-com startups fell from the top and more were thrown into bankruptcy. The other is the admission of China to the WTO, which gave birth to the economic miracles of industrialization and urbanization in the country. Because of this, companies that caught Zhang Wei’s eyes were, with the exception?of a few Internet-related companies such as Everyday Network, mostly enterprises which had acquired unique competitive advantages through technology innovation and market segmentation in the conventional industries. According to Zhang Wei, “the scale of the overall market is large enough, given the various operating environments of the emerging market, conventional industries are still full of opportunities in China.” Examples of this include Shandong Liuhe and Sunward Intelligent.?

    The three founders of Shandong Liuhe, Zhang Tangzhi, Zhang Xiaocheng and Huang Bingliang are classmates of 1978 at Qingdao Agricultural University (formerly Laiyang Agricultural College) all majoring in animal husbandry. Upon graduation, Zhang Tangzhi was assigned to a government department while the others were retained to teach at their alma mater. In 1992, Zhang Tangzhi ventured into business and launched Liuhe Group. One year later, Zhang Xiaocheng and Huang Bingliang resigned from the university to join the startup.?

    Sadly in 2001, an accident left Zhang Tangzhi half paralyzed and unable to speak. Thanks to the management of Zhang and Huang, the company grow rapidly while he was under treatment. This then created a bitter feeling inside Zhang. In the attempt to moderate the situation, the firm’s consultant professor Peng Jianfeng proposed that some modifications regarding the shareholders’ structures should be made and that presence of an external investor might do everyone some good.

    Peng Jianfeng, an old friend of Zhang Wei, completed a consulting project for the Liuhe shareholders and made an introduction. In May 2003, Zhang Wei and Chen Yanli went to the headquarters of Liuhe located in Qingdao, Shandong Province to take a look. “It was during the SARS pandemic. After arriving in Qingdao, we were not allowed to stay in any of the hotels because we were residents from Guangdong, which was a severely afflicted area at that time.” Chen Yanli still remembered the experience vividly.?

    In the feed industry at the time, the leading manufacturers were Chia Tai Group owned by the Xie Guomin family and the Hope Group owned by the Liu Yonghao family. Their business model was to distribute feeds through a complex series of wholesale dealers. The sales prices were high and the gross margins?were around 30%.?

    As Shandong is an agricultural province with a relatively high population density, Shandong Liuhe established concentrated distribution points in each county by renting feed factories owned by local grain administrations, allowing them to sell directly to farmers. This eliminated intermediate distributers, reduced logistics costs and prices. Meanwhile, Shandong Liuhe launched a “service marketing” strategy to provide free training seminars on large scale husbandry techniques. It recruited a large number of college graduates majoring in agriculture and animal husbandry and have them visit farmers at their home to help them raise animals in a more scientific way. “Farmers only needed?their own hands, livestock and some land. Liuhe taught seed selection for plant breeding, epidemic prevention and composting methods. To them, we were also important clients.”, said Chen Yanli.?

    The combination of concentrated distribution stations and the service marketing resulted in a high turnover.?Farmers?were followed up by designated people, who maintained detailed archives?of each farmer’s needs and?factories also kept in direct contact with farmers.?This allowed Liuhe to produce accurately based on the purchase frequency of customers, thereby?better managing?the inventory of raw materials and finished products. This customer follow-up and production scheduling enabled Shandong Liuhe’s inventory turnover rate - the most important indicator measuring the turnover speed - to reach?an?amazing 100 times. In other words, its inventory was circulating?once every 3-4 days.?

    In addition, with regard to cash management, Shandong Liuhe settled accounts with downstream farmers in cash and a settlement period was available for the upstream grain trade administration. As a result, Shandong Liuhe had strong cash flows and did not need to borrow money from banks because of its interest-free financing from suppliers.

    Therefore,?although its gross margin was only 4%-5%, because of the interest concessions it made to farmers, the superior turnover rate and the large amount of interest-free borrowings allowed Shandong Liuhe?to reach?a?steady?return on equity of 30%-40%, much higher than average.?The rapid inventory turnover reduced prices and made concessions to farmers, which rapidly secured the company’s market share. At its peak, Shandong Liuhe’s market share in Shandong was five times that of New Hope, becoming a model for China’s new generation of agricultural and livestock companies. Its pattern was ultimately followed by the rest of the industry.

    “We did not know much about the agriculture industry at that time, but according to the financial data, I found that they had very strong operation capability and very high efficiency!”, said Chen Yanli. When undertaking due diligence investigations, financial indicators are very important factors to be considered. As an investor with an investment banking background, Chen Yanli was more sensitive to the information contained within. “When we made the decision to invest in the company, their competitive advantages were the main reason.” In the end, Zhang Wei’s team decided to invest 67 million to purchase shares from all three founders, thus becoming one of four shareholders holding a 26.5% stake.

    Sunward Intelligent, located in Changsha, tells a similar story. Although Sunward Intelligent struggled for survival under the fierce competition with SANY Heavy Industry and Zoomlion Heavy Industry, Zhang Wei’s team appreciated its unique technical innovation in static pile drivers on one hand and was optimistic about the industrial cycle, believing that the engineering machinery industry had great prospects in China’s urbanization. The decision led to a payback of more than 100 times.?

    During the selection process, Zhang Wei always emphasizes entrepreneurship. For him, investors need to not only assess enterprises based on the value chain of their customers, but also understand the enterprises from two perspectives: entrepreneurship and organizational structure. “Without the continuous drive derived from the entrepreneurship, an enterprise can’t succeed; and without a mature organizational system, the enterprise can’t expand.”

    The investment in Shandong Liuhe follows the same logic. “In appearance, the company did not present a lot of technology. It developed because of its operational and management philosophy. For example, they were willing to provide long-term free trainings to farming households, regardless of the high costs. Moreover, they would reduce prices as long as it was profitable. Although increasing their market share was a driver, it was also beneficial to farming households.” Zhang Wei believed that the three founders of Shandong Liuhe, Zhang Tangzhi, Zhang Xiaochengand Huang Bingliang, were all dedicated to making contributions to the development of this industry.

    For building the organizational system, Zhang Tangzhi also had a long-term vision for his ultimate objective. Around 2000, at its own cost, Shandong Liuhe had sent almost all of their?middle and upper management staff to business school for an MBA education to schools all over the world, such as Singapore. Moreover, in order to improve the management of the firm, they?launched an Enterprise Resource Planning (ERP) system while other agricultural and livestock enterprises were still using traditional management methods. “At that time, this vision was not common even among the larger enterprises in China.”

    “This kind of company catches my attention. I think they have both lofty ideals and a clear vision and I look up to executives like this.” Zhang Wei saw entrepreneurship principles in Zhang Tangzhi, more specifically, in his pursuit of building up a long-term business instead of only seeking profits only, which reflects the ideas of Drucker of whom Zhang Wei is a fan.?“In the words of Drucker, profits are not your objective, they are a result.”

    After his investment in Shandong Liuhe, one of Zhang Wei’s old friends talked with Liu Yongxing, President of East Hope, about making an investment in the feed industry. Liu said: “This industry is not interesting, not profitable.” Therefore, East Hope Group that he established, after being carved out from the Hope Group, has gradually shifted from the feed industry to the heavy chemical industry such as cement and electrolytic aluminum.?

    “We felt immense pressure when we heard such a statement. However, we trusted our own judgment.”, said Chen Yanli. Time proved their judgment correct and that the feed industry was in an integration cycle. A company with an advantageous business model still had growth potential. In 2003 when the investment was made, Shandong Liuhe’s revenue was 1.4 billion. By 2011, its revenue had rocketed to 60 billion.

    Unfortunately, the IPO plan for Shandong Liuhe ultimately failed, due to the several suspensions of the?IPO?market. Later, with the help and coordination of Zhang Wei, Shandong Liuhe was restructured and listed via stock-for-stock acquisition by New Hope. Even so,?Co-Stone Capital’s initial investment of 67 million?became 2 billion?at exit, producing a return of over 30 times.?If Shandong Liuhe was able to successfully IPO on their own, the return would have been much higher.

    By considering the industrial cycle and entrepreneurship as key investment criteria, Co-Stone was able to realize returns of over 10 times. However, an accurate understanding of the industrial cycle depends on in-depth insights into the industry and the macro economy. In particular, the economic transformation of the Chinese market, the explosive growth of the digital economy and new models driven by technological progress have much higher professional requirements than ever.

    In 2009, the first year of the GEM board, Co-Stone Capital launched its first limited partnership fund - Wuhu Co-Stone, which had raised 400 million and was aimed at growing enterprises, particularly “Pre-IPO” projects. This fund followed the previous investment logic of Co-Stone Capital - other than one M&E company and one pharmacy, all other projects were from the manufacturing industry, including as Tonly Heavy Industries, Kaiyuan Instruments, Huachangda, Jiafa Chemicals, Western Heavy Industry, Kangxin New Material and others. The average investment amount per project was 40-50 million.

    However, while reviewing the investments made under Wuhu Co-Stone, Co-Stone Capital discovered in 2011 that the manufacturing industry experienced an obvious decline due to overcapacity. According to their calculations, the weighted return on equity in 2010 (net profit calculated based on the shareholding ratio) of enterprises invested by Wuhu Co-Stone increased by 58% compared with the previous year; however, the year-on-year growth rate declined to 36% in 2011, showing a substantial slow-down of the growth rate. After carefully analyzing each case, the management of Co-Stone Capital realized that, despite the 4-trillion stimulus program, the conventional economic growth trend had begun slowing down.

    The two company Tonli Heavy Industries and Kaiyuan Instruments were particularly demonstrative of this trend. Lin Ling, Managing Partner and Vice President of Co-Stone Capital told us the story: “Tonli Heavy Industries manufactures vehicles for mining, used sole in the coal industry. The company grew very rapidly in the beginning. When Co-Stone Capital made the investment, their profit was only 20-30 million. But by 2010, when the IPO application was made, their profit had grown to almost 100 million. Unfortunately, their IPO application was rejected. They tried again the following year but ever since 2012, the performance of the company started to deteriorate due to a steep decline in the coal prices. As?their business is closely tied to the coal industry, they never got another chance with the CSRC. The company is now listed on the NEEQ.”?

    Wang Qiwen explained: “Kaiyuan Instruments was comparatively fortunate. The company manufactures instruments for testing coal quality. When coal prices were high, such instruments sell themselves.??But when the coal prices dropped, customers become much more reluctant. Luckily, it got listed quite quickly and went through an IPO in 2012. However, their profit last year was only several million. We exited soon after the IPO.”

    Looking back on the original intentions of investing in such projects, Tao Tao said: “it was partially because advanced manufacturing could be easily analyzed and its core competitiveness could be easily understood. But the situation also exposed the problem: our lack of research in the industry.”

    With this awareness, Co-Stone Capital initiated some changes. In order to “identify industrial investment opportunities under the structural transformation of China’s economy”, they shifted from superficial research toward careful selection of key industries and focused on their investment research.?

    To begin with, the?investment teams?were?divided according to industries, instead of geographical locations. Six investment?teams were created?–?consumer products, TMT, pharmaceuticals and healthcare, agricultural industrialization,?clean-tech and new materials; meanwhile, they gradually withdrew from the manufacturing industry.

    After further review, they cancelled three teams: agricultural, clean-tech and new materials, leaving only consumer products, TMT and pharmaceuticals and healthcare. “We stopped looking at the agricultural sector since, even after evaluating almost 100 opportunities, we still couldn’t find a suitable investment target. Another important reason was that it’s hard to authenticate the performance of agricultural projects. We dropped the new materials research due to the highly differentiated products. We found several people with professional backgrounds but realized that accurate assessments?could only be made when their expertise matched perfectly with the project, which was quite difficult. The environment protection research was dropped because most of the projects depended greatly on government relationships and grants. To us, it does not represent the core competitiveness of a company and it is hard to replicate.”, said Tao Tao.

    Secondly, a supporting team was built for the construction of the managing team so that?each project team was fully staffed with?an?MD/ED, investment manager and industry researchers.?High-level talent recruitment concerns mainly the MD and ED positions. “Because the initial team members all came from investment banking, financial, or management background, under the new structure, a lack of professional technical background would be quite difficult.” Therefore, Co-Stone Capital hired many technical professionals such as Li Xiaohong and Ye Qiwei. In addition to the seven existing managing partners, Co-Stone Capital brought in a business partner, Li Ying from Oriza Holdings, a stated-owned PE in Suzhou.

    Under this organizational transformation, Co-Stone Capital launched a new fund in 2011 - Everest Co-Stone and aside from a few manufacturing projects, the fund invested in a lot more projects in the fields of consumables, TMT and health care, such as Soling Industrial (a company making vehicle audio-video and navigation systems), Silkroad Vision (a digital 3D rendering service company), Omnijoi (a film and TV program production company), Asymchem and Sunho Pharmaceutical (Pharmaceutical R&D and CMO companies),OppleLighting (the largest domestic consumer lighting company) and Tongfu Food etc.?The?1.418 billion?Everest Co-Stone?fund?invested in a total of 19 projects, with?an average of?75 million invested projects.?Tao Tao said: “Everest Co-Stone has a totally different portfolio profile compared to Wuhu Co-Stone. If you show these two funds to other PEs, they will definitely assume that they were created by different GPs. What happened between the launching of these 2 funds? The answer is that the partners of Co-Stone Capital are constantly learning and proactively adapting themselves to new environments and market conditions.”

    Such experiences made Zhang Wei understand that you can never follow the same old rules: “Unless you are extremely perceptive, one need to make extra effort in understanding the investment values of a company.”

    After a company has been selected for investment, the next considerations are the investment amount and the shareholding ratio. In alignment with the concentrated investment,?Co-Stone Capital normally?requires?a seat?on?the board of directors?on corporate affairs, so as to have a say in important matters.?In January 2014, they invested 54.9 million in Original Force, representing a 32.43% stake, exceeding the management shareholding and becoming the largest shareholder.

    In order to offer incentives to the management team and to meet the requirements for getting listed, Co-Stone Capital later transferred part of their shares to the founder Zhao Rui, through which Zhao regained his position as the largest shareholder. Then, with the investment from Tencent and LeTV, Co-Stone Capital cashed out a small portion of their stake. As of right now, Co-Stone Capital still is the second largest shareholder with a 17.33% stake.

    Looking back on this investment, Lin Ling stated that the investment was made mainly based on the following considerations: “There was a large demand for animation at that time. We evaluated many content companies, but it is hard for pure content companies to make profit, unless they can produce top-selling products like Pleasant Goat and Big Big Wolf[1]. Original Force took a different approach.?Initially all they had was a technology platform to produce contents for other companies. From there, they worked to generate their own IP based on what they have learned previously. This approach is interesting and worth trying. When the content market is growing, companies providing services to content companies will have the opportunities and this was exactly what Original Force was devoted to. Original Force was talking with DreamWorks about merging, who was teaching them step by step on how to produce good animation. As they couldn’t reach an agreement on the price, the merging had to be suspended. Despite their departure, people in Original Force learnt advanced standards of production while managing a company of over 1000 people. No other firms would ever have an opportunity like this.”

    With the latest round of investment made by LeTV in January 2016, the valuation of Original Force has increased by 7 times from the time Co-Stone Capital made their investment. Lin Ling was gladly surprised: “It is actually beyond our expectation that the valuation of Original Force could increase so quickly. Nevertheless, we believe that Original Force will present us even more surprises. It takes time, of course.”

    The success?of?the?Original Force?project led Co-Stone Capital to focus on the culture and entertainment industry.?Co-Stone Capital continued to invest in?Joyme, Excellent Craftsman, Zichuan Culture, Hengdun Culture, Ergeng Network,?among others.?In February 2016, Co-Stone Capital invested 100 million for a 5% stake in MEWE Media, founded by the famous host Ma Dong, who holds the IP for the top variety show on iQIYI,?“U Can U Bibi”[2].?The funds were primarily intended for building a vertical ecosystem for Internet video contents, in order to replicate the ecology effects of MEWE by making upstream and downstream investment along the vertical route of content production. Lin Ling considered MEWE Media to be one of the top content producers of Internet videos, which conforms to the macro trend of “the networking of video content, the content as priority and the high quality orientation of Internet-generated content”, making it another important entry for the future pattern of “Internet + Entertainment” from Co-Stone Capital’s prospective.

    Three institutional assurances for prudent decision-making

    Concentrated investment revolves around large-scale investments in a limited number of projects. Therefore, even a partner’s pet project must be subject to systematic scrutiny, to ensure prudent decision-making.?

    At Co-Stone Capital, the procedure starts when the project team presents the case to the internal review department. The project team is responsible for assessing projects from an operative angle. After an initial due diligence, the project team presents an investment report to the internal review?team for a financial and legal review. If the investment report requires additional information, the internal controls department may answer their needs or perform additional on-site due diligence independently. After several rounds with the project team, the internal review department will issue an official report, which is submitted together with the revised investment report to the investment committee for discussion and vote for a decision.?

    Judging from the firm’s mechanism, the internal controls department further enhances the risk control for projects on top of the project team’s due diligence work, which makes up for the disequilibrium between the investment committee and the project team. Take this for example: in order to gain approval for a project, the project team may conceal?certain critical information. Therefore, Wang Qiwen, the partner of Co-Stone Capital in charge of the internal controls department, stated that: “We encourage the internal controls department to challenge the investment teams and fully stand behind their decisions. The internal controls department team must have high professional competence, otherwise their opinions would not be convincing enough.”

    After reviewing the performance of Wuhu Co-Stone, Co-Stone Capital further enhanced the role of internal control and risk control by engaging professional IPO lawyers and senior accountants, forming an independent internal controls team. For many key projects or doubtful projects, members of the internal controls team would make on-site investigation and reviews. The team ultimately rejected several projects, which had good business prospects but also had issues that made it unlikely?that they would meet the IPO requirements.

    In order to make prudent decisions more effectively and truly control investment risks, Co-Stone Capital further designed two additional systems.

    1)?????Co-investment by partners.?

    Unlike the common practices of other PEs where partners make co-investment in individual projects, the co-investment system of Co-Stone Capital requires partners to make co-investment in the overall fund as LPs. Generally, when initiating a limited partnership fund, Co-Stone Capital would allocate 10%-15% to be contributed by each partner based on their own situation. “Zhang Wei usually lets others make their subscriptions first and he would take up the remaining portion. He encourages others to make significant investments.”, said Song Jianbiao, the secretary of the Board of Directors of Co-Stone Capital.

    There are fundamental differences?between co-investment in the fund and selective co-investment in certain projects.?First, co-investment in certain projects is subject to moral risks, causing conflict of interests between partners and LPs of the fund. For example, a partner could make a large co-investment in a high-quality project, but refrain themselves from making any co-investment in projects that they see mediocre. This is an obvious conflict of interests with the LPs. On the contrary, co-investment in the fund ensures high concordance between the interests of partners and the LPs. Moreover, this co-investment system creates a solidarity among partners by preventing the separation of interests. This way, all the resources of Co-Stone Capital are focused on providing value-added services for the portfolio companies. This enable all partners to work prudently and correctly assess risks in making investment decisions.

    Tao Tao analyzed that: “Because of our own investments in the fund, when making investment decisions, we may fight passionately without worrying about our friendship, for the sake of everyone’s own interest. Everyone knows that we are only concerned with the success of the projects instead of with each other. Otherwise, a different opinion on a project could affect the relationship with each other. For example, I might think that, since you always veto my proposition, is it possible that you have an issue with me personally?”

    The co-investment system of Co-Stone Capital started with the Sunward Intelligent project. With the high returns during the contract funds period, all partners proactively made co-investments in the projects.?In 2009 when Wuhu Co-Stone was launched, Co-Stone Capital officially established the?policy?that partners?must?make co-investment as LPs in the fund and partners are prohibited from making additional co-investment in projects to avoid conflicts of interests between the partners and LPs.?

    2)?????“one-person, one-vote”?for?the?Investment?Committee.?

    An independent investment committee is established for each fund of Co-Stone Capital. Members of the investment committee normally consist of five or six of the seven managing partners and for the investment decisions on each project, the voting is carried out following strictly “the “one-person, one-vote”” rule. Four affirmative votes are required to proceed with the investment in question.

    Although Zhang Wei is the largest shareholder and controls the company, he can’t pass or veto a project on his own. The one vote that he has carries the same weight as those of other partners.

    From the perspective of risk control, this strict “one-person, one-vote” rule can greatly reduce project investment risks caused by personal preferences and its corrected enforced. Tao Tao analyzed that: “The investment decision-making system, without the matching co-investment system, means that we are merely managing the capital of others. Although the “one-person, one-vote” rule may still be implemented, there is room for backroom horse trading. For example, if Zhang Wei wants to have a project approved, his position could naturally create a certain level of influence. However, because everyone has invested their own money and a careless decision would affect them personally, there isn’t actually any room for lobbyists.”

    “When my project got vetoed, I was initially quite upset. However, I knew I must respect this organizational rule, otherwise, it is impossible for us to control risks. At the end of the day,?it is actually a good thing if a project I propose?gets?vetoed. If my project can be vetoed, it means any project may be vetoed.?This builds a?platform for honest and open communication?within the company.”,?said Zhang Wei.

    Focused Services

    “Technically, looking at the success factors that determine the success or failure of an investment strategy, company selection accounts for only one third at most. The remaining two thirds or more depends on effective post-investment management.” For PE firms, making an investment is only the beginning. In order to exit smoothly, effective post-investment management, including risk control mechanisms and value-added services, is necessary to help invested companies outperform their pre-investment growth trajectories and achieve the expected high growth.

    For Co-Stone Capital and their concentrated investment strategy, post-investment management is even more important. Tao Tao said: “Actually, we spend most of our energy not on?selecting the investment target but on post-investment management. Providing meaningful value-added services requires the integration of additional resources. One of the aspects in which Co-Stone Capital excels is our post-investment management capability because of our rich experience in this area.”

    Post-investment management strategy?in correspondence?with?concentrated investment

    Co-stone Capital defines its post-investment management style as “service-focused” which corresponds with their?concentrated investment strategy. Co-Stone Capital President Xu Wei, who is in charge of portfolio management, believes that this match-up is driven by three factors.

    The first one is “necessity”. A PE firm must have invested significant capital into a project to manage that investment diligently. The average investment per project for Co-Stone Capital is nearly 100 million, with 70% of the projects exceeding 50 million.

    The second factor is “possibility”. That is, the PE firm must hold a sufficient stake in the company to exert influence on the management. Of Co-Stone Capital’s existing portfolio, 70% of the projects were sole or lead investments, which indicates, a large shareholding ratio. Furthermore, in three out of every four projects, they had either a board seat or a representative within the management, allowing them to exercise meaningful influences over the invested companies. In addition, if a single GP manages hundreds of projects at the same time, no meticulous management would be possible regardless of the size of the portfolio management team. Therefore, a true focus on services is only possible through concentrated investments.

    The third aspect is “competence”. In other words, the PE firm should have the capability to provide meaningful value-added services to companies.

    The value-added services provided by Co-Stone Capital can be broken down into three broad categories:?capital management, management consultation and resource integration.?

    With regard to capital management, the investment banking background of the partners in Co-Stone Capital is not only helpful to assess the investment criteria, the valuation of a company?and its potential to IPO, it also enables them to plan, design and implement equity related initiatives such as capital allocation, corporate restructuring and management incentives. For example, Zhang Wei’s team helped Huitian New Material to complete a restructuring and implement an employee shareholding structure. In the case ofOppleLighting, Zhang Wei’s team assisted the company to restructure?and?helped them design a management incentive plan in advance of the IPO process.

    For management consultation, Co-Stone Capital entered into a strategic partnership with China Stone Management Consulting Ltd., which was jointly founded by Peng Jianfeng and Bao Zheng, the men who drafted the?Huawei Basic Law. Through this partnership, Co-Stone Capital assisted companies to evaluate and adjusted their corporate strategies. As an example, they helped Huitian New Material adjust their strategy, extending their?adhesive product line from?only automobiles to electronic products and new energy applications.

    Through their extensive investment projects and external networks, Co-Stone Capital is able to provide their portfolio companies with necessary resources such as professional management and services, either by introducing them through their networks or by making direct connections between portfolio companies. For example, with Jialin Pharmaceutical, Co-Stone Capital assisted the company by bringing in a key General Manager, Liu Wei, achieving qualitative leaps in the performance of the company. For Shandong Liuhe, Zhang Wei’s team spent a significant amount of time resolving conflicts between shareholders and shifted their focus to the IPO process to align the objectives of each shareholder. Zhang Xiaocheng, one of the founders of Shandong Liuhe, said: “At a particularly tough period, we asked Zhang Wei to come in as the company president.” Zhang Wei, although appreciative of the offer, ultimately brought in Peng Jianfeng as Chairman and Chen Chunhua, professor of the Business School of South China University of Technology, as the new President. The three founders all withdrew from management and retained?non-executive seats?on the board of directors.”

    Thanks to Co-Stone Capital’s co-investment policy, the outcome of every project is intrinsically linked to the personal interests of all partners. Such bundling of interests further ensures that all resources of the partners would be motivated to provide true value-added services. Zhang Wei said: “If we, as partners, make co-investment selectively instead of the?overall?fund, everyone would be concerned with only the projects?in which?they have invested. It would be hard for the company to mobilize the vast resources of?the entire team to provide proper post-investment services.”

    House 365.com: comprehensive post-investment management generated returns over 100 times

    With the concentrated investment strategy of Co-Stone Capital, certain investments have needed a more comprehensive portfolio management.?House365.com?was the first project for which Co-Stone Capital needed such a hands-on approach. The team was heavily involved from the establishment of company, assisted the company in formulating their development plans and developing regional markets, ultimately?expanding operations to six major cities in east China and achieving IPO. Co-Stone Capital provided intensive, highly value-added services and management throughout the company’s growth and expansion stages.

    The investment in?House365.com?was driven by a need?of Huashang Media, in which Zhang Wei’s team invested in 2006. Huashang Media was the only domestic multi-regional media group operating metropolitan newspapers at that timeand based on the successful?Chinese Business View?released in Xi’an, it released New Culture Review in Changchun, Chongqing Times in Chongqing and?Chinese Business Morning View?in Shenyang, eventually becoming a media conglomerate consisting of seven newspapers, five magazines, five websites and over 10 companies.

    Of the advertising revenue sources?for a regional metropolitan newspaper, top contributions come from real estate, automobile, shopping malls and classified advertising. In 2007, one third of the advertising revenue of Huashang Media was coming from real estate. Internet advertising was also on the rise at that time, so Huashang Media initially considered?carving out?real estate advertising to Internet platforms?in order to?minimize the impact caused by the Internet.?Lin Ling, who was in charge of the project, added: “Because real estate was such an important revenue driver, if the business was carved out into an independent company, it would likely to get listed?”?

    Consequently, Huashang Media decided to make use of their abundant cash to explore an investment opportunity in an internet company specializing in the real estate vertical and the Huashang Co-Stone fund managed by Zhang Wei’s team became the standard bearer for this project.?

    At that time, the top 3 businesses in the online real estate arena, Fang.com, House Focus and House.Sina, had a significant market share. Given the huge first-mover advantage for Internet businesses, what was the opportunity for a new player? Zhang Wei theorized that: “The real estate market of China is massive and the entire industry is constantly evolving. Therefore, there should be some space for a company focusing on a specific region instead of following the national business model seen in the US.” “Fang.com and House.Sina were both listed in the US, but there was no similar subject on the Mainboard Market. This also presented an opportunity.”, added Lin Ling.

    Consequently, they assessed many independent real estate and housing portals in the Yangtze River delta area and finally selected?House365.com?founded by Hu Guanghui in Nanjing. In 2007, when Co-Stone Capital recommended?House365.com?to Huashang Media, the website had only been around for half a year.

    If Hu Guanghui of?House365.com?finally chose Co-Stone Capital, it was because he recognized the value of the resources they had: “We?were?profitable in the first year with good cash flow, so we decided to look at the possibility of getting listed. We got in touch with three investors at that time, but?we?preferred?industrial funds, which?we felt?would be helpful for future business expansion or for the development to the capital market.?Ultimately, we decided to?move forward?with Co-Stone Capital because of the resources?they could?bring us.”

    After the investment was made, Co-Stone Capital designated Lin Ling as a Vice President of?House365.com?and he became deeply involved in the operations of the company. For the next two years, Lin Ling would make the trip from Shanghai to Nanjing about twice every week to discuss with Hu Guanghui about the business plan and market expansion.

    The original intention of Lin Ling was “to find two or three companies in the Yangtze River delta area that could be merged directly into?House365.com, which would result in a larger company with higher?growth and lower risks”. However, it was later determined that there were big problems in this, such?as which company would be the core platform and how to resolve the shareholding structure. Without a core platform, it would be very difficult to build a large company because of the integration challenges. Therefore, they decided to keep?House365.com?as the core platform and look for opportunities for consolidation.”

    From then on,?House365.com?entered the cities of Suzhou, Wuxi, Changzhou, Hefeiand Hangzhou through acquisition and became the largest real estate and housing Internet company in the Yangtze River delta area. Because of this, they took up market share in cities not yet covered by Fang.comg and House.Sina. “We acquired a company in Suzhou first which is why there is a shareholder (Zhang Hailin) from Suzhou. The Wuxi website was reluctant to sell at that time so we took away their team. In Hefei, we were not able to find a suitable target so we set up our own website there and later acquired the largest local community website.”, Lin Ling recalled as if everything happened yesterday.

    While promoting business expansion, Co-Stone Capital also initiated the IPO process for?House365.com?and brought in Guosen Securities to run that process.

    In 2009,?House365.com?started its IPO preparations. At that time, the government started to implement controls on the real estate industry, listings of real estate companies were therefore suspended temporarily. “Fortunately, off-line stores were developing at a low speed so we made a timely adjustment to exit the off-line business.”

    In 2010,?House365.com?officially submitted their IPO application documents. Two major obstacles were waiting for them: does would IPO come into conflict with the real estate control policy and the regulatory authorities?were suspicious of the accuracy of the revenues of Internet companies since most internet companies were listed outside China. Guosen Securities performed therefore a comprehensive diligence review of the accuracy of?House365.com’s revenue. “For the reporting period, we completely reviewed all transaction contracts with an amount of over 50,000 and submitted all?review documents to the regulators.” The supplementary fundamental work greatly relieved the concerns of the regulatory authority. Meanwhile,?House365.com?maintained continuous growth during the review process and the net profit increased from over 30 million in 2010 to 70 million in 2011. The company successfully passed the CSRC review, resulting in a return of 150 times from the first round of investment.

    From Sunward Intelligent and Xcar.com to Anhui Quanyi: Exploring the value of projects?through M&A

    M&A is referred to as the “crown jewel” of the traditional investment banking business.?In?private equity, M&A is also a high-end business at the top of the pyramid. For leveraged buyout (LBO) funds, M&A is?involved?throughout the investment; while for PE funds?focusing on?growth investment, M&A may be either an important?tool?for improving the values of?portfolio companies or an important exit method.?In their value-added services, the team of Co-Stone Capital, with their investment banking background, also engaged in?all aspects of M&A.

    After the IPO of Sunward Intelligent, Tao Tao sat on the board of directors from 2007 to 2013 and promoted a joint venture between its main business - medium excavators - and Caterpillar. However, because Caterpillar wanted to sell the Sunward Intelligent’s medium excavators via their global network, Sunward Intelligent would effectively become a comparatively low-end sub-brand within the Caterpillar product line. He Qinghua, the controlling shareholder of Sunward Intelligent, was worried about losing control. No consensus regarding the joint venture was ever reached.

    In 2010, when the 4-trillion economic stimulus plan launched by the Chinese government started to tone down, Sunward Intelligent sought for a breakthrough. To that end, Co-Stone Capital assisted Sunward Intelligent in its acquisition of DeltaHawk Engines, Inc., a US aircraft engine manufacturer. “The eye-catching point of this project is that the aircraft engine run on diesel instead of jet fuel so the engines had great market potential for civilian applications.”, said Tao Tao. As the project was in the R&D stage, there were many uncertainties. “I designed a transaction framework for Mr. He by which the counterpart issued convertible bonds and pledged patents to Sunward Intelligent instead of a direct acquisition of equity. This way, they can take the offensive or defensive as they like.” Sunward Intelligent would be able to convert the bonds into shares if the R&D progress reached its expectations; if not, they could require the counterpart to redeem the bonds.?

    It has been disclosed that in this transaction, Sunward Intelligent made a contribution of 13.974 million for 51% of Hunan Sunward Aircraft Power Machinery Co., Ltd. and provided a loan of 2 million USD to DeltaHawk Engines via this subsidiary for a period of 3 years, with annual interest rate at 8%. Under the agreement, the principal and interest could be converted into shares of DeltaHawk Engines. In addition, according to the transaction plan, Sunward Intelligent had the globally exclusive manufacturing rights?for the engine and if certifies, could implement batch production.

    From the perspective of the capital markets, while the machinery business was not valued highly by the capital markets, the additional aircraft machinery concept helped support the market value of the company. Sunward Intelligent continued with M&A along this direction and in 2016 acquired the Canadian AVMAX company for its strength in the transportation industry. After 2011, Sunward Intelligent’s share price performed slightly better than SANY Heavy Industry and Zoomlion Heavy Industry (Figure 4).

    For Huachangda (300278) project in 2010, Co-Stone Capital once again improved the value of the project through M&A.

    Figure 4: Comparison between and Sunward Intelligent and comparable companies

    Confucian PE - The People-Oriented Principles of Co-Stone Capital    Zhang Wei, Chairman of Co-Stone

    The primary business of Huachangda is automobile equipment. “When making the investment, we conducted research into the growth potential of China’s automobile industry and concluded that the development had almost peaked. Although it was easier for companies to get listed, it was when competition for pre-IPO investment was extremely fierce among the different PE funds. We still made the decision to invest.” said Tao Tao. In 2011, Huachangda got listed as expected. “Shortly afterward, the industry reached a turning point. As a result, the market value of the company took a beating. Although the company was positing in net earnings, we felt that we should still actively assist the company with?their M&A expansion.” At the time, one of the acquisition directions discussed by Tao Tao with Huachangda was intelligent automation following the increasing labor costs in China. Tao Tao assisted Huachangda in identifying Shanghai New-Tronics M&E Co., Ltd. which manufactured?robotic end of arm tools with a high gross margin of 47%. Although an M&A agreement was reached by both parties, an accidental leak of internal information materially impacted the stock price, resulting in the ultimate suspension of the transaction.?

    After this, Co-Stone Capital assisted Huachangda in selecting another manufacturer of robot application - DEMC. The M&A was finally successful, which not only effectively promoted the growth of Huachangda’s financial performance, but also expanded their product by including robot applications. Co-Stone Capital further assisted Huachangda in two other overseas M&A after that.

    With the experience gleaned from these two projects, Co-Stone capital, together with Grand Automotive, raised a special M&A fund in November 2015 of 2.3 billion - Shanghai Aika Investment Center, which acquired 100% of the equity interest in xcar.com.cn from US based CBS.

    According to Tao Tao, Co-Stone Capital was already considering an investment in Grand Automotive and had already done their due diligence, explaining their systematic understanding of the automotive dealership business. When they got the opportunity to acquire xcar.com.cn, they communicated with Grand Automotive and both believed that an in-depth cooperation on the project would be mutually beneficial.

    Although automotive e-commerce was a huge market opportunity, for Grand Automotive, who, at that time owned the largest domestic network of 4S automotive dealerships, it was very hard for it to operate an online channel due to their lack of Internet background. By taking a stake in xcar.com.cn, the third largest domestic automotive vertical portal, it would gain access to a meaningful driver of online traffic, bringing more sales opportunities and strengthening their position with other automotive portals when negotiating. As for xcar.com.cn, during the period when it was owned by the multinational company, the cash flows were dividend out and little was reinvested. This explains why it was gradually surpassed by Autohome and Bitauto. By cooperating with Grand Automotive, they?will have access to more support to further expand and develop new business lines such as automotive e-commerce.

    After the M&A of xcar.com.cn was completed in the beginning of 2016, Co-Stone Capital focused on two aspects to improve the company’s competitiveness.?On the one hand,?they spent?hundreds of millions to purchase network flows from Baidu and on the other hand,?they explored and?implemented strategies to expand all aspects of?the automotive after-sales market. “There are?significant opportunities?at?every stage of the entire automotive consumption chain -?research, selection, purchase, use,?after-sales - and?even when cars break down?there will be various financial and insurance opportunities.”?Implementing all these is?a challenge for the M&A and integration capabilities of Co-Stone Capital.

    Just like the automotive after-sales market and real estate after-sales market, Zhang Wei also looked?at the drugstore chain market and saw huge opportunities for on-line and off-line integration. He explained his idea with an example: “If the government encourages e-commerce stores to sell directly prescription medicine and assuming that prices are only 1/3 of those charged by hospitals, the social insurance expenditure of the government would be greatly reduced and so could individual medical insurance payments. Therefore, although directors of hospitals are not motivated to promote such reforms, there are other forces in the society who would be.” According to Zhang Wei, to a certain extent, the development of chain drugstores is directly linked to medical reforms.

    Starting from 2013, Co-Stone Capital started its investment in the health care department, including New Industries Biomedical (830838) (in-vitro diagnosis), Lonwin (medical imaging), Dakang Health Care (hospital chain for renal dialysis), CONBA (600572) (pharmaceutical manufacturing) and 91160 and Pharm Plus (mobile health care), with a particular focus on chain drugstores which were not on the radar of the capital markets and relatively unconsolidated.

    Co-Stone Capital discovered that between government controlled medical insurance expenses and the separation between hospitals and pharmaceuticals, the monopoly of the hospital channel in prescription medicine could be broken and increased competition for providing prescription medicine would become a foreseeable medium to a long-lasting trend. At the same time, large drug store chains are appearing at an accelerating rate. With the changing spectrum of human diseases and the expansion of common drug stores catering to emerging businesses such as chronic disease management and preliminary diagnosis & treatment, the status of drug stores chains in the pharmaceutical value chain would strengthen significantly and the commercial value of large-scale drug store chains will be re-evaluated, leading to opportunities for large-scale horizontal acquisitions and industry consolidation.?

    Therefore, following the completion of the xcar.com.cn acquisition, in July 2016, together with a reputed management team in the industry, Co-Stone Capital invested 1 billion to acquire 80% of the drug store chain, Jiangsu Hengtai Health Care. In 2017, they planned to make a further investment of 4 billion in this project to expand the platform through M&A. In the future, we will be able to witness the development of this enterprise in the drug store industry, under Co-Stone Capital’s management.

    The review system: controlling?post-investment risks

    Even carefully selected and diligently managed enterprises may run int all sorts of trouble after investment. Risk control is thereby an important part of post-investment management. At Co-Stone Capital, in addition to the routine procedures of PE firms for monitoring the financial conditions of portfolio companies on a monthly and quarterly basis, a comprehensive review will be performed after each thorough investigation.

    According to Tao Tao, the fund review is mainly conducted following several procedures. First, we analyze whether the industry of the invested project is properly configured;?secondly, we try to determine whether each project conforms to our strategy and?expectations; thirdly, we review the content and effect of value-added services for individual projects; and lastly, we carefully plan a systematic solution for projects in difficulty.”

    During the review of Wuhu Co-Stone in 2011, Co-Stone Capital discovered that the market for conventional industries was slowing down, rectified the investment and research team accordingly and made timely adjustment to the investment direction of Everest Co-Stone which was launched later. In 2014, when the investment period of Everest Co-Stone had reached over 2 years, the management of Co-Stone Capital performed a routine review on the projects invested under that fund and detected some potential problems. Shortly afterwards, the investment management department instructed project managers to proactively identify potential problems based on their review and companies which may face difficulties in getting listed. Based on their feedback,?Co-Stone Capital successfully exited from four manufacturing projects, one environmental protection project and one consumer product project.?Because the problems were detected in time and the exit?happened while the companies were still growing, Co-Stone Capital suffered no principal losses and even earned returns of?up to?1.5 times in some of the projects.

    Thanks to this structure from investment decision-making to post-investment management, 2016 became a harvest period for Everest Co-Stone: with an initial capital of 1.4 billion, the fund invested in 19 projects, all of which have clear exit paths and none of them suffered principal losses (Table 4). By the end of 2016, Everest Cornerstone exited eight projects (including one IPO exit and one exit via back-door listing upon the expiry of the lock-up period) and a total of about 1 billion was distributed, representing 70% of the initial capital and six projects were in the lock-up period. In addition, one project passed the NDRC review and will be presented to the public, one back-door listing project was under official review, two projects were successfully listed on the NEEQ and recognized capital gains (partially exited one project with the principal recovered)and the private placement into the listed company CONBA booked a gain of 50%.

    Table 4: Information about partial investments under the Everest Co-Stone Fund



    Investment time

    Investment (million)





    Kangxin New Material (600076)

    Jun. 2011



    Partial exit



    Omnijoi (300528)

    Dec. 2011






    OPPLE Lighting (603515)

    Aug. 2012






    Silkroad Vision (300556)

    Aug. 2011






    Dezhan Healthcare (000813)

    Mar. 2012






    Asymchem (002821)

    Jun. 2011






    Kexin Technologies (300565)

    Jul. 2012






    Kunshan Kersen Technology?

    Jan. 2014






    CONBA (600572)

    Apr. 2014


    Private placement



    Soling Industrial (002766)

    Jul. 2011


    Fully exited



    Xi’an Sitan Instrument Co., Ltd.

    Jun. 2011


    Fully exited

    Source: Co-Stone Capital

    Exploring?the Best Investment Style for Domestic PE?Firms

    With its constantly improving organizational system and maturing investment strategies, the amount of capital being raised by Co-Stone Capital is gradually increasing: Wuhu Co-Stone raised 400 million in 2009, Everest Co-Stone raised 1.4 billion in 2011, Pioneer Co-Stone raised 2.2 billion in 2014, Lingyu Co-Stone raised 3.3 billion in 2016; in addition, in 2016, Co-Stone Capital also won the 11.5?billion Anhui Industry Upgrade Fund sponsored by the Anhui provincial government.

    As the AUM of Co-Stone Capital increased from 400 million in 2009 to 35 billion in 2016, the general business environment of domestic PE firms has improved despite several ups and downs. The PE fever has begun to subside and bubbles are better controlled. A 20/80 structure has emerged in the PE industry, where outstanding PEs with proven investment concepts and performance receive increased attention from LPs. Together with the development of the domestic PE market and the declining rate of return due to the cooling down of the economy, high-risk and high-return PE investment is evolving from a privilege for the few high-net-worth individuals into an important tool?for more and more institutional investors as they seek alternative investment options.

    The development of Co-Stone Capital is reflective of this change, symbolized by China Reinsurance Group becoming an LP and shareholder of Co-Stone Capital.

    The strategies are?validated?by investment from long-term funds

    For every PE firm, the participation of long-term funds such as insurance companies, social insurance funds and industrial funds as LPs may be a foundation for continuing their strategies. However, due to the need for stable performance, such institutions are very selective.?In the?insurance?industry?for example, in order to pitch insurance funds as LPS, a PE firm has to be on their “white list”. Then, passing a strict due diligence examination is a prerequisite.?Once the total investment quota has been determined, the insurance company will allocate funds accordingly to firms.

    The first round of due diligence investigation performed by China RE on Co-Stone Capital was initiated in 2013 and lasted for over a year. Song Jianbiao said: “The due diligence investigation team came so many times that their documents piled up to the height of a person.” Even the projects invested during Co-Stone Capital’s early contract fund period were subject to careful inspection. Eventually, Co-Stone Capital was successfully added onto the certified partner list.

    When China RE was making their fund allocations, 4 of 8 potential funds received investment, of which Co-Stone Capital received 100 million for Pioneer Co-Stone which was launched in July 2014. When Co-Stone Capital restructured into a joint stock company at the end of 2015, China RE became a shareholder of the newly established Co-Stone Assets Management Co., Ltd.

    Another milestone event for Co-Stone Capital was winning the bidding for the 10?billion Anhui Industry Upgrade Fund. The total amount of this fund was 11.5 billion, of which 70% was to be invested in Anhui Province. Co-Stone Capital was responsible for raising 3.5 billion, with the remaining portion to be coordinated and raised by the Anhui provincial government. Han Zaiwu, Managing Partner of Co-Stone Capital, moved to Hefei, together with his team, to work solely on this fund.

    Through their investments over the past 15 years, the team of Co-Stone Capital gradually refined their investment methodology of “concentrated investment and value-added services” and designed a series of corresponding systematic supporting measures which resulted in much higher performance and returns, compared with other similar funds and the appreciation from the best LPs. It is safe to say that today, Co-Stone Capital is even better positioned, with abundant capital and confidence.

    In recent years, they have continuously expanded their product lines by creating funds that are more diverse. For example, they established a private placement fund of 5 billion for investing in listed companies, an M&A fund together withOppleLighting in the typical Chinese “PE + listed company” structure, industry focused funds in special fields such as the Lingkang biology & medicine fund and a NEEQ fund to implement capital management plans for companies listed on that exchange.

    In the past, based on their?concentrated investment strategy for their cross-industry comprehensives funds, Co-Stone Capital would focus their investment on several main industries while making appropriate allocation to other industries based on market conditions at the time. After their product line was expanded, this strategy has been correspondingly adjusted. For the investment portfolios of the various specialty funds, the allocation is made based on the nature of the fund and the evaluation of the specific company. For example, while individual investments for PE funds are usually high in amounts and individual investments for VC funds relatively low, industrial funds are allocated with consideration to primary and supplementary projects based on specific sub-sector trends and the status of potential projects.

    The experience from mature markets shows that on average, 50% of returns normally come from several key projects. Even with their concentrated investment strategy which means meaningful stakes, Co-Stone Capital must also carefully prioritize investments to allocate properly. Take Everest Co-Stone as an example,?the average investment amount for each project exceeded 70 million,?with?two projects receiving?over 200 million?and over half of the projects?maintaining a?5-10%?stake?after dilution. For?post-exit returns,?the top 3 projects contributed 48% and the top 8 projects contributed 85%.

    Today, Co-Stone Capital manages over 40 funds ranging from VC/PE investment and industrial M&A funds to PIPE fund. According to the plan of Zhang Wei, Co-Stone Capital is expected to expand across the investment value chain, which will build a diversified asset management platform combining all the key business lines in the capital market around equity investment.

    With a history of 15 years, Co-Stone Capital is now reaching a new level. Does the success of Co-Stone Capital represent the potential value of the current Chinese equity investment market? Can their investment methodology be duplicated?

    Exemplary methodology of Co-Stone Capital

    Compared with the PE market in the USA, which was already quite advanced in the 1970s, the domestic PE market hasn’t yet found our own investment style. What investment strategies are most suitable for the Chinese market? All local PE firms are navigating their own path.?

    Co-Stone Capital, which has always operated in the market alone, does not seek hot projects nor aligns with other PE firms. The two projects from which they had acquired returns over 100 times—Sunward Intelligent?and?House365.com?might be unknown to many investors and none of any other famous PE firms appear on those company’s shareholder lists. The investment methodologies that Co-Stone Capital is exploring are deeply rooted in the economic environment of China and have passed the test of time in the market. Co-Stone Capital’s methodology of concentrated investment and providing value-added services is noteworthy from the perspective of both PE practices?and the macro economic environment.

    From a pragmatic point of view, PE investment is a high risk--high return business which is why in order to control risks, the four business stages of fund-raising, investment, management and exit must be controlled in a strict manner, with investment and management as the two core elements. Generally speaking,?if a PE?fund invests in the right company?and manages the project properly, there?should?be no problem in the exit. With a solid track record of project exits and?high returns, fund-raising would not be a problem either.?The experience of Co-Stone Capital demonstrates?the proper control over the investment and management stages,?leading to?a high success rate and high returns.?Their?approach?to?value creation is of universal value for the whole industry.

    Going through the development history of Co-Stone Capital, it is quite clear that their strategies of selecting outstanding projects, concentrated investment and providing value-added services are derived from the domestic environment and the highly regulated Mainboard Market. Because of their investment banking background, the Co-Stone Capital team?is particularly concerned with the exit channel on the Mainboard Market?when making investments.?Therefore, when considering potential projects, in addition to the quality and growth potential, whether the company can endure beyond the economic and market cycles is also an important factor.

    Although it seems quite different on the surface, there is little change in the fundamental process for listing in the public markets from 15 years ago when the team of Co-Stone Capital started their business. Proposals to relax listing scrutiny?were not put into?the national policy agenda until 2016. Additionally, the economic transformation of China and the changes in the macro environment caused by declining global growth and increasing trade protectionism has made it even more challenging to select projects with long-term growth potential.

    As China emerged over the last 30 years, there have been innumerable investment opportunities. However, there are few companies like Huawei that are able to develop independent of the international markets. The Chinese public markets are highly speculative with ups and downs based on current trends and that dynamic carries through the primary market, driving many PEs and VCs feverish for hot projects. However, these investment hot spots may fall just as quickly as they rise. Only a few outstanding enterprises can grow in a sustainable way. In China, the average life of SMEs is less than three years and many of the hot projects are only able to maintain attention from the hot money funds for less than one year. For PE funds whose investment cycle is normally as long as 5 or more years, they may be in a dilemma when the tides change if they are always in pursuit of the current hot markets.

    With the upcoming relaxation of the listing approval process, many pre-IPO opportunities are disappearing. The profits from PE investment will no longer derive from valuation arbitrage between the private and public markets but from the fundamental long-term growth of enterprises. In order to win this race of endurance, PE firms must switch from extensive investment to intensive investment. Such notion of intensive investment is reflected in the selection of outstanding companies, concentrated investment and providing value-added services. In other words, Co-Stone Capital’s investment style in the Chinese market is a prime example.

    At the beginning of 2017, “uncertainty” may be the best words to express the views among investors in the capital markets. Nevertheless, there are actually certainties behind the multitude of “uncertainties”. In China, private equity investment is becoming an indispensable role in the equity investment and in macro assets configuration. In the global low-return environment, the rise of alternative investment options, including PE, is becoming a macro trend. With such certainties and uncertainties, the direction in which domestic PE firms, including Co-Stone Capital, move forward?will further improve the systematic planification and investment efficiency of the market to achieve a more sustainable and optimal performance.

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