Something has gone wrong. Bao Fan has found himself becoming less empathetic throughout his investment career. This sounds surprising even to himself, as he was a social champion working in investment banking. It was his area of expertise, and he was more than happy to socialize while making money.
He was just being humble. He had successfully tackled cases after cases in the first half of his career. Investment bankers tend to refer to their cases as artwork. In this regard, it is fair to describe Bao Fan as a prolific creator.
If you have to name a successful investment banker in China in the last Internet Era, that must be Bao Fan. He handed over the investment banking unit to his team in 2019. As the Chairman of the company, he took responsibility for investments instead. Looking back, his "lack of empathy" started from then.
As an investment banker, you can make deals as long as you can reach agreements with people; however, as an investor, to some extent you have to keep in line with the truth. In investment banking, you have to handle others. But in investment, you have to handle yourself. Self-realization and finding inner peace are key propositions.
In the financial sector, assets under management (AUM) is a decisive factor indicating the performance of a financial institution. Three years after CEO Bao Fan took over the portfolio, the AUM reached RMB 70 billion. Despite the rapid growth of the fund, the company did not adopt an aggressive investment strategy. Instead, it was prudent when making investment decisions, rather than crowding into star projects.
Strategically, Huaxing Growth Capital (China Renaissance's investment management unit) focuses on long-term investments with loss ratio lower than 5%. Additionally, the General Partner (GP) contributed around 10% of the capital in each fund. Clearly, Bao Fan has a unique approach to risks. "We don't want to lose money." He said.
Data and ideas are not the only things I'm curious about. I'm also interested in Bao Fan, the investor himself. How did he wrestle with himself?
The anchor Yang Xiaolei is the CEO of China Venture Info (CVInfo) .
The guest Bao Fan is the Chairman & CEO of China Renaissance Group, as well as CIO & Founding Partner of Huaxing Growth Capital.
§ I am not obsessed with the size of my AUM.
Yang Xiaolei: Do you think China's financial environment is better than before?
Bao Fan: It definitely is if you look at objective indicators. The volume of AUM in both the primary and the secondary markets has risen.
Yang Xiaolei: Have you made any adjustments to your investment strategies to address uncertainties in the market?
Bao Fan: You don't have to change significantly if your investment philosophy is effective. Just adjust your parameters will do. But you do need to figure out whether the problems are cyclical or secular.
Cyclical problems, unlike secular ones, are reversible, such as stock prices and evaluations, which drop and then rise again.
Yang Xiaolei: So what are the cyclical and secular factors now?
Bao Fan: I haven't figured that out yet. Let me share something I'm clear about. First, China's economic growth model is shifting from quantity-oriented to quality-oriented. Second, the global landscape is changing. The world will become multipolar. The landscape of the global production and supply chain will change.
Third, economic transformation driven by intelligent technologies will be the next focus of innovation. We saw innovations based on mobile internet over the last ten years. From now on, the intelligence of the entire society will improve significantly, and all walks of life will undergo tremendous changes.
Yang Xiaolei: Some argue that the current environment is more favourable for the RMB fund than the USD fund. What's your take on this?
Bao Fan: Well, it depends. From a national perspective, China still encourages opening up and welcomes foreign capital. Just that the proportion of foreign capital will be different. The U.S. may shrink its investment in the Chinese market. However, the U.S. is not the only country with money to invest in China.
Yang Xiaolei: Where else?
Bao Fan: Asia, the Middle East and Europe. It is impossible for global investors to stop investing in China. With such a big market, China's future economic growth is sustainable. I'm pretty sure about that.
Yang Xiaolei: We have observed that almost all RMB fundraising activities of funds that traditioanlly focus on USD have failed.
Bao Fan: This indicates two problems - communication and core competitiveness such as whether some USD funds can enter other verticals successfully.
Yang Xiaolei: Is this phenomenon secular or cyclical?
Bao Fan: The industry will experience reshuffling.
Yang Xiaolei: I've heard of the word "loss ratio" from different managers. The context is that in the mobile internet era, a mega project can generate couple hundred times of return, but this has become less common recently. Investors have to be more careful when making their investments. What do you think of this?
Bao Fan: I call it gambling odds. Suppose you gamble in a casino, and the three of you are playing blackjack. Theoretically, everyone has a 1/3 probability of winning. However, if A has 10,000 yuan and B has a million yuan, you have to bet on B because the return will be higher if you win.
The second situation is that if we have a table of three and another table of ten, we have to bet on the former because it has a higher probability of winning.
In the mobile tnternet era, you would get 100 times of return if you bet it right. Now, you only get 20 times of return even if you invest in something novel.
Yang Xiaolei: Will you become more prudent? Huaxing Growth Capital is a PE fund where investors have low tolerance for error.
Bao Fan: Yes. But our return does not rely on probabilities. A professional investor cannot predict the odds of winning much better than an ordinary person. In the end, it's all about earning more and losing less. There is no such thing as not losing.
Yang Xiaolei: In May, Huaxing Growth Capital announced the first closing of the latest RMB fund with 3 billion yuan in committed capital. What's the targeted fund size this time?
Bao Fan: Almost the same as the last fund.
Yang Xiaolei: You said you want to do "your best" , not to become "the largest". It seems that the latest fund sizes of your USD and RMB funds are quite large. Is this a result of the market or your strategic effort to upsize?
Bao Fan: It totally depends on the market. I am not obsessed with the size of my AUM.
Yang Xiaolei: Compare with the RMB Fund III three years ago, is there a difference in the fundraising process this time?
Bao Fan: Firstly, it has become more difficult. Secondly, our target LP type has evolved. In earlier vintages it was mostly high net worth individuals and we are now more institutionalized.
Yang Xiaolei: Is this a result of market education?
Bao Fan: As AUM of the industry increases, limited partners also become more sophisticated, like having improved investment research mechanism and more thorough due diligence. I think that's a good sign.
Yang Xiaolei: As the market has become more competitive, will this make it harder to differentiate managers' performances?
Bao Fan: No. Instead, I think the difference will be more significant these years.
Yang Xiaolei: How is it so?
Bao Fan: Everyone made money in previous years, but now, since the market is undergoing significant changes, fund performances will be more diverse...
Yang Xiaolei: Which institutions will become better, and which will become worse?
Bao Fan: You have to measure the underlying capabilities through performance. Those with better performance may still convince their investors, and those who can maintain their excellent performance will become even stronger.
Yang Xiaolei: Does Huaxing Growth Capital fall into the latter category?
Bao Fan: Our core competencies are as follows:
First, we have a strong investment banking brand. Our funds excel in deal sourcing and exits.
Second, our investment strategy is research-driven. We don't rush into investments as we make concentrated bets. Rather than investing in multiple projects to bet on odds, we ensure we fully understand the companies so we can invest in the best ones.
Third, our approach is relatively reserved. We know what should or should not be done. It is essential in the primary market.
§ I could have taken the ordinary route, but there is no point.
Yang Xiaolei: I entered the finance field in 2012, and you were one of the KOLs I have been following closely. I've always wondered why you started your business in investment banking? Many people moved to primary market investment from foreign investment banks.
Bao Fan: It was intentional as well as coincidental. I started my career doing M&A with Morgan Stanley and Credit Suisse, then moved on to IPO. I am one of the first tech investment bankers in Asia. Later I went to Asiainfo Tech and stayed for four years. In that period, I realized I could never learn how to write codes.
After all, you should work in fields you are passionate about and have core competency in. So, I returned to the financial field. I like to study history. There is always a reason behind the rise of investment banks. Key clients always support them. For instance, Goldman Sachs started by doing commercial paper, which was bill discounts for Jewish dealers. It was a disdained business, but Goldman Sachs expanded the business and later seized the opportunity of the emerging retail market in the U.S.
To build an investment bank, we need a favourable trend and a group of clients who I can acquire and who will be successful in the future.
I got to know many internet companies during my four-year stay at Asiainfo. The companies were very small back then, but I believed these entrepreneurs had the potential to succeed. If I could seize the opportunity and win them over, China Renaissance would become the next generation of investment bank. China Renaissance was created based on this idea.
We entered the blue ocean and got hold of this fast-growing market that was untapped by major investment bankers. We were also lucky that the internet industry started to surge when China Renaissance was established in 2005.
Yang Xiaolei: Have you considered other options? Like creating a fund?
Bao Fan: Yes, definitely. Lots of people say you will fail if you don't do this and that. But I still hoped to help others succeed. I thought it was good to be the person behind the hero, and I didn't need to be in the limelight myself.
Yang Xiaolei: But you're now the head of a listed company. You will need a different mindset.
Bao Fan: Well, there is really nothing much about it. I just need to show up at the annual shareholders' meeting.
Yang Xiaolei: So, you did investment banking because you thought that's what you were good at.
Bao Fan: Right. I'm a person who will strive to do my best once I start it. Since I've started the financial advisor (FA) business, I will not move on to another business until I become the best in China.
Yang Xiaolei: Is investment banking a good product?
Bao Fan: It is a good platform. It is the most efficient link between capital and assets.
Yang Xiaolei: Is it a good business model?
Bao Fan: I think the best business model in human history is the internet, but not every industry can work through the internet.
Yang Xiaolei: China Renaissance's FA business ranked first for over ten consecutive years. Is there any secret to China Renaissance's success?
Bao Fan: Honestly, I hear people talking down China Renaissance all the time, saying that other competitors are about to surpass us every year. However, statistics show that we remain at the top.
The financial advisory field has two main features. One is the low entry barrier. You can gain a sense of accomplishment even when you have only developed a couple of clients. The other is talent-driven. At the core of this industry is the culture of talent cultivation. A company has to be tested over time. Businesses come with the times, but what matters is whether they can deal with the changing situation.
Yang Xiaolei: I once talked with a CEO of an investment bank. His philosophy for using people is: one, that person must provide good service and is easy to control; two, they must be cheap; three, only recruit second-tier talents.
I find the latter two quite interesting, especially the last one. Generally speaking, talented people flow downstream from first-party companies. Theoretically, top-class talents are not the best choice for investment banks because of the potential issue with turnovers. But investment banking is also an intelligence-driven field that requires top-class talents. So, what do you think about this contradiction?
Bao Fan: I think rather differently. Everyone thinks making investments is the business of the first party. However, who doesn't have to go against all odds to nail down deals? Just like if you want to win a girl's heart, you have to tell her you love her, and you even need to write a powerpoint to demonstrate why you love her.
Only a handful of people can handle investment and investment banking. But we insist on using the elite-centric strategy. We only look for the best and offer the highest pay, as we believe this is the only way to obtain the best clients.
As a former employee of Morgan Stanley, I'm impressed by their culture of "first-class business in a first-class way". The value of the CEO you mentioned earlier may sound plausible if he only wants to maximize return in the short run rather than establishing a timeless brand. But if I put forward such a value at China Renaissance, I will definitely be fired, and China Renaissance itself will be out of business in a short period of time.
Yang Xiaolei: But you founded China Renaissance. Don't you have the final say on the company's values?
Bao Fan: Yes, I do. But I will lose the support of my other business partners. Anyone joining China Renaissance with a different value will likely find themselves out of place and unable to fit in.
There were no born leaders at China Renaissance. You either got what it takes, or you don't. It's in our blood. It may not be appropriate for everyone or every client, but I think it is pretty good because we only need to find like-minded ones.
Yang Xiaolei: So China Renaissance is now the No. 1 in investment banking, and has obtained an international license in 2013. Are you planning to dominate the entire business chain?
Bao Fan: I have a dream after all. When I returned from Wall Street, China's manufacturing industries were already developed, but its capital market was still far from being competitive. A strong capital market is a must-have for a strong nation as capital is indicative of national strength. I hope to contribute to China's financial sector and ultimately to China's national development, which is why I named my group "China Renaissance".
To others, China Renaissance may seem to have done a lot of things. To me, however, the group has been charged with only one mission over the past two decades: to discover and support the entrepreneurs of the next generation and to work with them hand in hand in creating and sharing values.
Through FA, you can discover the next generation of Chinese companies. It is also the case with investment. Now that we have what it takes to discover, we should also engage deeper in the business rather than simply being a service provider.
Yang Xiaolei: Do you have further ambitions that go beyond investment banking, brokerage, or investment?
Bao Fan: Our business can generally be divided into two segments: one is investment, and the other is investment banking, which encompasses financial advisory, brokerage, and wealth management.
To be frank, only a handful of private-owned investment banks in China can grow to our size, and it would be remarkable for us to remain successful in investment and investment banking. At least, we will not cover other business segments within the next ten years.
Yang Xiaolei: What was the most fundamental reason for China Renaissance to go public?
Bao Fan: Capital was needed for both investment banking and securities businesses.
Yang Xiaolei: Going public means your wings are clipped. As the CEO of a listed company, have you been through any inconveniences?
Bao Fan: It is the fundamental duty of a listed company to be responsible to its shareholders. That said, going public should never prevent us from carrying out long-term and challenging tasks and doing what's right.
Yang Xiaolei: Such as?
Bao Fan: It is a long list. Take fund allocation as an example. Most of our carry goes to the team. Many have asked me to "leave more dividends for your shareholders", but how could we retain staff if I do that? How could we keep up our performance if we fail to retain staff? With poor performances, how could we expect anyone to give us money? Without approvals from our limited partners and without sufficient funds, how could any listed company manage to survive?
If that advice were to be taken, we would not only see short-term performance, but long-term damage as well. And that's just not in my book.
Yang Xiaolei: When did you decide to give free rein to the investment banking segment?
Bao Fan: Since 2019, I have been a lot less involved in the investment banking segment. Although the segment remains to be our base in the industry, I no longer need to spend much time on it as our reputation is now well established, and our team is fully developed.
Looking at our investment business, although our AUM is among the top in scale, it is not well understood by the market.
Yang Xiaolei: Do you find it hard to lead groups in people-driven, intelligence-intensive, and even labour-intensive businesses such as investment banking and investment?
Bao Fan: Yes, of course. I have led groups in both investment and investment banking, and I find it harder to lead the former, where everyone is highly sophisticated and competitive in the same game.
Yang Xiaolei: How could they effectively collaborate with each other if all of them are highly sophisticated, especially in a large business with hundreds of employees?
Bao Fan: China Renaissance has a series of internal collaboration mechanisms. They ensure that helping each other pays. Put it bluntly, the financial industry is driven by nothing but interest. Corporate culture, vital as it is, does not make money, so it must be supported by mechanisms.
Corporate culture and internal mechanisms, as I always believe, are two sides of a coin. Without mechanisms, corporate culture will lose its foundation. Without corporate culture, however, mechanisms will not work. Why? That's because mechanisms are prone to be abused. They will mess with you and make everything much more thorny.
Our internal distribution mechanism is the result of years of practice and development. To be honest, it is something that is unlikely to be acquired by others.
Yang Xiaolei: Speaking of corporate culture, China Renaissance adopts the so-called "wolf stance". As you have mentioned, "rabbits" could not survive in China Renaissance as they would be eliminated either by "wolves" or by you. With the development of the group and with the slowdown of market growth, is the "wolf stance" still viable?
Bao Fan: It depends on how you define "wolf stance". The corporate culture of our group, in plain words, is to "dream big", "get shit done", and "have fun".
The "wolf stance" of our group tends to be understood as our effort in delivering as much as possible, but we do not have anything like a "KPI rank" since everyone here is aware that all talk and no actions make one loses footing, support, and eventually their job.
Yang Xiaolei: As you have mentioned, investment banking is your base in the industry. Does the investment banking segment provide great support for the investment segment?
Bao Fan: Yes. Our investment banking segment is a source of projects and also provides industrial resources for our other clients. When the investment team is looking to exit a company, the segment can be helpful in many areas as well, such as follow-up financing, IPO, and M&A.
On the other hand, we have brought in many clients to investment banks by investing in a lot of companies, but this is just the surface. The core of our business is knowledge. We have developed a sophisticated knowledge system, and we are, by nature, a knowledge-based group. We gather valuable information, data, and knowledge, from both outside and inside, on what we call the Solar platform. Our staff can always get support for their work and growth from there. When we created the Solar platform, we hoped that the platform would continue to accumulate our digital assets and create value.
The coverage of our investment banking segment is extensive. We are highly sensitive to all the latest and hottest trends in the market. Just ask our employees, and you will find that each and every case in the market is known by someone and is very likely to have been studied by their colleagues.
From a knowledge structure viewpoint, investment banking needs width, while investment needs depth. It is not possible, in general, to have both width and depth, which is why brokerage firm is normally mediocre in investments as it is driven by trades and opportuniities, instead of research.
Yang Xiaolei: Isn't there a conflict of interest? After all, the clients of investment banking are entrepreneurs, and you will become their shareholders by investing in them.
Bao Fan: There certainly are, and the same can be said for all financial advisors making investments. The solutions are twofold, one is compliance, and the other more important one is correct values.
Yang Xiaolei: What is the biggest challenge for investment banking and investment?
Bao Fan: The former is built on trust. For a good investment banker, building trust with his or her client is the most important thing to do.
Yang Xiaolei: How about investment?
Bao Fan: Investment, by nature, means fighting against yourself. A good investor goes against human nature in cognition, way of thinking, emotions, and more. After all, there are so many aspects of human nature that may lead to wrong judgments.
Sluggishness is also a problem. Why, one may ask, should I start something new since I am already successful? The senior ones tend to be pessimistic about the future, as this is the only way to prove that they are at the top. Otherwise, are you saying that someone will overtake you if you are optimistic about the future?
Investment, to some extent, is a long and hard journey of learning and reflection.
Yang Xiaolei: "A long and hard journey of learning and reflection", so investment is hard for you as well, isn't it?
Bao Fan: You only live once. There is no point of only doing the easy stuff. "Lying flat" and doing the bare minimum to get by is easiest, but boring.
Yang Xiaolei: In other words, you have a low tolerance for repetitive or boring work.
Bao Fan: Yes. I cannot do mechanical and repetitive work.
Yang Xiaolei: In investment, it takes at least three to five years to see returns, which is much longer comparing wit investment banking. So where do you get any sense of satisfaction during the period?
Bao Fan: Investment is indeed a process with deferred gratification. During the process, the satisfaction comes from continuously learning, thinking, and improving the algorithm in my mind. When my algorithm and insight become more accurate, I feel as if I were a scientist getting closer and closer to the truth.
I do not intend to put myself on such a pedestal, I cannot stand the comparison with scientists, but that process of seeking the truth gives me a real sense of satisfaction.
Yang Xiaolei: In the past, when you were managing and executing the investment banking segment on your own, you can oversee the whole process yourself. Now, however, you are relying on corporate mechanisms and culture. Could that lead to mediocre performance?
Bao Fan: Honestly, if I were to personally offer service to our clients today, I could not necessarily outdo my folks because this is a different era. Those born before 1985 may see me as their "bros", but with those born after 1985, it would be difficult, sometimes impossible, for me to communicate with them. Look, I am the service provider, but my client feels obliged to pay me respect because I am a senior figure and a "big boss" in the industry. Therefore, people may not want to deal with me because they will feel highly pressured.
Investment banking is, by nature, a platform business which can be replicated when effective rules are established.
Yang Xiaolei: But the same does not apply to investment?
Bao Fan: No, at least not at this stage. People may have different judgements on a single matter, even if they receive the identical information. As everyone gained different insights along the way, I find it very difficult to allow any single person to call the shots on investment matters. That's why I have no veto power on our Investment Committee.
Yang Xiaolei: So no one on the Investment Committee has veto power?
Bao Fan: No one except the member in charge of risk management.
Yang Xiaolei: What is the business volume of the investment segment of China Renaissance?
Bao Fan: We look into 5,000-6,000 projects a year, and 100-200 of them will be entered into our system for further consideration. Forty to fifty of them may reach the Investment Committee, and we will only invest in about ten of them.
Yang Xiaolei: You just mentioned "this stage". Will there be "the next stage"?
Bao Fan: I do not know. Some of my fellows in the industry can manage hundreds of billions of yuan, which is well beyond my capability.
Perhaps their organizational capacities have reached a certain high level, but investment is a business that can hardly be scaled up, as I see it for now.
Yang Xiaolei: China Renaissance has been doing investment for ten years. Are there any changes in its relationship with the external groups? Clients in the past are now competitors, aren't they?
Bao Fan: So far, so good. Investment Banking and Investment Management are independently run internally. Now, when our financial advisor offers deals to the fund side, the financial advisor regards the fund team as nobody but a partner, sometimes not even a partner.
Yang Xiaolei: Aren't the internal fund team prioritized?
Bao Fan: No. It is purely market-driven. For example, even if our investment banking segment has a good deal to offer, it will regard the investment management team of China Renaissance and those of external groups equally. We enjoy no priorities.
If I were to tell them "Don't forget who your boss is", it would certainly work. But that is certainly unadvisable as it will disturb the dynamics.
Two-thirds of the projects of our fund are identified by the fund team themselves. We also cooperate with external financial advisors. We will for sure suffer some efficiency losses, but it is the best for our organizational security and health in the long-term. Sometimes, there are people who come to me and complain about not being prioritized - well, there is nothing I can do, you have to solve it yourself. Maybe a dinner will help.
§ Experiences are stumbling blocks.
Yang Xiaolei: As you said, your success in investment banking lies in discovering fundamental needs and producing innovative solutions. Is there any room for innovation in the investment segment?
Bao Fan: There is not much to innovate when making solutions. There are no patents to it as well. People can always copy solutions. What lies at the core is one's insight.
For example, when a team is presenting an investment case to me, my focus is on whether the team can identify the most important aspect of the case. If the team replies to me that all aspects are important, it means that the team has failed to understand the case properly.
Some matters seem to be complicated, but the key drivers are always similar.
Yang Xiaolei: Do you learn how to invest from your competitors?
Bao Fan: Everyone can be learned from and I study my competitors thoroughly. But only copying them will not work as every group has its own DNA. We can learn the parts that they are good at.
Yang Xiaolei: On a global scale, whose and what ability do you wish to learn the most?
Bao Fan: Ray Dalio is a good author. He is now really enjoying himself on TikTok. Steve Cohen is a good friend of mine. He has a fund called Point72, a very successful hedge fund in the U.S. Many years ago, I asked him a straightforward question: Can you share with me your successful experience in investment?
Yang Xiaolei: Um...
Bao Fan: Haha, I have no idea why I asked that question either. Out of respect, he thought about it and said two things. First, "always have conviction", that is to invest only in what you believe and understand; second, "always adapt", that is to keep evolving.
At that time, I thought he had a point. But when I got home, I started to wonder what he really meant - first he told me not to change, then he told me to change; he must be fooling me, isn't he? So I didn't take his words seriously.
When I myself became an investor, however, I gave some thought to his words, and I realized he really had a point. Always have conviction - one must have his or her own investment framework, no matter whether it works.
So what did he mean by "always adapt"? Any investment framework, no matter how remarkable it is, will be out of date one day. We should never live in our own experiences. Experiences are stumbling blocks. When the world is struck by significant changes - especially in the event of a paradigm shift - the basis will change, and the algorithms in our minds that were built on experiences will be prone to failure.
Yang Xiaolei: It is like "A mountain looks like a mountain, but it isn't a mountain, but is only a mountain".
Bao Fan: Yes, exactly. I even thought, at that point, that he had been fooling me.
Yang Xiaolei: Looking back at your experience in investment banking, do you find it to be easier now?
Bao Fan: No, I haven't. I really miss my time in investment banking. When I was working in investment banking, I could fully gain the trust of my clients and became their friends. But as an investor and a shareholder, I basically invest money in them, and they earn money for me. It is a different relationship.
Yang Xiaolei: If you can label yourself, what will you choose?
Bao Fan: Entrepreneur. It is the most fitting one.
Yang Xiaolei: Just one label?
Bao Fan: Yes.
Yang Xiaolei: Does going public influence the investment style of China Renaissance?
Bao Fan: In theory, yes, but it is not that significant. If you want to assess the performance of China Renaissance, you should do it on a three-year cycle, not an annual one - given the frequent fluctuations in the industry, you would be horror-struck if you did it on an annual basis.
Yang Xiaolei: Is China Renaissance a conservative investment institution?
Bao Fan: In plain words, all investments come with risks. No risks, no money.
There are two ways for excess returns: one is to make more profits while taking the same amount of risks, and the other is to make the same amount of profits while taking fewer risks. We chose the latter.
Yang Xiaolei: More specifically?
Bao Fan: We are a growth stage private equity company instead of a venture capital. We have a low loss ratio, less than 5%. The return of capital is also rather fast. Each fund manages to return the invested cost to investors in five to six years.
General partner commits about 10% to the fund, and that rate should be the highest in China. As we invest money from both ourselves and our limited partners, we take risks even more seriously. We don't want to lose our money.
Yang Xiaolei: You often talk about "loyalty". Does it affect good judgment?
Bao Fan: I see loyalty as a value, behind which is "longtermism". Suppose you could always take from me but I could never take from you, then we might never be friends. Suppose you cannot give me anything for now but I am willing to give you things - that is because I believe in what you can give me in the future.
Yang Xiaolei: Years ago, Bloomberg commented that "relationship" is key to your success. What is your take on it?
Bao Fan: What is a "relationship"? There is no exchange of interest among us, and we are not relatives or friends. What links us is nothing but trust. I am a person who takes trust very seriously. If someone puts their trust in me, I must live up to that trust. General partners and limited partners are linked with long-term trust. Personally speaking, it is my most fundamental value in life.
Yang Xiaolei: You are very patient. When you were handling your first case in financial advisory, you worked as a CFO for your potential client for one year, just to secure that client. Later, when China Renaissance established its brokerage team and hardly had any case to work on in the first two years, you still kept the team. Where do you get your tremendous amount of patience from?
Bao Fan: Did you just say I am a patient person? You are the first one who ever says so.
I hardly care about immediate and petty benefits. It takes time to do something huge, including running a company. The easy jobs had been done by others, not by me. What's left is likely to be complicated.
Yang Xiaolei: Did you think long and carefully about every major decision you made?
Bao Fan: Not every decision. I have made a couple of rash decisions, and I have paid a lot for them. Rash decisions mostly end up in vain.
§ I have become less empathetic since I became an investor.
Yang Xiaolei: How does the fund of China Renaissance invest?
Bao Fan: We focus on growth stage investments. On average, we invest US$25-75 million in every project or RMB100-300 million. We primarily invest in technology, healthcare, and consumer area, each of which accounts for one-third of our fund. In general, it takes three to four years on average to complete the investment of one fund.
Yang Xiaolei: China Renaissance avoids venture capital but prefers slightly later-stage investments. Is this what investment banks tend to do?
Bao Fan: We are just trying to keep it simple, do fewer things but do them well.
Yang Xiaolei: Which is your largest case?
Bao Fan: It is the Beike (KE) deal. We invested 2 billion yuan into it, from both our fund and our limited partners. The upper limit of our fund for a single investment is 15%-20%.
Yang Xiaolei: Is there a definition for "over-placement option" in China Renaissance? If there is an extraordinary case, would you exceed the limit? And if yes, by how much?
Bao Fan: In that case, we will create a separate investment vehicle that has no upper limit.
Yang Xiaolei: At present, the valuation of shares in the public market are worse than those in the private market, and the institutions investing in later stages cannot earn much. Could China Renaissance lose money because of its current investment approach?
Bao Fan: It is not a big issue. The valuation for the private market is going through rapid adjustments as well, and there is generally a transition period of three to six months from the public market to the private market. Dry powder is the most important at this time. The market will see a second wave of investment opportunities if it continues like this for another three to six months.
Yang Xiaolei: Is it possible for some structural opportunities like M&A to appear? It is recently said that some investment institutions are building up their own M&A teams.
Bao Fan: Yes, but only small opportunities. The core issue is: where are the buyers?
Yang Xiaolei: Having seen so many entrepreneurs, do you have any methodologies for judging people?
Bao Fan: It is the "4+1" model – determine strategies, build up a team, deliver results, and inspire everyone.
The first step is to determine strategies. Are they intelligent enough to sort matters out? The second is to build up a team. Are they able to find partners and set up the right mechanisms? The third is to deliver results. Can they walk the talk? For the fourth step, they need to have the charisma of a leader, build corporate cultures and organization.
Lastly, the ability to grow is essential. No one is perfect from the start, but some entrepreneurs can work wonders every six months in their role.
Yang Xiaolei: How would you score yourself against those criteria?
Bao Fan: Seven out of ten. I am good at determining strategies but not at building up a team. I can deliver results and I am good at inspiring people. I am able to grow as well.
Yang Xiaolei: Recently, more and more competitors are putting more emphasis on post-investment management. Are you going to do the same?
Bao Fan: Of course. Empowerment is the future.
Yang Xiaolei: But it brings little value to help companies deal with operational works like recruitment or public relations. In my view, what makes post-investment management really valuable is the key strategic decisions, not a team of five HRs who do nothing but build a recruitment platform attracting 30 job-seekers.
Yang Xiao: That's exactly correct. Empowerment does not mean doing everything. One success is better than ten discussions.
We should empower our clients and not be greedy and attempt everything. Just ask yourself what your unique resources are. You only need to do one or two things right.
Yang Xiaolei: By now, I think you are a person who takes everything seriously.
Bao Fan: What do you mean by that?
Yang Xiaolei: You mean it every time you do something, that is to say, you put your heart into wherever you do. For example, for reporters, some will write for higher number of views, some will write for the attention of certain groups, and some want nothing but to write better articles.
It is also the case with investment. You have billions of assets under management and investing in earlier stage deals should not be difficult for you. Even if you just say that you would like to do it, it is just an addition to your fundraising story.
Bao Fan: Would my limited partners agree to this?
Yang Xiaolei: Just negotiate with them. I believe you understand that approach. It is not a bad approach and a rather "modern" one in my view. But you do not want to go this way. Why?
Bao Fan: Good question. People pursue different things, while my goal is to do my very best in one matter at a time. Self-restraint is the core of investment. The hardest job is to fight against no one but yourself.
Yang Xiaolei: The approach also defines your competitiveness.
Bao Fan: Yes. In the private market, you need to market your brand. Partners need to make an appearance, or the brand will lack presence. You are right with what you said, but we should not forget our core competency. Do not confuse your side job with your main business. I prefer to focus and make solid efforts on a limited number of things. I prefer to complete one thing before moving to the next business.
Yang Xiaolei: Is this also your value in life?
Bao Fan: Yes.
Yang Xiaolei: How do you define "success"?
Bao Fan: Always compare yourself with no one but yourself. Your success today will be bigger than that of yesterday. Your success tomorrow will be bigger than that of today.
Yang Xiaolei: It is a quite subjective definition.
Bao Fan: Not quite. As an investor, I generate KPIs that are measured very objectively. But my definition of success is how I define talents. We at China Renaissance are always after the talents with intrinsic motivation, who achieve things, not for their own fame or wealth. Extrinsic motivation only is bound to fail - see, how much money is enough, and how much fame is enough?
For the people with intrinsic motivation, however, there is no such thing as "enough". They will always try to learn new things.
Yang Xiaolei: There are two kinds of success in the investment sector: one is to make perfect choices and get the highest return, and the other is to have the largest scale and capabilities. In a nutshell, they stand for skill and strength respectively. So what kind of person do you want to be, a person of skills or a person of strength?
Bao Fan: In theory, those two are indivisible. A person with strength is sure to be equipped with skills. That said, at some point of time you have to decide. And I would rather not expand to too large a scale.
Yang Xiaolei: What identity makes you more comfortable, being an investment banker, investor, or the CEO of China Renaissance?
Bao Fan: I am happy with all of them. I disagree that life should be defined by a single role. I think we can take on many roles in life.
Yang Xiaolei: Do you still need to maintain a circle after you became an investor?
Bao Fan: Yes, but it is quite different. It has something to do with age. Back then, all my friends were about my age, and we called each other "bro". But now, young entrepreneurs born in the 1990s know me as their investor, and they always call me "boss". It feels quite different.
Yang Xiaolei: You have a great deal of entrepreneur friends. Among those friends, what personalities do you treasure the most?
Bao Fan: It is a sharp question. For anyone who is my friend, I will not judge whether that friend is great or not. Friends are friends. No matter how edgy that friend might be, the friendship remains.
Yang Xiaolei: I heard that you once helped another group in securing a hot deal that could not be obtained otherwise, so I think it is not hard for you to secure a“super deal". However, looking at the portfolio of China Renaissance, I can hardly find any "super deal". Why?
Bao Fan: Firstly, whether a "super deal" is worth investing in depends on which stage and the valuation. Second, we are not afraid of missing out, and we care little about "being tagged". We have made it clear to our limited partners that super deals do not fall within our preferences.
For investment banking, however, China Renaissance must take part in prospective and popular cases in the market and take the vantage point, unlike our investment segment, where we are charged with only one mission: to earn money for our limited partners with or without super deals.
Yang Xiaolei: But you may lose something from your style. For example, the market knows a lot about your investment banking segment, but not your investment segment.
Bao Fan: Yes, but we are ok with that.
Yang Xiaolei: Are you more inclined to the entrepreneurial mindset? I think those with the investors' mindset will go to great lengths in raising big funds, and making big bets, doing everything to their limited partners. Those with the entrepreneurial mindset, however, keep thinking about how to make better investment decisions and how to build a better company.
Bao Fan: I think neither of the two mindsets is dispensable. Limited partners are our clients, and we have to provide the best services. But no matter how good our service is, it will not work unless our investments go well. As I have said, performance is everything. Bring up a project with a hundred times return, then the market will instantly look at you with different eyes.
Yang Xiaolei: Only the results count.
Bao Fan: I have become less empathetic since I became an investor. I was quite empathetic back when I worked in investment banking, but now, as an investor, I must do things objectively and pragmatically to excel.
I am short-tempered. I am impatient with folks who only beats around the bushes.
Yang Xiaolei: What is the future of China Renaissance? More like Morgan Stanley, Credit Sussie or CICC?
Bao Fan: Every one of them is an outstanding example, but none of them fits my ideal.
For the next 10 years, we will continue doing what we have been doing over the past 20 years. We will look for the best entrepreneurs of the next generation and create value and win-win situations for them while hoping that they will share their success with us. That's it.
If we succeed in that cause, we will be able to demonstrate the business value of China Renaissance. Any sort of vision must be rooted in business value. It would be irresponsible to only talk about sentiments without creating real value.
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