Second-level thinking, first-level thinking

On July 14, 2019, when Liao Ming accidentally received an email from Preqin inviting him to write an article for the flagship report of China’s PE / VC market, which was first published, he did not think of himself Prospect Avenue Capital (PAC), founded in early 2018, will be the first Chinese fund to write an article on a Preqin report.

As a professional global alternative asset data platform, Preqin has interviewed dozens of Chinese funds on this report. Why did you choose a fund that was established less than two years to explain their concerns to global LPs?

It’s time to get to know Liao Ming.

This may be a name that is unfamiliar to you. The PAC he founded has not been more than two years, but he has deployed 8 companies in the financial technology, cloud service, logistics and other industries. The well-known names are: Tiger Securities , Ronglian Cloud Communication, TalkingData and Fuyou Truck. Five of these companies can achieve IPOs: Tiger Securities has been listed in the United States, and the other four will be listed in 2020 and 2021. Although PAC is a PE fund, it has not been easy to obtain such a solid investment result in the past two years that Black Swan has frequented.

This depends on Liao Ming’s unique investment philosophy. Prior to founding PAC, Ming Liao, a graduate of Princeton University, worked at Morgan Stanley, Carlyle, Barclays, and UBS. Except at Carlyle, his previous career path has almost followed the typical investment banker career extension. Long-term investment bank training and capital market immersion have laid the key investment methodology for Liao Ming after joining the primary market: starting with the end and always looking at the primary market investment from the perspective of the secondary market.

Looking back at 2019, the suspension of Wework’s IPO is undoubtedly the most dramatic business event, and even silent investment banks can’t sit still. “The failure of Wework’s IPO marks the end of an era,” said Mike Wilson, chief equity strategist at Morgan Stanley in the United States. Of course, this statement not only addresses Wework, but also a “concluding remark” on the wave of new economic venture capital sweeping the world . In fact, Liao Ming expressed this view earlier.

In September, when Liao Ming wrote the chapter of the valuation, he made a “very good description” of the Wework incident and its historical significance. However, due to the lag of the report, this article did not appear until the end of the year. He summed up Wework’s historical lessons in the article and pointed out that the reason for this status quo is: Internet companies in the true sense are extremely limited. Most companies are traditional industry companies that only use Internet or technology elements, but use Internet companies Valuations and therefore high valuations.

At the end of October,Michael Cembalest, chairman of the strategy department of JPMorgan Asset Management, once again shakes Wall Street with a report, making very sharp criticisms on the valuation system of the primary market, expressing exactly the same view as Liao Ming: Internet companies are few in number and used. Traditional companies with Internet tools must use the valuation system of their industry in order to eliminate the valuation bubble in the primary market and return to normal valuation.

The heavyweight reports of two heavyweights, McWilson and Michael Cembalest, point directly at the valuation flaws in the primary market, announcing the end of an era’s valuation system. The turning point is finally here.

However, for Liao Ming, it is very lonely to insist on this concept since 18 years. He has given up the star project several times, and he has been under tremendous pressure. But between market hustle and sobriety, he chose the latter every time.

China’s venture capital has run wild in the past ten years, not to mention that VC itself is a game of probability, which has made a large number of investors and entrepreneurs look forward to explosive growth. Many almost insane worlds were once spread as good stories: signing TS in 10 minutes, doubling the valuation and directly making payments … The most important point in the past two years was named the inflection point of the Chinese venture capital industry: The stronger secondary market has completed the huge verification of the past ten years in an irrefutable way, and its specific manifestation is exactly the valuation inversion that we keep seeing and even the IPO halt.

This underscores the significance of our discussion of Liao Ming’s investment methodology today. The so-called “second-level look at the first-level”, the core is “look at the primary market companies based on the secondary market’s company positioning and valuation system.” He took Xiaomi as an example: he was positioned as an Internet company in the primary market, with a valuation of $ 45 billion in 2014, but the latest market value is $ 35 billion. This is precisely because “90% of its revenue comes from mobile phones and Hardware sales, which shows that the capital market only recognizes Xiaomi as a hardware company. ”

From the perspective of the company’s growth, startup companies and investment institutions should also pay attention to the “signal meaning” transmitted by listed companies in the same industry. “The secondary market is rational and objective, profit is the essence of all business models, and continuous loss of money is not the core of any business model.”

For example, the online education company “Learn from Who” he serves as the sole director, has adopted the industry ’s “only profit model to date” —online large class, and used the price-earnings ratio when it was listed. “. Because learning from whom is an analog company, other online education companies must be profitable before they can go public, so the signal of the capital market is “online large class, profitable, accepted by the capital market, and IPO”. Therefore, last summer, a large number of online education companies focusing on one-on-one and small classes have been developing large class business one after another, hoping to achieve profitability as soon as possible.

IPO has been the most mainstream exit channel for Chinese funds. Liao Ming believes that since this point is clear, all PE / VCs should consider when investing: whether the project meets the requirements of the capital market-that is, whether it is possible to IPO, and what valuation will it get if it enters the secondary market? ?

“Only companies whose business models are recognized by the capital market, have the correct positioning, are valued based on their industry, have a unit economic model, and have sustainable profitability are the targets worth investing in, and they can effectively withstand the post-IPO two. Market fluctuations. “Liao Ming emphasized in the article.

Liao Ming summarized the above criteria: “It is necessary to look down and look up at the sky”, which is also the so-called “starting at the end”.

Even to this day, there is still a huge gap in the primary and secondary markets that is insurmountable for a long time. It seems that a considerable number of entrepreneurs and early investors have a secondary vision and thinking. Liao Ming believes that this is precisely the important reason why the PAC as a new fund can invest (or even lead) multiple star companies: in understanding the capital market, he not only provides scarce insights, but also includes practical resources . For example, after he invested in Tiger Securities, he quickly arranged the heads of many investment banks in China to visit the company, arrange non-trade roadshows and reverse roadshows, recommend executives and independent directors, preside over investment bank beauty pageants and project launch meetings, and even participate in the prospectus. Write a meeting and provide suggestions and opinions on IPO pricing and order allocation.

As the first believer of Preqin in China, Liao Ming’s rational thinking and clear voice have been passed to more than 83,000 institutional investors worldwide in mid-December last year.

Returning to PAC, Liao Ming said that the fund size is 500 million U.S. dollars and the single investment is between 10 million and 50 million U.S. dollars, but he has not explicitly locked the field because according to the standards of the secondary market, “exclude Method “can filter out many items. And for a company he believes has investment value, his second-level experience is an important plus. “It can help, or even others can’t help, is the core competitiveness of investment.”