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By Yuan Yang
From the outside, China’s technology sector looks like a dealmaker’s dream. The private market is awash with venture capital money, and 65 companies are valued at more than $1bn, a total of $427bn, neck-and-neck with the US.But those inside the industry know this competitive scene is fraught with distrust. Bao Fan, the 47-year-old founder of boutique tech investment firm China Renaissance, has surpassed his international competitors to advise by far the highest number of Chinese tech deals last year, amounting to $11.7bn.
But he has also managed to win trust from all sides. “Trust allows us to do our job as champions to all players in China’s new economy,” wrote Mr Bao on the first page of their prospectus for an initial public offering in Hong Kong last month. The company raised $324m, but its share price has been falling since — along with a general downturn in the stock market for Chinese tech companies this year.
In the private markets where Bao Fan has made his best-known deals, however, valuations continue to soar. Mr Bao served twice as an adviser on both sides of high-stakes M & As that led to two of the world’s four most valuable unlisted tech companies.
“We internally debate a lot over whether we want to be in that situation,” says Mr Bao, on being asked to advise both sides of a deal. “Even a small slip could lose the trust of both sides. You have to be absolutely principled as well as absolutely sensitive.”
Mr Bao advised each of Meituan and Dianping on series of capital raisings, starting from 2011. Meituan was engaged in a traditional war of subsidy-raising to win market share in food delivery, while Dianping was trying to bring businesses and customers into its restaurant-rating platform. In 2014 he started discussing the idea of a merger with them.
“The business rationale was obvious — they have such complementary businesses,” Mr Bao says. “But then there are issues regarding management, valuation, and also their Alibaba/Tencent background. We needed to resolve all of these issues.”
In the middle of September 2015, both sides approached Mr Bao saying they were serious about merging and wanted him to advise them. He knew it would be a big job to accept. The two were then valued at about $7bn and $4bn respectively. What is more, Alibaba was backing Meituan while Tencent backed Dianping. But he said yes: both sides insisted on having him as their sole adviser, he says, and he knew they already had a high-level agreement.
It was only when he started working on the deal, that he found his impression had been wrong.
“I realised they didn’t have an agreement. There were some big gaps in understanding, especially in terms of the valuation and the structure of the deal. That was the point where I started panicking,” Mr Bao recounts.
Mr Bao was left with the prospect of building a deal from the ground up within a few weeks. It was not enough for Mr Bao to build trust between the two parties.
“Trust takes time to build. For fierce competitors to get to the level of trust is a huge ask. But both sides are very rational, and they are also realistic,” he says.
After Mr Bao got both sides to agree the framework, he left them to sort out the basic agreement, and did the rest of the detailed legwork. The deal was formally announced this month, and culminated in a company that achieved a $53bn valuation in its IPO last month - and still goes back to Mr Bao for advice.
“It’s important early on for them to speak the same language, in same framework,” says Mr Bao. “In English the words might sound the same, but each side thinks it has a different meaning. Like the basic financial stuff — the valuation exchange ratio, the share exchange ratio. Pre-money and post-money concepts. There’s a lot of granularity. How do you interpret it?”
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