Chinese pioneer

It was way back in 1986 that David Mahon spotted an opportunity to establish Mahon China as a firm that would provide advice to overseas companies seeking to build relationships with Chinese partners in the early days of economic reform. Mahon says he had previously worked for a textile business, giving him a ?good grounding? to advise on issues relating to that sector in particular.

Recalling those early days, he says: ?As with any emerging market, in the 1980s and early 90s the Chinese political trends were the major drivers of the economy, and it was very difficult to know how to expand and adapt. We had to face each year with patience and try not to get ahead of ourselves.? There was also the challenge of interpreting China's new business laws (which were only just being drawn up) with frantic speed.

Mahon adds that entering China as a foreigner presented certain logistical issues. ?Initially, there was no clear support for us. The position was tenuous in terms of your individual status, the need for visas and registering your offices. It was a relatively precarious and insecure situation, ameliorated by the knowledge that China needed to keep its doors open to the rest of the world.?

Despite the distractions, Mahon had his eyes on a prize that would make all the temporary frustrations worthwhile: expanding beyond advisory work and to become a private equity fund manager. Once the business laws had become sufficiently clear for Mahon to plan ahead with confidence, his firm began seeking mid-market Chinese private equity investments for the first time in 1991.

Of course, although the legal picture had become better defined by then, China was still virgin territory for private equity investors and Mahon Chinawas something of a trailblazer. ?We could have waited until the environment had become more open, but when it gets easier to invest in a country then a host of other firms begins arriving,? says Mahon. Risky as it may have been, he was determined to try and exploit first-mover advantage.

Fund target: $300m
The extent to which Mahon China has indeed taken advantage of its early entry to China is about to be put to the test. After having managed a total of $200 million (€168 million) in a total of four fund vehicles over the years, the firm will later this year take a step up in terms of scale and ambition by raising a single fund with a target of $300 million from international institutions and high net worth individuals.

This seminal fundraising will, if successful, represent the culmination of the groundwork that has been laid by the firm over the years. One aspect of this was, as outlined, the transition from adviser to fund manager. Another is achieving proof that the firm has been a successful investor of money. To this end, says Mahon, the firm has in recent times ?been busy parcelling up and selling most of the assets we have acquired over the last eight years? in order to add more weight to its track record.

Mahon China has also set out to demonstrate that it can apply different strategies to the market, and hence be seen as adaptable to changing conditions. The firm has generally been seen, says Mahon, as a mainstream investor. ?But in recent years, our portfolio has comprised a large proportion of stressed assets – which was a deliberate move. We wanted to show that we could be active in extracting value.?

Expanding on the theme, Mahon says: ?Unlike others, we see China as a value play, not simply a growth play. Growth in itself in China has not per se been a successful story. It's not just about investing, it's about restructuring and repositioning. It's those investors that have really helped companies that have delivered the best returns.?

In order to be in a position to effect change, control is essential. Mahon China is rare in being a Chinese mid-market GP seeking control positions (which Mahon says often means investments of as little as $7 million to $20 million).

There are few other GPs, says Mahon, operating in the same space as his firm. ?People say there's too much money chasing too few deals in China. But the problem is that there's a lot of cash looking for a home in the same places, particularly the coastal cities. Once you move away from the more visible companies in the sophisticated areas and start to look inland, you find few foreign GPs around at all.?

As part of the effort to extract value, Mahon makes no secret of the fact that hiring and firing management at portfolio companies is sometimes necessary. Interestingly, he rejects the common perception that such measures are particularly sensitive in China. ?If what you are doing is seen to be in the best interests of the investment, it's accepted to a much greater degree than foreigners anticipate,? he says.

Resilient workforce
Referring to China's ?iron rice bowl? livelihoods of the recent past, whereby some workers were guaranteed a decent standard of living in exchange for handing over control of almost every aspect of their lives to the state, Mahon says: ?My view is that the rice bowls are more iron clad in Europe than in China.? Chinese workers he says, are generally very resilient, cope well with change and express an enthusiasm for re-training and developing new skills.

Aside from its strategic approach, Mahon China has other methods of trying to achieve differentiation. Firstly, it has retained the advisory business that was its foundation stone. ?Industrial companies making acquisitions often need help on the deal advisory side. For example, how do you negotiate the deal? How do you structure it? We share with them all of the stupid mistakes that we have made over the years,? says Mahon.

The firm also produces research on various aspects of the investment scene in China, encapsulated in a series of papers called China Watch, which Mahon says are distributed to over 1,200 organizations. ?It creates a profile for us to show that we understand what's going on in the country – we take positions, and people can judge us on those positions.?

When he refers to people, Mahon is at least in part referring to limited partners. While China Watch is undoubtedly a useful read for those who receive it, from Mahon China's point of view, it is first and foremost an excellent marketing tool that will be produced during the upcoming fundraising as evidence that the firm has an acute grasp of market dynamics in China.

?We've been here for 20 years, we've got to know people, we've developed networks and we've become a recognized player in the industry,? says Mahon, who stresses his belief that ?through your actions you are judged.? If so, he and his firm can hardly be faulted for effort. Now it's down to the LP community to judge whether those actions deserve reward in the form of capital commitments.

Mahon China
Office: Beijing

Founded: 1986

Total employees: 12

Investment professionals: 7

Administration: 3

Key team members (Beijing):

David Mahon (founder and managing director): leads all major transactions, including liaison with domestic and foreign exit partners and customers. In negotiations with stressed assets, takes the initiative in dealing with local managers and government authorities.

Zhao Yujiang (senior investment adviser): one of a select group of students sent out by former leader Deng Xiaoping to learn about modern economies. Graduated from Oxford University in economics and helped shape China's economic reform policies. Advises financial sector deals and involved in marketing and development of new funds.

William Baker (senior investment manager): Studied at Beijing Language Institute and Taiwan Normal University, and a fluent Chinese speaker. Has managed and run Chinese companies, joined Mahon China eight years ago. Specialist in due diligence, compliance and technical issues.

Simon Huang (investment team member): Joined Mahon China nine years ago after spells in foreign-owned private equity firms. Investment specialist with particular experience of turning around under-performing assets.

Key team members (New York):

Jim O'Neill (partner), Bob Caines (partner)

Strategic partners: Paley Dixon (New York-based M&A advisor); Infometrics (Wellington, New Zealand-based economic and consulting service); Leverage Asia (investment group run by New York-based partner Jim O'Neill)

Recent funds: 4 funds with $200m in total under management