David Liu: Hailed by Wu Shangzhi as "the most astute PE investor in China"
Time:2016-08-31 From:PEdaily

KKR made an announcement that shocked the market yesterday. It said that David Liu, partner at KKR, Co-head of KKR Asia Private Equity, and CEO of KKR Greater China, has resigned. Together with another partner, Julian Wolhardt, the two will set up their own private equity firm.

This is the third time that Liu and Wolhardt will start a business together. In 2006, Liu and Wolhardt joined KKR to found its China investment business after having spent more than a decade at Morgan Stanley, setting up and successfully managing Morgan Stanley Private Equity Asia.

China’s most astute PE investors

“David Liu and Julian Wolhardt are some of China’s most astute PE investors,” said Wu Shangzhi, when contacted the founder and Chairman of CDH Investments. “During the Morgan Stanley era”, Wu collaborated deeply with Liu and Wolhardt in three projects--China Mengniu Dairy, Nanfu Battery, and Belle International. During the KKR era, the two companies jointly invested in China Modern Dairy.

“Whether at Morgan Stanley, or later at KKR, David’s investment style has been prudent, consistent, disciplined, and professional.” Wu continued, “They have a long-term investment track record, strong local connections, and deep industry insights. For more than two decades, they have invested in and nurtured numerous prestigious domestic enterprises and have earned an excellent reputation among local entrepreneurs.”

“Having experienced a number of market cycles, you can tell that they have deep local market knowledge and shrewd investment judgment.” An experienced private equity insider gave them high marks when interviewed by In more than 23 years of investing, Liu and Wolhardt have led numerous groundbreaking investments, and have one of the longest and most successful investment track records in the history of the Chinese market.

Unparalleled investment track record over 23 years

Liu began his career in private equity in 1993. He served as Managing Director and Co-head of Private Equity Asia at Morgan Stanley, and was the first head of private equity in China.

2005 was a pivotal period when global venture capital and private equity firms thronged to the Chinese market. KKR, the world’s largest private equity firm, began to recruit actively that year to set up an Asian investment fund, marking its official entry into this emerging market. Liu and Wolhardt, who had led Morgan Stanley for more than 10 years in China, decided to join KKR. Liu was the first local employee of KKR in Asia. As CEO of Greater China and Co-head of KKR Asia Private Equity, Liu was involved in making private equity investment decisions for the whole of Asia. Over a decade, Liu and Wolhardt helped KKR achieve consistently steady and outstanding investment performance.

The two funds managed by KKR Asia are now fully invested. The first fund totaling USD4 billion, achieved such excellent performance that KKR swiftly raised funds for the second fund of USD6 billion, still the single largest private equity fund in Asia. Currently, the total funds managed by KKR Asia amount to USD10 billion, of which approximately one-third is invested in the Greater China region. Publicly disclosed data revealed that KKR has made investments in approximately 30 projects in China in the past decade. An accurate and decisive investment style coupled with robust investment returns has made KKR stand out among foreign-funded institutions in China. Its performance has far outstripped other international private equity giants.

In the past 23 years, Liu and Wolhardt have overseen and led nearly 40 projects in Greater China, first at Morgan Stanley, then at KKR. The projects included a series of classic success stories that were groundbreaking, had landmark significance, or enjoyed exceptionally high returns. Its portfolio boasts some of the leading players in major industries: Ping An of China (Ping An Insurance), China Mengniu Dairy, Qingdao Haier, Sunner Development, Belle International, Far East Horizon, Nanfu Battery, China International Capital Corporation, China Modern Dairy, United Envirotech (now CITIC Envirotech), China Cord Blood Corporation, Yolo, Hengan International, COFCO Meat, Yuehai Feeds, Asia Dairy, Uxin,, and 58 Daojia, among others.

Many of the projects were a first in China’s private equity industry at the time: Ping An of China was the first foreign-invested Chinese financial institution, Mengniu was the first authentic private sector red chip in China, and Nanfu Battery was the first PE-backed management buyback in China.

Its investment performance also continued to break new records. KKR bought an 18% stake in Sunner Development, China’s largest white feather broiler producer, at RMB12.30 per share for a total investment of USD413 million (RMB2.46 billion). Sunner Development’s share price has since appreciated by 227% to RMB28, and KKR’s unrealized investment gains now exceed USD500 million. There are many other examples of past investments made by Liu and Wolhardt that have yielded high returns. Based on figures from, investment reporters estimated that single investments with unrealized returns exceeding USD500 million made by the pair during the Morgan Stanley and KKR days also included Ping An of China, Far East Horizon, United Envirotech, Haier, Modern Dairy, and Shanshui Cement.

An investment rationale appropriate to the Chinese market

Based on the global investment philosophy applied by Morgan Stanley and KKR, Liu, who is deeply committed to the local Chinese investment market and an expert in China’s market characteristics as well as the growth path of Chinese enterprises, has led the KKR China team in the creation of an investment rationale appropriate to the Chinese market by integrating the international philosophies of Morgan Stanley and KKR with his Chinese experience.

First, “set the direction”—stay committed to industries with sustainable growth prospects. This is a clear and resolute strategy. A review of KKR’s Greater China investment cases revealed that the company’s investment preferences in China were in the following five major sectors: food safety, environmental protection, medical, finance, and education.

This was very much in line with Liu’s philosophy: stick to the sectors one understands and is best at. “For more than 20 years, there have been many hot investment ideas in the market, and these have changed consistently. These “winds” were very strong sometimes, but we have remained steadfast and refused to jump on the bandwagon. On the surface, it would appear that we may have missed out on some opportunities, but if we jumped on the bandwagon, the long-term losses could far outweigh the gains. Rather than pursue hot market ideas, we’d rather spend time studying which sectors have investment opportunities that would suit us,” said Liu in an interview with QQ Finance in June 2015.

Second, “counter-cyclical investment”. In contrast to pursuing hot investment ideas, KKR’s typical modus operandi is to look for industries and enterprises in the doldrums, make decisive investments, carry out buyouts, and then realize the value of the enterprise through M&As and consolidations or spin-offs. Liu and Wolhardt incorporated the principle of making decisive investments in industries and enterprises in the doldrums into their strategy at KKR China. A review of publicly disclosed information at the time showed that Haier was trading at a PER of about 8x, with net cash of USD3.3 billion and EV/EBITDA of just over 3x when the investment was made. Overseas, meanwhile, white goods firms GE and Whirlpool were trading at about 15x PER. The investment in Modern Dairy was made in 2008, after the melamine tainted milk scandal erupted and the entire industry was heavily discounted. At the time, the industry required a standardized milk supply enterprise. The investment in COFCO Meat was made in 2013, just after a large number of dead pigs were found floating in the Huangpu River. With investment and support from KKR, COFCO Meat built and managed large modern live pig farms and meat processing plants. When a series of meat and chicken food safety crises erupted at McDonald’s and other fast-food locations in 2014, the domestic white feather broiler industry was in the doldrums for almost two years, but a large white feather broiler enterprise with a good environmental protection infrastructure and standardized quality management was ushering in a new growth opportunity. Based on this judgment, KKR decided to invest in Sunner Development. Liu and Wolhardt were experts in finding opportunities and bold enough to invest in industries and companies with depressed values such as these.

The third principle is “patient capital”--use post-deal management to unearth and lift enterprise value. Although he uses the counter-cyclical investment method, Liu’s investment philosophy is to conscientiously find the heart of the industry problem and find a fundamental solution based on the strength of capital. It is apparent that seeking a reasonable valuation for entry is just the first step. A key reason for KKR’s consistent ranking among China’s top 10 private equity firms may be attributable to its accurate judgment of industry trends and issues, the value and shortcomings of an enterprise, and the targeted and feasible post-deal support it offers.

For instance, when the melamine tainted milk scandal hit China’s milk powder industry in 2008, Liu and Wolhardt believed that the root of the problem did not lie with milk enterprises, but with upstream enterprises in the industry chain. To solve the problem fundamentally would require changing the mode of milk production, from small individual farmers to large farms involved in concentrated breeding where quality may be controlled. Hence the investment in Modern Dairy. KKR also helped Modern Dairy build numerous modern farms, thus solving the issue of the milk quality problem at its source.

The international investment philosophy adopted by Morgan Stanley and KKR has been enriched, extended, deepened, and localized in China. This depended on a strong and large localized team. This is a team that was built up and nurtured by Liu and Wolhardt. This stable team, which has been active in the private equity sector in China since 1993, has had more than 20 years of local investment experience, and a shrewd, capable, and efficient team. This has maintained an excellent long-term investment track record rare even among the world’s private equity industry.

"David and Julian have helped build the strong franchise we have in China today, and we are proud of the foundation we have established,” Henry Kravis and George Roberts, Co-Founders and Co-CEOs of KKR said in an official KKR announcement yesterday.

How good was KKR’s performance in China and Asia? Since its inception some 40 years ago, KKR has generated a compounded annual rate of return of close to 26%. KKR’s LP disclosed that the rates of return of KKR Asia’s funds were even higher. In comparison, the 50-year compounded annual rate of return of investment guru Warren Buffet is only 19%.

Wu Shangzhi, a colleague who has collaborated closely with Liu and Wolhardt for years in China’s private equity sector said that global enterprises’ appetite for the Chinese market remained immense despite the current overall downtrend in the Chinese market. The entrepreneurial and innovative spirit of Chinese enterprises will support rapid growth in the private equity sector in China. This will help lay a solid market foundation for localized investment institutions going forward.

Although Liu has been involved in the Chinese private equity industry for 23 years, he is only 45 years old, in the prime of life for an entrepreneur. Presently, both KKR funds are fully invested, and fundraising for a new fund should be in the offing. If Liu does not leave now, he would have had to wait for at least another five to ten years. One wonders if Liu wanted to start a new business before it was too late and chose to leave KKR for this reason.

A number of local institutions, from VC to PE, have recently left the USD system. Whether in VC or PE, it has been observed that the best investors in the industry are heading in one direction. This is driving the emergence of local investment institutions in China.