Li Ruigang, dubbed China’s “King of Content,” has his hand in many pots. His China Media Capital PE fund has investments in two of the largest upcoming entertainment-related US IPOs, Bilibili and iQiyi. He has also made waves in Hollywood, investing in studios and the CAA talent agency. In this article translated exclusively by The Harbinger China, Li lays out what makes investing in entertainment unique, peculiarities of the Chinese entertainment market, and how he expects the industry to evolve over time.
An overview of CMC's portfolio
At the beginning of 2018, Bilibili and iQiyi (two of the most popular video sharing and streaming sites in China) quietly started their IPO launch into the US market. A month ago, the nation's leading variety show production company Star China Media(灿星制作) also announced that it would declare an A-share IPO early this year. Li Ruigang, 49, is the common investor behind all these projects. The media industry leader who once leveraged his boldness and instincts to carry out drastic reforms in the state-owned broadcasting and television group began channeling all his efforts to China Media Capital three years ago.
CMC is China's largest private equity fund for cultural industries to date. The total size of its four funds (including two phases of the RMB fund and the U.S. dollar fund) is about 10 billion yuan (approximately 1.6 billion USD). Although the fund was already approved by the NDRC in 2009, the real market operation started only four years ago.
Over the past four years, China Media Capital has invested in more than 30 projects in total. Apart from its shares in Bilibili and iQiyi, CMC’s portfolio company - Star China Media was also the producer of The Voice of China (中国好声音) and Mask Singer(蒙面歌王), holds shares in Kuaishou, Yitiao, SNH48, Kuaikan Comic(快看漫画), and Fun Factory(笑果文化), a comedy content company who produced TOAST(吐槽大会) and ROCK & ROAST(脱口秀大会). All of which have received spectacular viewership and popularity. CMC’s portfolio encompasses almost all of the Chinese culture and entertainment life. Li Ruigang was thus bestowed the title “The King of Content" by the Chinese media.
Among all of CMC's exit cases, the investment in IMAX(China) is the only one that has recorded more than 4 times return after its listing in Hong Kong in 2015. Projects such as Bilibili, iQiyi and Star China Media could prove to yield decent returns for Li Ruigang’s LPs. Li Chuan, managing director of CMC, said that as of now, the return in the project of Star China Media for CMC has exceeded 10x.
Since the beginning of 2016, China's investment in the entertainment industry has had a surplus of funding. Large sums of funds continued to flow into the market in the wake of the national policy in 2011, and high-quality projects that have not yet been listed have become very scarce. As a result, many investment institutions are no longer looking at entertainment projects.
Investment Research Institute statistics show that in the first 11 months of 2017, only 58 projects were financed with a total of about a billion U.S. dollars in China's cultural media industry. In comparison, in 2013 the scale of financing for the media industry was nearly 4 billion U.S. dollars.
Chen Hang, president of CMC, told Tencent Media that investment in the entertainment industry is not the same as investment in other fields. The first reason is that, in China, the entertainment industry is closely regulated based on political and ideological factors. The second is that the entertainment industry is essentially an asset-light industry. Risk assessment is very subjective in its financial models. Also, the demand for entertainment market changes rapidly. So the largest challenge for current entertainment industry participants is how to reduce all aspects of risk to improve the efficiency of capital allocation.
From an investment point of view, the performance of CMC is still hard to pin down. But if we consider the troubled situation Chinese entertainment industry is currently in, Li Ruigang's exploration can be considered to be a unique sample.
Deals that only CMC can enter?
Among the four members of the decision-making group of China Media Capital Committee, Li Weicai was the last to join in 2016. But soon, he closed the CAA (Creative Artists Agency) deal, which is one of the investment projects that caught the most attention in CMC's history.
Founded in 1975, CAA is the world's largest talent agency headquartered in Los Angeles, USA. The company has signed the world's most successful actresses, writers, producers, and directors, all of whom together comprise seven of the world's top 10 box-office films in history. CAA has, therefore, become a global resource hub for the entertainment industry and has a strong grip on Hollywood. In addition to film, television, and music, CAA quickly became the world's No. 1 sports agency.
CAA has coveted the Chinese market for a long time. Its competitors are all going through radical expansion and continuing acquisition across the world by leveraging capital. A very established US talent agency WME also set up a Chinese joint venture in 2016.
At that time, Li Ruigang has been actively investing in Hollywood projects. For example, CMC set up joint ventures including "Oriental DreamWorks" with American DreamWorks, "Flagship Entertainment" established with Warner Bros., and "IMAX China" with IMAX, the world's largest provider of movie entertainment system. CMC also invested into Hollywood films, and television production company Imagine Entertainment and entered the core departments of Hollywood’s blockbuster production.
Li Ruigang and Li Weicai, who previously served as the director of Lanting Investment in North Asia's private equity platform under Singapore’s Temasek Group, have also been in contact with many CAA executives.
In July 2016, CAA got into contact with Li Ruigang and discussed the possibility of strategic investment and cooperation. In the following April, CMC announced a stake in CAA and Li Ruigang served as CAA director. At the same time, CMC and CAA co-founded a joint venture company "CAA China" to jointly explore Chinese artists, sports agents, and the marketing business.
"The original intention of CAA is to let CMC participate, not to find a minority investor. They are not short of money." Li Weicai told Tencent Media. CAA wants not only a strategic resource in China but also a well-matched partner. The so-called "strategic resources" here refer to the resources of the entertainment industry controlled by CMC, including the control over regulatory policies and their ability to communicate with the government.
Du Yongbo, a partner at China Renaissance, said: "They [CMC] can always find projects that we cannot see and enter deals that we cannot make." These sorts of connections may sound exaggerated, but from Li Chuan’s perspective, it seems like CAA is "a project that only CMC can do."
One important reason lies in Li Ruigang's unique experience and background.
Born in 1969, Li Ruigang graduated from the School of Journalism at Fudan University in 1994 and then worked as director of news and documentaries for Shanghai Television Station. At the age of 33, he became president of SMG (Shanghai Media Group) and became the youngest official in charge of China's major media groups. Later, he took the lead in the restructuring of SMEG (Shanghai Media & Entertainment Group) and SMG in Shanghai. He also served as Deputy Secretary General of Shanghai Municipal Party Committee and Director of the General Office of Shanghai Municipal Party Committee. These "within the system" experiences allowed Li Ruigang to achieve success one way or another.
Chen Chuan, the managing director of CMC, commented on Li Ruigang in Tencent Media: "In this industry, he is one of the few people who possess all of the following specialties. The first is the industrial capability to understand the entire business and its various products. The second is the management ability to lead the team to fight. The third is the understanding of the policy environment. Media culture, after all, is a regulatory-intensive industry. Fourth, Li Ruigang has his own resources and professional capabilities in the international community and his status within the industry is internationally recognized. "
In the Fall of 2015, the short video application Kuaishou, whose user base has been skyrocketing, negotiated a new round of financing. Before this, Kuaishou had already obtained the investment of Morningside Venture Capital, Sequoia China and DCM China. According to Chen Xian, "At that time, the company still had 200 million U.S. dollars and did not need any money at all. However, it still plans to open a small round, to interested institutions with strategic resources."
There were CMC and BAT (Baidu, Alibaba, Tencent) at the time. The strategic resources of the latter three for Kuaishou, are quite obvious: Baidu is the search portal in China, Ali can provide the e-commerce platform, and Tencent has a strong advantage in social media.
Finally, KuaiShou chose Baidu and CMC in this round, Tencent to enter in the next round. According to Chen Xian's argument, the attractiveness of CMC to Kuaishou lay in the mastery of regulatory policies. "At that time, Kuaishou’s Daily Active User was more than 20 million and was growing rapidly. The supervision’s opinion on content has to be taken seriously."
The same is true for Bilibili. As an anime barrage video website that has gathered a large number of young people, Bilibili has been running for a long time since its launch in 2009 and received no great attention from the outside world. However, as the number of users and the social influence of Bilibili gradually increased, Bilibili started to receive more and more attention from the industry and regulators. They didn’t have a Government Relations department back then.
In 2014 and 2015, CMC invested in Bilibili twice in succession. Chen Xian said that CMC has provided valuable advice and assistance for the "policy of Bilibili" and the unblocking of the Bilibili's GR system. Today, under tighter regulatory policy, the GR awareness of Bilibili has been very strong.
At an industry conference organized by government departments in Chengdu in November 2017, posters of several participating companies stood alongside hallways of the venue. Among them, the poster of a well-known video streaming website is an advertisement of its exclusive drama, "How Xing Zhaolin (main actor in the drama) was induced by his tiger girlfriend?" Comparatively, the poster of Bilibili is a portrayal of its users: "They are a free and colorful generation", with a very positive slogan of "culturally self-confident, morally self-disciplined and humanity accomplishments" below.
"CMC never relies on high prices to win the investment deals. When choosing investment institutions, many entrepreneurs emphasize more on the resources and added value in addition to the funding." Li Chuan told Tencent Media. "Compared with other institutions, CMC is unique in a sense that CMC has a more accurate understanding of the policy, and a greater control over resources within the entertainment industry.
Li Ruigang's secret weapons
In May 2017, Li Dan, founder and a famous actor of Fun Factory(笑果文化) flew to the United States with dozens or so colleagues. Fun Factory, the creator of the prominent show TOAST and ROCK&ROAST, has received investment from both Wang Sicong and Li Ruigang.
At that time, CMC just closed the deal with CAA. Under CMC’s arrangement, the production team of Fun Factory(笑果文化) visited the United States to learn about the American stand-up comedy.
He Xiaoxi, CEO of Fun Factory(笑果文化), told Tencent Media that CMC also helped them hire a team of professional comedy content producers from the United States to join Fun Factory(笑果文化). This team has participated in the Emmys, Oscars and other large award shows behind the scenes.
April 2017, Fun Factory(笑果文化) announced the completion of A round of 120 million RMB financing. In the press release, the lead investor was "China Media." However, few people know that the money came from two sources: China Media Capital, and CMC Holdings, an investment and operation unit under CMC. Its shareholders include Tencent, Alibaba, and Vanke.
Li Ruigang explained to Tencent Media that CMC is an investment platform aiming at financial returns, and the investments made must exit within a certain period of time. However, the CMC holdings, as an investment and operation unit has a long investment horizon. It has its own long-term development strategy, which is to build a closed-loop system including quality contents, media platforms, and corresponding technology services, so that it can leverage the synergies among its quality contents and platforms both online and offline.
As an example, on January 10, 2018, the CMC Holdings announced its deal to integrate 21 leading local talent agencies to establish a company called CMC Life, and Li Ruigang serves as chairman. He is trying to make CMC Life the largest performing arts platform in Greater China region, not only changing the status quo of the decentralized entertainment industry, but also integrating channels and content resources in this industry.
These exclusive industrial resources will in turn benefit CMC and become an important reason for entrepreneurs to choose investments from CMC. "Industry + Investment" is the secret weapon of Li Ruigang.
“When negotiating with industry partners or regulatory authorities, if you can cut the time from two weeks to, for example, three days, that would be a huge difference. As another example, if you want to find an advertisement agency, you might have to speak with ten different ones, comparing the price and before finally making a decision. That would be quite inefficient. Our approach is different. We know which agencies are the best, and we even invest on some of them. You can directly reach out to our portfolio companies, and that would be a huge improvement regarding efficiency. Sometimes, timing is significant for startup companies, especially in the entertainment industry.” Chen Xuan said when talking about the helps CMC could offer to its portfolio companies.
In fact, CMC played a crucial part in the content collaboration projects of iQiYi, comparable to Hulu in the US. "There is still fierce competition for copyrights in domestic film and television projects. We helped to facilitate the cooperation between iQiYi and some other film and television companies to leverage our connection advantages to win the copyright - some of the companies are those we have invested in and others we have been friendly with. We help each other." However, Chen Xian did not disclose which film companies are involved and details of the collaboration.
Fun Factory(笑果文化) has launched a new variety show called Offended Family(冒犯家族), which is streamed on iQIYI. The sponsor of the show is a language education app, Liulishuo. Ele.me, Bilibili and SHN48 are also heavily engaged in product placements within the show. The new season of the ROAST, a collaboration between Tencent and Fun Factory, also partnered with Kuaishou, the famous short video sharing site. These companies are all portfolio companies of CMC. According to Chuan, CMC essentially bridged these collaborations together for mutual benefits.
Chuan would like to call this business model as “systematic” and “centralized.” "Immersing yourself in the entertainment industry for a long time, and you will become a center in some senses, knowing the whereabouts of the industry, including upstream and downstream industries. We will also share our understanding of the industry as well as policies and regulations. We know what kind of human resource certain company will need in a certain area, and we can find talents for them." Li Chuan said CMC had reached out not only to companies that did not want to raise capital, but also some people that hadn’t considered starting a business. After talking with them, there’s going to be a follow-up investment.
Xu Husheng's venture project Yitiao, was born out of a discussion with Li Ruigang. At that time in early 2014, when Husheng Xu was the editor in chief of The Bund, he began to visit the office of CMC in Shanghai quite often. He was looking for Ruigang Li. Witnessing the decline of the traditional media industry, Husheng already had the idea to start something new, although he did not quite figured it out clearly back then.
Ruigang is Husheng's former boss. Xu is one of the founding members of the "First Financial Daily," a newspaper owned by SMG (Shanghai Media Group).
Chuan told Tencent Media that Husheng and Ruigang frequently discuss the possibilities of business model ever since the beginning. However, due to the growth-oriented investment preference of CMC, Yitiao is not consistent with the fund's overall strategy. Not until 2016, when the e-commerce model made the breakthrough did CMC started to participate in and lead Yitiao's C round with 100 million RMB.
According to Chuan, less than one-third of the more than 30 deals entered by the CMC were introduced by financial adviser. The rest of them are deals that either discovered or created by themselves, especially in the entertainment and media industry. He sees this as the success of the "industrial + investment" model of CMC.
But this model itself, has many aspects worth exploring.
Kinship and "Barriers"
CMC is not the "Industry + Investment" model unicorn. In fact, large enterprises such as Lenovo, Fosun, CITIC, Xiaomi, and BAT have hatched one or more specialized investment units with market competitiveness on an industrial basis.
However, most of the responsibilities of these investment groups backed by large groups are strategically seizing the resources of the industry. Part of this is true for CMC, with its investment based on the pursuit of financial returns. The ideas of mutual benefit between industry and investment are broadly consistent.
"This model is one of the future trends." Li Jiaqing, managing director of Legend Capital, a unit of Lenovo Group, told Tencent Media that with the increasing influence of the investment departments of industrial companies such as Tencent and Ali, pure financial investment is under considerable pressure because it is difficult for the latter to mobilize the cooperation of more industrial resources when investing. "Industrial resources is a differentiated competitive advantage.”
Although some powerful financial investment institutions can form a certain industrial synergy through their large number of invested enterprises, Li Jiaqing believes that this loosely-controlled investment relationship is far less close than incorporating into the same brand, as the latter will bring more synergistic effect. But the former also has an advantage that it may be more market-oriented at the operational level such as decision-making.
Chen Hang said to Tencent Media that the significance of the CMC holdings to CMC is that there is more of an exit channel than strategic resource coordination. In other words, the projects invested by the CMC in the future may be directly sold to CMC holding groups in addition to listing or equity transfer to other institutions.
Of course, this does not mean that the CMC holdings is the last resort of CMC. The premise of a takeover by CMC holdings is that the deal is attractive and can create synergy for CMC holdings, instead of taking any deals that are not able to exit.
Zero2IPO Research Center data show that the currently, exit through IPO is still a major channel China’s VC and PE are taking, accounting for about 60% of all the deals. The rest includes equity transfer, mergers and acquisitions, repurchase, MBO, which are not only more difficult to achieve but also have less return compared with IPO.
"The fact is that not every business can be listed. The equity transfer price is also very hard to reach an agreement." Chen Hang believes that the transaction cost will be much lower between two companies under this “industry + investment” model compared with that with external companies.
Nevertheless, the risks and challenges are not small. Li Jiaqing believes that both the industry group and investment vehicle must be independent of each other regarding decision-making, operation, and management while maintaining a unified brand culture and sharing resources with each other. Because the shareholders are different for these two companies, the interests of the representatives are different too. The primary goal of fund managers is the pursuit of financial returns, while industrial operators are pursuing the development of industrial strategy. The two follow different laws, and therefore the logic behind the judgment and the results may be big differences.
Once the independence is undermined, such synergy between two entities may turn into conflicts of interest. Li Ruigang also realized that. Although the CMC and the CMC Holdings are two teams working in the same building office, sharing the same information, and sometimes co-investing in the same deals, teams on both sides do not overlap and have no equity relationship between each other, except for the fact that Li Ruigang is in control of both companies. "They make decisions independently and run according to their own demands."
CMC’s listing plan
CMC is also shifting towards the secondary market. Li Ruigang told Tencent Media, which CMC Holdings has a listing plan, but did not disclose more information. Li Chuan said: "A few years later, there may be more than one listed company under the CMC group."
There is also a clear trend throughout the PE investment industry. Chen Hang believes that the current equity market is facing increasingly fierce competition. Institutions who want to enhance their competitiveness must expand the size of their funds and portfolios, both in RMB funds and US dollar funds, so that it can exit from both the A-share market and overseas market. At the same time, there is a need for growth equity funds as well as leverage buyout funds. Moreover, it is a must to invest both in primary and secondary markets.
There are many examples of PEs entering the secondary market, such as Hillhouse Capital and Hony Capital, which recently gained the license to launch its public offering. The benefits are not only that the public equity fund market is much larger than the private equity fund market. There is also a primary-secondary market linkage effect.
"The most important thing about primary-secondary market linkage is risk control and strict information isolation mechanism to prevent insider trading," said Chen Hang.
Tang Xiao-ming, founding partner of WE Capital, a fund focusing on entertainment industry investment, believes there is certain merit in the "industry + investment" model. However, it’s hard to generalize this model because not everyone has the resources and connections Li Ruigang had.
“However, it’s clear that the most competitive investors are no longer those with solely investment banking backgrounds, but instead feature experts from specific industries,” Tang Xiaoming told Tencent Media. “After all, finance is only a way of moving capital around. The key is an understanding of the industry. It’s especially true in the entertainment industry, where people are the main driver behind the success of a business.”