Suda Electric Vehicle Company: Private Equity Investment in China

In March 2013, the Shipston Group, the family office of billionaire industrialist Michael D. Dingman, was considering a private equity investment in the SuDa Electric Vehicle Company (SuDa), a rapidly growing maker of electric bicycles (e-bikes) in the People's Republic of China (PRC). This field-based case explores the differences between investments that are funded through a family office compared to a more traditional committed fund. Shipston began investing in the PRC in 2005, focusing on China-for-China investments, and in sectors that would benefit from the continued expansion of the Chinese middle class. Over the past decade, the PRC had experienced rapid growth in the number of individuals moving from the rural areas to the cities in search of better employment. As a result, the cities had grown much larger, often necessitating long distances between an employee's residence and place of work. The dual trends of urbanization and industrialization had also resulted in heavily polluted cities and an overwhelmed public transportation system. E-bikes provided an affordable and energy-efficient means of transportation that appealed to this new group of urban settlers. After several rounds of due diligence, Shipston is evaluating whether it should invest CNY37.8 million (USD6.0 million) for a 10% equity stake in SuDa. The case provides an analytical exercise where students are provided a forecast model of the expected cash flows to the SuDa investment and asked to evaluate whether the investment can meet Shipston's 20% return requirement. In order to evaluate the investment, students must construct equity residual cash flows and estimate the internal rate of return for the investment.This case has been taught successfully in a second-year MBA elective in private equity and can be used in other courses focusing on valuation. The students should be familiar with basic valuation techniques, including equity residual cash flow analysis. The case can also be used in courses on international finance to discuss the differences in the business environment between the PRC and other developed markets. Excerpt UVA-F-1766 Rev. Jul. 5, 2017 SuDa Electric Vehicle Company: Private Equity Investment in China In March 2013, the cold of winter of Beijing was about to give way to spring. Winston Wang had just gotten off the phone with Alex Chen, the owner of the SuDa Electric Vehicle Company (SuDa). Wang, after graduating with an MBA from a top U.S. university and a few job stints overseas, had returned to his home country as an investment manager with the Shipston Group (Shipston), a family office founded by billionaire industrialist Michael D. Dingman. The strong economic growth of the People's Republic of China (PRC) had attracted capital from foreign private equity (PE) firms, but finding good investments had often proven elusive. In the “hot” industries like technology, pharmaceuticals, and natural resources, capital was no longer scarce and the competition was intense to invest in good target companies. Also because of the more regulated nature of the PRC's business environment, foreign investors frequently found themselves with less influence over the target company's management and business compared to investments in more developed markets. As a family office, Shipston was able to take a longer-term view of an investment's potential future growth and value compared to PE firms organized as committed fund-limited partnerships. B