Funding pro specializes in SOEs

But Hony Capital is not content with being a passive investor. "We influence our investment company's strategy and profit model, even though it is an SOE," said Zhao. "We make additional contributions to the company's development and make sure its strategy does not run counter to the nation's policy direction."

In the Zoomlion case, Hony Capital also worked with other investors to help boost Zoomlion's globalization effort, including the latter's 271 million euro ($360 million) acquisition of Italy's concrete machinery manufacturer Compagnia Italiana Forme Acciaio SpA in 2008.

Thanks to its new connection with the Chinese market, CIFA's profit increased in 2012 by 80 percent compared with 2008, according to Gao Zhen, a managing director at global equity private firm Mandarin Capital Partners that joined Hony in Zoomlion's takeover of CIFA.

In 2012, Zoomlion saw its total asset value rise to 88.97 billion yuan from only 4.2 billion yuan in 2005.

During the same period, the company's operating revenue rose from 3.28 billion yuan to 48.1 billion yuan.

The country's unprecedented urbanization drive, actively promoted by the government, continues to generate new opportunities for Zoomlion, Zhao noted. The company is supplying construction machinery to building projects across China in the areas of new cities, new expressways and railways and public infrastructure and utilities.

"Other than in a few sectors of State monopoly and defense, SOEs are expected to be more market-oriented and to prove their efficiency through competition against other companies, both domestic and overseas. "We've done the right thing. Our experimentation in the last decade or so has successfully created such market-savvy SOEs," Zhao said.

Not many financial participants in SOE restructuring have been so content with their results. In 2005, the global PE firm Carlyle Group planned to invest $375 million in State-owned machinery maker Xugong Group for an 85 percent stake. But doubts immediately spread throughout China that the deal was too cheap and public assets shouldn't be sold like that. The deal collapsed.

Another foreign PE firm, Newbridge Capital Investments Ltd, offered 1.24 billion yuan in 2004 for a 17.89 percent of the stake in Ping An Bank, then known as Shenzhen Development Bank, to become the first Chinese-foreign joint venture in the banking industry. This joint venture also experienced conflicts and complaints from both sides.

Hony sees itself as a different story in which it is more flexible by acting more willingly to adapt to Chinese business culture. "Any investor would like to have the controlling power. But Chinese companies don't want to be controlled," Zhao noted.

"But to control doesn't mean you must be the majority shareholder. We are the second largest shareholder of Zoomlion but still have a strong influence," he said.

Hony Capital chooses its deals by examining the people it wants to work with and undertakes careful evaluations. It usually takes as long as three months and many internal debates before an investment decision is finalized. But "choosing the right people, or those you have confidence in, is vital", Zhao said, adding that otherwise the investor could end up in trouble even though the valuation figures reveal no flaws.

If a SOE management team is competent and possesses a good incentive structure it can make a great contribution to the firm's development, said Zhao.

Once a company is considered to be trustworthy, Hony Capital is not only generous in acting as an investor but also goes out of its way to help it in many other ways.

Looking ahead to the next stage of China's economic reform, Zhao said the newly elected leadership in China makes him feel confident, especially in that the SOE reform will enter a new phase. From what he can tell, "Many SOEs are keen to learn new skills, to expand into new markets and to make new changes."

Hony Capital will continue to leverage its past experience in SOE reform, he said.