We believe the coming decade will be marked by an emergence of individuality, a shift from savings toward consumption, and government policies that support the growth of a strong consumer-led economy. Managing these changes is a challenge for the consumer businesses that we target for investment.

The recent slowing of growth, in addition to scarcity of credit, has resulted in the need for a different approach to managing consumer businesses. Businesses solely reliant on growth will face particular challenges; no longer will all boats be supported by rising tides. We are entering a phase of development where robust management processes are necessary at every level. Top-line growth must be driven through better distribution and product offerings, not simply through discounting. Efficiencies must be generated through more aggressive supply chain management and stronger human capital.

Energy and talent that entrepreneurs and founding shareholders brought to their businesses must now be complemented by professional management with the necessary skills and clear decision making processes. Many companies will continue to build strong professional management teams and delegate accordingly. We anticipate that others will turn to Lunar as a solution, in which we offer fresh management talent, streamlined decision-making, and a win-win partnership with shareholders facing generational, succession or other issues. We believe that we can do our job best as investors when we position ourselves to provide a solution to these challenges and create a fresh new wave of growth and opportunity.

We are confident that our processes are the best way for us to deliver value and create the platform for further entrepreneurial growth across a growing and increasingly diverse set of companies. Many of the same business processes we apply in our Yeehoo baby wear business are directly applicable to Peekaboo, and influence how we think about managing Yonghong or expanding Joysun’s product offerings. Regardless of the industry, the challenges we face during product development, distribution, marketing, supply chain management, logistics and human resources share many similarities.

We also believe that these processes allow us to deliver the transparency necessary to make informed decisions, generate realizations, and serve as the best possible fiduciaries for our partners, which have been hallmarks of Lunar Capital’s culture. We understand that we are custodians of capital with a responsibility to ensure compliance, best practices and an ethical work culture, all of which we take very seriously.

We are pleased to report our progress year-to-date in 2014:

·         We have now generated full or partial exits on more than 75% of our historical investments. Realizations can roughly be classified as 55% Trade Sales, 30% IPOs and 15% recapitalizations or other distributions of profits. We believe this balanced mix of realization proceeds through multiple channels is a differentiating characteristic of our investment strategy, and demonstrates the resiliency of our businesses and the resourcefulness of our professionals.

·         Distributions in our most recent two funds continue to outpace our peers despite the challenging environment for IPOs in China. To the best of our knowledge, LCP-II and LCP-III both lead their vintages in China.

·         We began exiting two investments that are nearing the end of our investment process. This resulted in partial realizations in WH Group, now the world’s largest pork processor, and Yunnan Forestry, our timber and wood-related products business.

·         We generated an additional two partial exits through bringing on board minority investors that we believe will be of substantial strategic benefit. This includes the sale of a minority stake in Little Star Brands Group to one of the largest department store owners in China, and the sale of a minority stake in I Pinco Pallino to one of China’s most famous international movie stars.

·         We distributed substantially all of the proceeds realized from the above four transactions, maintaining our commitment to deliver returns in a timely manner, favoring distributing cash versus increasing the perception of unrealized value.

·         In all cases, we believe that our operational involvement has been a key driver of what we were able to accomplish. We have observed in our own portfolio that investments with the highest relative degrees of control have generally performed better and benefited from more exit options, with less risk. We remain convinced that operational value-add is our best way of driving investment performance.

While the past six months in China have largely been characterized by reports of slowing growth and politics, we see China re-balancing towards a healthier and more sustainable economy. Whether overall growth rates are surging higher in the 8-10% range, or merely robust around 6 -7%, there is clear indication of a strong shift toward domestic consumption driven by the rise of the Chinese consumer. Policy makers are supportive of these objectives, and reforms are well underway. With these powerful trends in place, we are confident that investing in well-positioned consumer businesses and helping them with intensive operational value-add will yield success as capital markets continue to liberalize, the IPO markets reawaken, and our investment strategy benefits from substantial tailwinds.