Frank Yu, founder of healthcare-focused investment firm Ally Bridge Group and formerly head of China Investments at Och-Ziff Capital Management, answers five questions in this video interview with Nina Xiang, host of China Money Podcast.

Q: What is a key industry trend that is overlooked by most people?

A: I would say that everyone tends to focus on healthcare services, especially hospitals, given that demand for healthcare services are very high (in China).

But people are starting to focus more on truly innovative technologies in China, which is a new trend that’s picking up (speed) now.

Q: Describe an ideal company that you would like to invest right now?

A: We are a global healthcare-focused group and we have a lot of target (companies) overseas, which are much more attractive in terms of valuations compared to companies in China.

When we invest in Chinese companies, we seek a specific value-add, which is to help them with access to world’s cutting-edge technologies.

We focus on medical devices, biotech and healthcare IT. There is a big difference between venture growth and buyout deals. WuXi PharmaTech is a great example of a buyout deal. That was a perfect target except that we had to pay rich valuation to take it private, but otherwise the deal wouldn’t happen.

For venture deals, we like to focus on companies with truly innovative and potentially disruptive technologies and products. Otherwise, the company has to be very cheap, so that we can create value out from it.

Q: If you were the Chinese regulator, what changes to existing laws or new laws would you make?

A: The China Food and Drug Administration (CFDA) has made great strides upgrading the regulatory framework and rolling out of new policies in favor of home-grown innovation.

The challenge is how do you accelerate mass population’s affordable access to good drugs and medical devices. This is a big political, social and economic issue.

Q: What is the most difficult investment decision you had to make?

A: Valuation is probably the most challenging, because we are in a very hot field and everyone wants to be associated with healthcare. A lot of hot money from the Internet bull-run has switched to healthcare, making deals more and more expensive.

We decide to walk away (from expensive deals) very early on, because we are not in the game of competing for price.

For healthcare services companies, anything above ten times price-to-earnings (are too expensive for us). But right now, you don’t even think about ten times (P/E) ratio. We are talking about 30, 40, 50 times.

Q: What is the ten-year average return number that will make you proud?

A: We have been able to generate 50% IRR (internal rate of return), and might achieve higher (returns).

I cannot predict too far into the future, but we would like to and have been able to generate well above 25%, which is the average expected return for private equity investors.

Five Questions For Ally Bridge’s Founder Frank Yu