GPs look to adapt to a fast-changing China

"The biggest pain is the economy," Chang Sun, co-founder and managing partner of Black Soil Capital Partners, told the Hong Kong Venture Capital & Private Equity Association's (HKVCA) Asia forum, noting that domestic consumption is connected to GDP growth, and a slowdown in the latter would have an impact on the former.

"We have two businesses - one sells rice and the other potatoes," said Chang, who invests in agriculture-related assets. "Their customers are Uni-President or Want Want in Taiwan. These guys will squeeze you and try to get a lower price, but the cost of production hasn't really gone down and labor costs are increasing."

For Principle Capital, increasing labor costs have demonstrated the need for technology upgrades, particularly in the manufacturing sector. This was part of the rationale for the firm's investment in a robotics manufacturer. Lin-Lin Zhou, CEO and co-founder of Principle, observed that it a shortage of labor wasn't the problem, rather a lack of people willing to work in traditional factories.

"Young people don't want to work in factories any more, they want to work in the new economy," he said. "So you have to consider machines, robotics, as a supplement to human labor. Actually, we have found the cost of robotics has gone down quite significantly."

Bing Yuan, managing director at Hony Capital, highlighted the problem of overcapacity and how this is making GPs look more closely at consolidation strategies. This was the case with Jin Jiang Hotels, a state-backed group in which Hony invested in 2014. "Our previous strategy focused on opening new hotels in China, but now it is really about helping them consolidate," Yuan said.

Jin Jiang ventured overseas to buy Louvre Hotels, Europe's second-largest hotel group, from Starwood Capital, but it has also been active domestically. Towards the end of last year, the company agreed to acquire budget chain 7 Days Group for RMB8.3 billion ($1.3 billion), facilitating an exit for PE investors that had previously supported a privatization of the business.

Overseas investment is part of CDIB Capital International's playbook as a means of hedging the "China risk." Lionel de Saint-Exupery, the firm's president and CEO, said it is possible to find control investments in companies with strong management teams while not paying too much of a premium. There businesses tend to have direct or indirect exposure to Chinese demand.

The GPs on the panel were united in their belief that the internet has made investors to reconsider approaches to traditional businesses, particularly in the consumer space. Potential investee companies must now be considered in the context of online-to-offline integrated retail strategies. It is just one example of how private equity has been forced to adapt - and quickly.

"China changes very fast. We try to brand ourselves as long-term, patient money, but actually you shouldn't be that patient," Black Soil's Sun said. "One, the internet has changed everything. Two, consumer tastes and trends move quickly. Third, government's intervention can make things unpredictable. We can't stress [too much] the timing of exit. If you don't get out, yesterday's hero could become tomorrow's post mortem."

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• Topics
• Greater China
• Expansion
• Buyouts
• Industrials
• Consumer
• Technology
• China
• Agriculture
• manufacturing
• Consumer
• Technology
• Hony Capital
• Black Soil Capital Partners
• CDIB Capital
• Principle Capital
• Growth capital
• buyout