Deal focus: KKR eyes O2O home services expansion

Competition at the larger end of China's internet industry has in recent times been characterized as an arms race: the leaders in a particular segment offer huge subsidies to attract customers and build market share. In many cases, Alibaba Group has been on one side of the battle lines and Tencent Holdings on the other.

Mergers this year in the online-to-offline (O2O) services space - Didi Kuaidi and the impending Dianping-Meituan union - suggest the dynamic is now changing. The recent $300 million investment in 58 Daojia, the O2O local services platform of classifieds site 58.com, offers further evidence: While Tencent is a major shareholder in 58.com, the funding round for the subsidiary is led by Alibaba, alongside KKR and Ping An Group.

"They realize that the internet market - especially O2O - is going to be a big opportunity for everybody. Instead of competing and investing a lot of cash we see them agreeing to work together," says Lane Zhao, a director for private equity at KKR. "Having them both involved [directly or indirectly] in 58 Daojia is very meaningful for the company strategically."

58 Daojia was set up in September of last year, and although the recent investment is described as a Series A round, 58.com has invested a significant amount - hence the post-investment valuation of $1 billion. Additional capital from third parties was seen as essential for the business to realize its potential.

The company provides information on and access to offline services such as cleaning, moving, babysitting, and beauty care in approximately 30 cities in China. The idea is that customers can connect directly with nearby independent service providers who can travel to their homes.

Zhao estimates the market was worth $180 billion nationwide in 2014 even though the penetration level is low compared to more developed Asian markets. It is also a highly fragmented market, dominated by countless small-scale players that provide inconsistent levels of service.

Online platforms can consolidate in a way that offline players cannot. The individual service providers also stand to benefit: they manage their own time, take on more customers, and pay the platform a 25-30% commission compared to the 60-70% taken by offline establishments that have higher fixed costs to cover.

58 Daojia's objective is to offer more services in more cities. Zhao accepts that subsidies are required to get traction in new markets, but notes that 58 Daojia's burn rate is far lower than that of some other players in the O2O space in recent years.

"58 Daojia is number one in each of the service categories in which it operates," he adds. "Our main competitors tend to be smaller players in different categories; we think it would be difficult for other players to become large enough to compete with us in the near term. We think there is the potential to build a platform as large as Dianping-Meituan or Didi Kuaidi."

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• Topics
• Expansion
• Technology
• Consumer
• Greater China
• China
• Growth capital
• TMT
• Consumer
• KKR
• Alibaba Group
• Tencent
• Ping An