AVCJ Awards 2022: Deal of the Year – Mid Cap: Honour Line Shipping

Relatively few China-focused private equity investors exclusively target middle-market control deals. For K.C. Kung, founder of Nexus Point Capital, which does operate in this area, the main competitors are strategic investors. Nexus Point’s playbook involves moving faster than its rivals and offering more friendly terms regarding founders’ shares and other issues.

Sometimes, the private equity firm’s proposal is strong enough to convert an auction process into a bilateral discussion. This is what happened with Hong Kong-headquartered freight forwarding business Honour Lane Shipping (HLS), which led to the acquisition of a 75% stake from the founders in May 2022.

Bloomberg reported seven months earlier that HLS was contemplating a sale at a valuation of approximately USD 500m. According to Kung, the price paid is lower than that. Indeed, Nexus Point wasn’t even the highest bidder; it won out by establishing strong chemistry with the HLS founders.

“A key factor in any potential acquisition is the target’s management. Their ability is very important; whether they are good partners is also very important. If we cannot communicate effectively with them, this would certainly impact the development of the business,” he explained.

“The three founders of HLS are great partners – they cooperate seamlessly with each other, and they communicate very well with us. Our professional ethics and beliefs are similar."

This was the first deal from Nexus Point’s second fund, which is said to be in the market with a target of USD 700m. (Kung declined to comment on fundraising.) The commitment from the fund was about USD 70m and three LPs topped up the equity piece with co-investment. There was also debt financing.

The HLS founders retained a 25% interest and will continue to direct the business during Nexus Point’s tenure. They are likely to exit at the same time as the private equity firm, in about five years, said Kung.

A niche play

Founded in 1997, HLS is one of the six largest non-vessel operating common carriers (NVOCC) active in the Asia-US trade lane. It acts as a transportation intermediary or a service provider, typically coordinating logistics between manufacturers and brands and moving goods from factories to distribution centres. The company doesn’t maintain its own fleet, which appealed to Nexus Point.

“Because the business is asset-light, it is not heavily affected by the shipping price fluctuation. It earns a certain commission no matter the price rises or drops. It also a better cash flow model: it can grow volumes rapidly without large investments in working capital,” explained Calvin Chen, a managing director at the private equity firm.

While large players like Walmart maintain direct relationships with third-party logistics providers, small and medium-sized enterprises prefer to use NVOCCs because these operators consolidate dozens of small orders and extract more favourable prices from carriers. NVOCCs are also known for their flexibility, working with multiple carriers and therefore offering more choices to customers.

NVOCCs handle about 60% of all goods shipped globally, and Kung believes this share hasn’t changed much in the past decade. Among those targeting the Asia-US ocean shipping route, Nexus Point found little difference between the top players – HLS, in sixth, is about 30% smaller than the leading player.

The private equity firm identified HLS through a combination of top-down sector research and bottom-up work that leveraged its networks within the freight forwarding industry. Several other opportunities were assessed and discarded before the concerted pursuit of HLS began.

“The most important issue is the scale – not the scale of your overall revenue, but your position in a single trade lane. Carriers choose their partners for each route based on scale. A freight forwarder with large scale also gets more favourable prices from carriers,” said Kung.

Other factors include whether the freight forwarder has a stable relationship with all major carriers on a certain route, as opposed to just one or two, and whether its customer base is so concentrated that it poses a risk. For example. if a freight forwarder only serves certain sectors, it might be adversely affected by US-China trade tensions.

Nexus Point approached HLS with a view to using it as a platform investment. There are likely to be bolt-on acquisitions of smaller operators, which should bring down the overall valuation multiple and make the business more diversified. Some targets the private equity firm passed on can now be revisited if they offer attractive synergies. Air freight, where HLS has a relatively small presence, is a priority.

“Air freight and ocean freight are complementary because they often serve clients that have both ocean freight and air freight needs. The two businesses, therefore, have a natural synergy,” said Chen. He added that bolt-on acquisitions may also enhance coverage of certain ocean shipping routes within the US-Asia landscape.

Driving digital

In addition to M&A-driven growth, Nexus Point wants to improve performance through digitalisation. It has already helped HLS hire a chief technology officer to upgrade customer-facing and back-end IT systems. Meanwhile, a CFO has been brought in to work on financial planning and analytics capabilities.

“Digitalisation is twofold. First, it is an upgrade of internal management – the experience-driven decision-making process should become data-driven. Second, the freight forwarding business is very traditional with paperwork and phone communications still dominant. Moving online is a big trend,” said Kung.

“After all, efficiency is key in logistics. If you can remove frictions and improve speed, you can provide services at lower cost, which is most beneficial to your customers.”

Nexus Point also wants to broaden the HLS customer base by adding more cross-border e-commerce players. Shipments tend to be small packages comprising goods of mixed nature. While a US department store chain may order 2,000 chairs in a single batch, individuals shopping online are more likely to accumulate a range of personal and household products in their baskets.

The challenge for HLS and other freight forwards is how to consolidate these packages into single containers to realise high shipping efficiency. The company is looking to establish partnerships with cross-border e-commerce platforms to address these issues.

Pictured: Wanda Xu of Nexus Venture Partners at the AVCJ Awards

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• Topics
• Greater China
• Support services
• Industrials
• Buyouts
• Hong Kong (China)
• Logistics
• Nexus Point Partners
• AVCJ Awards