Q&A: Ocean Link's Tony Jiang

Q: What was the rationale behind establishing a sector-focused fund?

A: In 2006, when I joined Carlyle, we would spend six months on a deal and see almost no competitors. Now it has become much more competitive with increasing amounts of capital available for deployment, whether US dollar or renminbi. At the same time, companies are facing more complicated operating environments. There are two questions. How can a private equity firm differentiate itself from others in the market? And how do entrepreneurs choose their investors? Being sector-focused is the answer to both. It allows us to build a competitive edge and also bundle operating capabilities based on that sector expertise.

Q: And why travel and tourism in particular?

A: It is part coincidence. At Carlyle, we invested in several travel-related companies, so I built up a bit of a network. Ctrip was also willing to be an anchor investor in the fund. Another important consideration is how much money people spend on travel. How much do they spend on e-commerce? Probably a few thousand dollars a year. I think they spend much more than that on travel, and that’s excluding business travel, and they will continue to spend more money and time in this sector as part of the trends in consumption upgrade whereby people buy more services and experiences versus physical products. The travel sector is as big as e-commerce and the growth rate is similar. A lot of private equity and venture capital firms target e-commerce and TMT [technology, media and telecom], but few have a dedicated focus on travel.

Q: How important was Ctrip to the fundraise and does it get preferential treatment?

A: The fact that Ctrip invested $170 million across our US dollar and renminbi funds was an endorsement, and it gave some of the other LPs the confidence to invest. Ctrip has three roles in relation to Ocean Link. One, it is an anchor LP in the fund. Two, because it is an anchor LP and because of its market position and sector knowledge, it can help us in many of our investments. In exchange for that, Ctrip has a small minority stake in the GP. Three, the chairman and founder of Ctrip, James Liang, sits on our investment committee. But we are still an independent private equity firm. We make investments based on making money for our LPs rather than Ctrip’s strategic interests. James has one vote out of four on our investment committee, he has no veto right, and if there is a conflict of interest with Ctrip he would excuse himself from the voting process.

Q: Is there any crossover between Ctrip and Ocean Link in investment strategy?

A: Ctrip’s investments tend to relate to its core business as an OTA [online travel agent] and it tends to want control. The acquisitions of Skyscanner and Trip.com complemented the OTA business and directly relate to the strategy of international expansion. They are strategically-driven while we are financially-driven. While we occasionally seek control deals, most of our investments are for minority stakes. Occasionally we work together – such as eLong, which was a take-private transaction we did with Ctrip and Tencent. Ctrip might also refer deals to us that don’t fit its strategic goals but are potentially good financial deals. Could we compete? Theoretically yes, but it hasn’t happened so far.

Q: We have seen the large internet companies have expanded into different technology-enabled verticals. Is travel harder to enter than others?

A: We think about the travel sector in terms of online and offline components. Of our 10 portfolio companies, half are online businesses and half are offline. However, even for an online player in the travel space, you not only need the online technology component but also strong customer service capabilities and supply chains. It takes time to build these up, which is why it is harder for large internet companies to expand into travel directly. The other challenge for small or start-up internet companies is the relatively low frequency of travel activity – most Chinese travel only two or three times a year. A new start-up must spend marketing dollars to acquire customers and then try to make money from them through that consumption cycle. To be successful in the travel sector, a technology company needs a unique advantage in terms of user acquisition or it is very difficult to cover acquisition costs due to that low frequency. For example, within our portfolio, Mafengwo – the Chinese equivalent of Tripadvisor – uses content as a form of user acquisition. It also has sophisticated supply chains and customer support capabilities.

Q: How flexible is Ocean Link as a capital provider in terms of size and stage?

A: We invest across stages and sizes.  The US dollar fund is $300 million, and the renminbi fund is aimed at a similar size, so we tend to take significant minority stakes of 10-30% with board seats and meaningful shareholder rights. Three of our 10 investments are early-stage, four are growth-stage, and three are late-stage. But even for early stage deals, it’s still a private equity approach: we know the sector well, we don’t expect to lose money on early-stage deals, and we expect to add tremendous value through our operating capabilities to early-stage companies.

Q: How broad is your exposure within the travel sector? 

A: If you break down the travel sector, there are a lot of related areas or sub-sectors. In addition to lodging – and that could be traditional hotel businesses or Airbnb-style shared accommodation – transportation is another very large vertical. And then there is destination services and entertainment, shopping, tax refunds, travel-related insurance, technology companies that improve the efficiency of OTAs and travel supply chains. Most of these sub-sectors benefit from the significant growth of travel demand, and we aim to pick up the top players in each one.

Q: As China becomes more buyout-oriented, will we see more sector specialization?

A: We may see both trends, but they are not directly correlated. The increasing availability of control deals is partly a result of the increased amount of capital GPs must deploy. At the same time, this increased amount of capital changes the competitive dynamics, so private equity firms want to be more focused and build sector teams to create a competitive advantage. If you look at the US, the large firms already have sector-focused teams and they will likely replicate this approach in Asia. Sector specialization will be a theme but encompassing different approaches and practices.

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• Topics
• Greater China
• Consumer
• GPs
• Fundraising
• China
• Ocean Link
• The Carlyle Group
• TMT