Q&A: Investcorp's Duncan Zheng

Q: What is the scope of Investcorp’s China presence?

A: We have a technology fund of $500 million, a consumer fund of $500 million, and a healthcare fund that was established this year and has raised $100 million. We are preparing to go into a second phase with three new funds across technology, consumer, and healthcare. We hope to follow up with bigger vehicles as we prove our strategy and value creation credentials.

Q: To what extent has COVID-19 created new opportunities?

A: The confidence we have in Asia is not opportunistic. It’s a long-term conviction based on five years of detailed work on the ground and a very concerted and strategic effort to have firsthand insights and market reach in the region. We’ve underscored that by having already invested in the region for the last three years, so our views are also based on a lot of discussions with our portfolio companies and the large institutions we work with in the region.

Q: How has the pandemic impacted activity in the region?

A: We were in a fortunate position in that when the pandemic hit and the lockdowns occurred, we already had a team in place. That has given us real-life data and reporting about what’s happening on the ground, how people have been reacting, and what measures have been put in place by governments. It has also given us timely insights into how quickly things recovered in terms of consumption and daily activities when lockdowns were over. We have been able to identify the companies and sectors where the pandemic has not really had a negative impact. So, it has really and strengthened our conviction in consumer and healthcare and accelerated our investment activities.

Q: What has been the progress so far?

A: We’ve announced two investments in healthcare and one buyout in the consumer space. These are businesses that have not really been negatively impacted by the pandemic. On the consumer side, we acquired [Hong Kong supermarket operator] City Super with China Resources Capital. We are one of few players in the market able to do control buyouts in consumer in China, and we hope to repeat that in the coming quarter or so. Investcorp has 40 years’ experience doing control buyouts and value-add in consumer in the US and Europe, so we’re now looking to project that expertise with various partners into China and Asia.

Q: What are you seeing in terms of valuations?

A: We know many companies are performing well, even in this pandemic year, and the valuations are therefore quite healthy. Our first China healthcare fund targeted secondary opportunities at the beginning of the year when people were fearful and looking for liquidity, so the timing was good. We were disciplined and able to achieve attractive valuations versus what we see on the public side now. We invested in [hospital operator] Lu Daopei Medical Group and [telemedicine platform] WeDoctor. Both companies have exhibited resiliency, and we believe they will be real winners even after the pandemic because demand for what they do is unwavering.

Q: How much competition are you seeing?

A: Investment activity this year is quite healthy for a lot of private equity funds, like us, that have dry powder, particularly in healthcare and the technology space. Competition is always there, but we have a team here locally with years of experience and relationships in the market that we can be flexible and quick. That has given us a real advantage. It is similar on the consumer side. Valuations and negotiations have become very favorable for investors that can act and take control of the situation.

Q: Has the US-China phase-one trade agreement had an impact?

A: We started investing in China before the phase-one was signed and we have continued to invest in the time thereafter, so I don’t think that specific deal has any implications on our strategy overall. The underlying drivers of these businesses are rather independent of the whole US-China relationship because they cater to consumers mostly inside China. Because we focus on technology, healthcare, and consumer, we don’t have to worry too much about global geopolitics.

Q: Isn't decoupling affecting technology investment?

A: There are many views about how fast and to what degree decoupling will happen. We want to invest in companies that are always in high demand, whatever the outcome will be. Specifically, we’re looking at technology through the lenses of 5G and AI [artificial intelligence] because China is the fastest in deploying these technologies in many sectors. We must think about how these businesses will change, what kind of revenue and profit they can generate in a 5G environment, and what will be possible with AI. We look at fundamental demand, regardless of how the geopolitics develop.

Q: How do you describe China’s technology fundamentals?

A: Almost one billion people in China are on mobile phones, and they’re estimated to spend 4.3 hours per day on them, maybe more. That daily activity – business, entertainment, and service – will be considerably expanded when 5G networks are widely available. We’ll focus on early movers and areas where the commercialization, scale, and speed of 5G and AI will be fastest. That’s in line with our strategy globally. Our healthcare and consumer themes stand by themselves, but there will be some overlap investing out of the technology fund. It’s really about understanding the disruption and new business models that will come from using 5G and AI.

Q: Industry 4.0 is also a target area in China…

A: As the labor force ages and labor costs increase, it will be strategically important for China to maintain its leadership in manufacturing globally by catching up in automation. We’re seeing a lot of homegrown companies in robotics, sensors, industrial chips, and software, but they must use the advantages China gives them in 5G and AI to compete globally. China has a very low density in automation compared to the West. We see a lot of interesting opportunities where traditional industrial companies have to make a leap into the next stage of advanced manufacturing. Private equity firms with a lot of experience in these areas in the US and Europe, like us, can help those companies achieve that.

Q: How much does this include mobility?

A: Next-generation mobility is a theme for us. We invested in SenseTime, which is the largest AI company in China, and a lot of their technology is being used for autonomous driving. The mobility thesis is really about where China has to go in terms of increasing road safety, lowering the costs of personal movement, and especially, lowering the cost of moving goods across the country. New modes in terms of drones, autonomous driving, and electric vehicles will come into play. China will probably be a global frontrunner in terms of developing technology in this space. 

Q: What is your plan in fintech?

A: This is another area where we share the knowledge base from our colleagues in the US and Europe. For China, we would like to develop a pipeline that goes beyond e-payments, which is pretty much a set thing with companies like Ant Group. We’re thinking of diving deeper into subsectors like software for insurance companies, AI for credit analysis, default protection, and financial risk management. A big area in China coming up is fintech for asset management. Even though China is leading in e-payments, AI-enabled services in terms of asset management are still only a fraction of what they are in the West. There will be more platforms to manage government and corporate money and pension funds and to enable renminbi investments overseas.

Q: What risks are you monitoring in your China expansion?

A: This year has taught us is that things cannot really be predicted anymore with any certainty. When the pandemic started, people thought it was very bad to be in China, but now, it turns out to be a very good place to be. A lot of conventional thinking no longer applies, so the risk really comes from not having optionality and flexibility. With our existing setups in the US, Europe, the Middle East, and now Asia, we have optionality to increase and decrease asset allocations across the globe. In China today, we can move between consumer, technology, and healthcare in the private equity space, which is already quite good variation. But in the long run, we will have to build more capabilities in credit, real estate, hedge funds, and the renminbi market. We need to replicate the business lines we have globally in China. That will take 5-10 more years, and I’m looking forward to that, but it’s one step at a time.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Expansion
• Buyouts
• Healthcare
• Consumer
• Technology
• GPs
• China
• Investcorp