Profile: Vision Knight Capital’s David Wei

When David Wei left his position as CEO of Alibaba Group’s then Hong Kong-listed B2B marketplace in 2011, he didn’t consider launching a business of his own: there was little chance of topping Alibaba in terms of size and sexiness.

But the prospect of backing a series of start-ups that together could form a portfolio worth billions of dollars was enticing. Later the same year, Wei launched Vision Knight Capital, a private equity firm dedicated to investing in internet-enabled consumer and B2B services companies in China.

A decade on, Vision Knight has accumulated $3 billion in assets under management across four funds, two US dollar-denominated and two renminbi-denominated. These vehicles have invested in – and in some cases exited from – businesses with an overall market capitalization well above the $100 billion target Wei set for himself at the beginning.

The Vision Knight strategy is described as Bain Capital plus Bain Consulting but executed by a single team. Wei believes this approach has enabled him to leverage his operational expertise from Alibaba and offer portfolio companies more than just capital.

“Many start-ups achieve significant scale in a short period of time, yet they lack accumulated management experience,” he explains. “The most valuable inputs to them are strategic consulting and management consulting. This is what we are good at. Even before we invest, we offer consulting services to help businesses improve their organization and operations."

Wei refers to this model as “freemium” – the consulting is free of charge, but it leads to a premium investment opportunity in a known quantity. The start-up is upfront about its pain points, as part of the consulting process, and this amounts to due diligence shortcut for Vision Knight. Typically, these would be exclusive opportunities, the absence of competition implying a reasonable entry valuation.

Alibaba and the rest

Freemium has served the firm well with internet companies, and Wei can claim to have learned about the industry dynamics from one of the local progenitors.

He first met Jack Ma in 2004 at a Harvard Business School event for Chinese entrepreneurs, and the pair hit it off. At the time, Wei was CEO of UK-headquartered home improvement chain B&Q’s China business. Revenue was approximately RMB8 billion ($1.25 billion), the same as Alibaba’s C2C Taobao platform.

Asked by Ma how long it would take to double sales at B&Q China, Wei said three years. Ma then bet him that Taobao could achieve this target in three months. This insight into the power of e-commerce – or at least the bullishness about its prospects – intrigued Wei and ultimately set the scene for his arrival at Alibaba in 2006.

Prior to B&Q China, Wei was busy forging a career in financial services. A graduate of Shanghai International Studies University, his first job was as assistant to the president at Shanghai Wanguo Securities, then China’s largest broker.

Shanghai Wanguo fell from grace in 1992 after taking a massive short position in government bond futures without sufficient collateral to make the margin. The so-called “327 incident” resulted in a loss of RMB1 billion, a jail term for the CEO, and a forced merger with a rival to form Shenyin & Wanguo Securities.

Wei moved on, enjoying a stint in London with Coopers & Lybrand – immediately prior to the merger that created PwC – before returning to Shanghai as a founding member of state-backed investment bank Orient Securities. The firm was a rapid success story, its headcount growing from 20 to 200 within two years, but Wei soon became more interested in building businesses than banking them.

“When you are an investment banker and help companies pursue IPOs, you think that you know everything, but it’s all on the surface,” he observes. “You don’t have operational experience.”

He joined B&Q China – a subsidiary of UK-headquartered Kingfisher but now owned by local retailer Wumart Group – as CFO in 2000. Within two years, he was named acting CEO. Securing the job on a permanent basis a few months later, 31-year-old Wei became the youngest leader of any Chinese Fortune 500 company. B&Q China grew to become the country’s largest home improvement retailer.

Wei’s star continued to rise at Alibaba. In the mid-2000s, with consumer-facing internet platforms growing but commercially unproven, B2B marketplace Alibaba.com was the group’s main profit center. A $1.5 billion Hong Kong IPO came in 2007.

Four years later, events took a turn for the worse as Alibaba.com was caught up in a fraudulent transaction scandal. Wei made efforts to tackle the problem but ultimately chose to take responsibility for the “systemic breakdown” and resign.

Feelm inside

The move into private equity was followed by a swift fundraise. Vision Knight closed its debut US dollar vehicle on $250 million in 2012, with high net worth individuals and family offices accounting for three-quarters of the corpus. Ma backed Fund I and re-upped for Fund II, even as Vision Knight’s LP base swung towards institutional investors. That vehicle closed on $550 million in 2014.

The private equity firm’s investment pace has been deliberately controlled, so the consulting angle can be properly executed. It has backed approximately 100 companies to date, with 80% of deals following the consult first, invest later model.

Wei points to Smoore International as an example. Founded in 2009, It company has become the world’s largest manufacturer of vaping devices, serving traditional tobacco players like Japan Tobacco, British American Tobacco, and R.J. Reynolds, as well as e-cigarette brands such as Relx and Njoy. Its market share was 16.5% in 2019.

Smoore went public in Hong Kong last year, with Vision Knight as the only external institutional investor, and now has a market capitalization of more than HK$207 billion ($26.6 billion). Prior to the IPO, there was concern internally that the company’s strong profit margins – it generated RMB22.2 billion in 2019 with a net margin of 28.6% - would cause disquiet among its customers.

Smoore had never sought to raise private funding prior to Vision Knight’s approach. It was sold on the consulting expertise, which Wei led personally.

The private equity firm noted that Smoore had strong R&D capabilities with more than 700 domestic and international patents to its name. Its Feelm technology, developed entirely in-house, represented the top-end of atomization technology and was used by most mainstream vape brands.

Vision Knight suggested that Smoore add a “Feelm inside” logo to all these third-party products, solidifying the company’s brand recognition and value – and perhaps helping justify its profit margins in the process. The strategy was inspired by Intel Corporation, whereby computers containing its chips display “Intel inside” on their casings.

“We are entrepreneurs and we have experience solving problems. The question was how should the company be positioned. Most people associate it with Foxconn, but we thought Intel plus Foxconn was more appropriate,” Wei explains. “Whether the end-customer buys Relx or Njoy, the technology behind the vaping device is the same, hence ‘Feelm inside.’”

Smoore has since gone from strength to strength. Net profit hit RMB2.9 billion in the first half of 2021, up 128% year-on-year, while the net profit margin reached 43%.

Building a business

Vision Knight’s consulting projects take at least three months. The longest to date is two years, for Anker Innovations, best known for its phone chargers, power banks, and earbuds. Three rounds of consulting led to three proprietary investments.

The private equity firm also prioritizes exits. One of the first books Wei read on entering the industry was “King of Capital,” which tracks the rise of The Blackstone Group. He began an intermittent dialogue with Stephen Schwarzman, Blackstone’s co-founder, chairman and CEO, in 2012. One of the latter’s key messages was that a PE firm cannot be successful without well-executed exits.

Vision Knight has introduced a 5/8 rule for exits: by year five of an eight-year life, a fund should have achieved distributions to paid-in of more than 1x, or returned the principal. Each Vision Knight vehicle has achieved this target. The firm holds exit meetings twice a month where it decides whether the time is right to sell portfolio companies that have already gone public.

“Exits are our top priority,” Wei adds. “For us, it’s exits, portfolio management, investments, and then fundraising.”

Even as its core strategy remains firm, Vision Knight has moved with the times. For years, it resisted raising renminbi funds, put off by the five-year lifespan preferred by many local LPs. Wei believes it’s very difficult to make good investments in such a short timeframe. Eventually, investors were willing to back a 10-year vehicle, so the firm felt comfortable enough to proceed. A second renminbi fund is currently being raised.

Vision Knight’s investment scope has also broadened from consumer internet to hard technology, a transition that began in 2018. “We felt that the online traffic dividend bonus had ended. Moreover, hard technology is in line with national policies and can create good returns,” says Wei. “When we support an industry or a company, it must be aligned with broader social benefit.”

The latest step in the firm’s evolution is the creation of a holding company that sits above the funds. This is intended to facilitate the development of a new generation of investors running sub-strategies. For example, Mark Fang has been appointed founding partner of the hard-tech strategy. He will hold a majority stake in the GP entity behind the funds, with Vision Knight in the minority.

It constitutes a significant restructuring, but one Wei regards as being in keeping with his entrepreneurial instincts. A career in private equity was not planned at the outset – although it was considered as early as 2005 – but he believes that experience in investment banking, consulting, and running large operating businesses like B&Q China and Alibaba stands him in good stead as an investor.

There have, and continue to be, various external influences as well. Wei highlights studying Clayton, Dubilier & Rice (CD&R) and the US-based firm's highly operational approach, which includes signing up former CEOs as operating partners. He is also a fan of Jack Welch, the ex-General Electric CEO who is now among the names on CD&R’s roster. Welch's book, “Winning,” had a profound impact on Wei.

“The book is about being successful, but it’s about more than being successful in your own career,” Wei explains. “More importantly, you help others prosper.”

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• Topics
• Greater China
• Technology
• Consumer
• GPs
• China
• Vision Knight Capital