Q&A: CVC Capital Partners’ Hans Wang

Q: Has CVC altered its approach to China given recent regulatory uncertainty in various industries?

A: Long term, we are committed to China – it represents a huge opportunity, and we will continue to invest there. We are currently live on several situations that are China proper or China-related. We have not been impacted by the recent regulatory actions, but looking forward, the environment has changed. This doesn’t mean we won’t invest, rather the level of scrutiny and the level of vetting is going to be at a much higher level. In addition, we are probably going to have to pivot our sector focus and strategy, because the universe of investable sectors has narrowed. We will concentrate on more purely domestic consumption opportunities. And then, in terms of exits, we wouldn’t be looking at anything heavily reliant on the US. Overall, I would describe it as very much a China-contained thesis.

Q: Is there anything you have invested in previously that you wouldn’t invest in now?

A: We have done education before and we wouldn’t be doing it now, although vocational remains a space that supposedly has policy tailwinds, so we would look at that. We want to steer clear of anything that has too much regulatory risk. We are not in the business of making bets on policy.

Q: Some earlier CVC investments in China didn’t turn out as planned because of issues with partners. Is the strategy for partnership deals in China different from elsewhere in the region?

A: Partnership means it is very important to assess and find the right partner. In the past, there were instances where we could have done a better job of assessing the partner, but looking forward, it hasn’t changed our strategy. It just means we need to be more vigilant, which is what we have done with our partnership deals in China. These are not dissimilar from partnership deals we’ve done elsewhere in Asia. A lot of businesses are of high quality, they just aren’t available for control because the family or corporate isn’t selling. The only way you can participate in those businesses is to partner with them. Whether you are 70%, 50%, or 30%, you are effectively partnering with them. There are a few things we agree upfront with the partner: the business plan, changes to management, and exit. There must be alignment on exit, we don’t want that to become a dispute down the line.

Q: Yikang Pharmacy is an example of a recent partnership deal. How did it come about?

A: It’s an area in healthcare that has positive tailwinds, the pushing out of dispensing drugs into pharmacies from hospitals. We map out sectors and sub-verticals, and our team in Shanghai has been following this space for some time. It’s also a fragmented space, and Yikang is a market leader with a good founder. M&A will be a big plank in their growth, but there is also a lot we can do in terms of procurement optimization, pricing optimization in store, and developing in-house e-commerce channels.

Q: Are you also seeing more control opportunities in China?

A: Maybe the pace is not as fast as people were projecting, but we certainly see a fair number of control or joint control situations. Succession is certainly a theme, as well as carve-out or divestment situations. Take-privates is another area we are focused on. Many of the opportunities have yet to materialize and there are reasons for that. For example, a lot of people are saying they can do a dual listing, so they don’t necessarily need to go through the hassle of a take-private. How long is that sustainable as an endgame? I’m not sure. It’s hard to say how many will bite the bullet and do it – companies are feeling their way through it, and everything is evolving in real-time – but I think it will continue to be a relevant theme.

Q: The deal involving advertising and marketing agency BlueFocus Group was control, but unusual in that you bought the international assets of a Chinese company…

A: It’s a unique deal, we spent almost a year cultivating it. Blue Focus remains a 30% shareholder, so we are partners, but they sold control because CFIUS [Committee on Foreign Investment in the US] was making it tough in the US. They didn’t have to unwind anything; it was frustration at being unable to do things they would have liked to do, such as bolt-on acquisitions. They felt it was necessary to bring in a partner to lead the business in a different way, without the overhang of a Chinese corporate, which doesn’t help in certain situations in the West right now. We want to do M&A consolidation and we want to introduce data and analytics capabilities.

Q: Are you working on any similar transactions?

A: There are other situations out there, although CFIUS isn’t a factor in the ones I’ve looked at. It’s more the classic unlocking of value, the divestment of something that is less core. Some of them are assets acquired during the Chinese overseas M&A boom, some are businesses that have grown organically.

Q: You describe deals as China proper or China-related. How does A Bathing Ape fall into the latter category?

A: In that it has China exposure. The company was founded by a streetwear designer in Japan in the 1990s and it was subsequently bought by I.T Group. We had to privatize I.T Group and simultaneously carve out A Bathing Ape where we and the chairman were 50-50. It’s a Japanese brand with global provenance – there’s really only Supreme and A Bathing Ape in the luxury streetwear space. It’s huge in Japan, the US and Europe, and China is one-quarter to one-third of the business.

Q: CVC has a dedicated regional team within the broader Asia team. How does it function?

A: The best way to think of it is Greater China ex-domestic China, plus anything with an international or cross-border element. The lines are not bright red. We are origination-focused, so the team that originates a deal leads it. But there might be crossover with other country teams. We have three sector teams in Asia – financial services, TMT [technology, media, and telecom], and healthcare – and they have close ties to sector teams at the global level. Anyone who directly participates in a deal gets a share of the economics, based on their contribution, irrespective of where they sit.

Q: Is the Growth Partners team or the Strategic Opportunities team, which focuses on longer duration investments, active in Asia?

A: They are currently focused on the US and Europe, but never say never. There are instances where we find an opportunity that doesn’t fit our profile and we would ask the Strategic Opportunities team whether they would be interested in looking at it, but no triggers have been pulled yet.

Q: What are CVC’s competitive advantages in Asia?

A: We are very local, with nine offices in the region and guys on the ground who are really tapped into the local business community. That’s something we’ve done well, and a hallmark of CVC globally. The partnership strategy has worked well across our key regions – Southeast Asia, Japan, and China/regional, and we are starting to see the same thing in India. And we need to know our core sectors – consumer, financial services, healthcare, TMT, and business services. I think it’s important to leverage the global platform and expertise. Our partners want to know what we can bring to the table, whether that is experience from similar deals elsewhere or industry advisors and experts. For example, we’ve done well in healthcare globally and we see that in Asia as well.

Q: Why do you think the partnership strategy worked well in Asia?

A: It comes back to fundamental analysis and due diligence. Partnerships live and die by the quality of the partner. You can have a good business but a terrible partnership, and that could go very badly. You could have a mediocre business but a great partner or management team, and it could still go fine. Assessing partners is an art, not a science. When we vet deals, a lot of senior people meet those partners we work with, so everyone pitches in and helps form a view. There is no hard and fast formula, but a lot of our partners are repeat partners.

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• Topics
• Greater China
• GPs
• Buyouts
• Expansion
• Consumer
• Asia
• China
• CVC Capital Partners