China GPs underline merits of sector focus

"Entrepreneurs not only need capital, but also advice from us. This is the time that strategic guidance has become critical; this is also the time for us to stay even more disciplined in value creation," said Kevin Zhang, founding partner at Ascendent Capital Partners. "In the next few years, both macro and capital markets will remain volatile. But there is still hope for Chinese entrepreneurship and for resilient [performance] in the private sector. Sector focus is increasingly important - a lot of research and thought should be devoted to specific sectors."

Ongoing structural change in the economy is also expected to generate investment opportunities, with the longstanding drivers such as urbanization and industrialization joined by digital evolution. Lei Zhang, chairman and CEO of Hillhouse Capital, said that, with this in mind, his firm is willing to remain involved for the long term once it has found the right sector and the right company.

"We recognize there aren't many high-quality businesses available. When we find them and get them, we want to partner with them at all stages," said Lei. He cited travel portal Qunar as an example. Hillhouse invested in the company during the early VC rounds and held on to a stake when Baidu came in as a majority investor and when Qunar eventually went public. The company merged with larger industry peer Ctrip last year and Hillhouse remains a shareholder in the combined entity.

Travel is one of several segments in the services sector - alongside healthcare and media and entertainment - that China-focused GPs are optimistic can generate the most attractive deal flow.

Alex Zhang, founding partner at Hosen Capital, highlighted the merits of the food products and services space in particular, noting that it accounts for the bulk of domestic consumption but is still challenged by quality and safety issues. "If you look at food quality and safety, we can't only focus on consumer brands, but also supply chain. That's a really an important area for private equity investors to address," he said.

In healthcare, sector specialist Ally Bridge Group has observed a discrepancy between public and private market valuations - the latter being higher than the former - and has therefore created different vehicles for each one. The firm's hedge fund has committed more than $300 million to PIPE deals over the last three months, leveraging the same expertise and networks that are prevalent on the PE side, but leveraging the arbitrage between private and public markets. "We've been very active in PIPEs in the three markets - Europe, China and the US - in which we operate," said Frank Yu, CEO of Ally Bridge."

Meanwhile, in other industries China's A-share market continues to trade at a premium to the private market, prompting Chinese entrepreneurs to try and take advantage of this valuation gap by pursing reverse mergers. CICC Private Equity has made four exits from its debut renminbi-denominated fund, two of which have been reverse mergers. Each one generated a 7x return, said Cathy Zhang, managing director at CICC Private Equity.

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• Topics
• Greater China
• Expansion
• Buyouts
• IPO
• Consumer
• Technology
• China
• TMT
• Hillhouse Capital Management
• Ascendent Capital
• CICC
• Ally Bridge
• Hosen Capital
• HKVCA