Investors advise caution in face of crazy valuations - AVCJ Forum

“Sooner or later there will be a downturn, and we don’t know where it will come from,” said John Lindfors, a managing partner at DST Global. “The critical thing is making sure companies have enough resilience in their business and have sufficient financial resources.”

DST started investing in China seven years ago and the country now accounts for 45% of total capital deployed, compared to 35% for the US and smaller allocations for Europe, India, Indonesia, and Brazil. The firm specializes in late-stage deals involving leading consumer internet companies, which puts it at the heart of the debate about valuations, but these concerns are relevant to all investors.

Warburg Pincus makes growth investments globally, including exposure to China’s technology sector. Julian Cheng, the firm’s co-head of China, raised the possibility of a correction being accompanied by some kind of decoupling expressed through a sharp divergence in the fortunes of different companies.

“It’s about finding good companies and management teams and finding growth that is interesting,” Cheng said. He believes Warburg Pincus’ model of local investment teams bound together by a global platform helps in this respect by facilitating knowledge-sharing between industries and markets.

DST has a similar structure. Lindfors noted that the ability to understand companies in detail, based on a lot of due diligence and thematic research, helps it get comfortable making relatively large bets. The firm came under scrutiny in 2009 when it backed Facebook – with numerous market watchers suggesting the deal was overvalued – and it has continued with other investments.

“If you know you are coming into companies that are seen as overvalued, it comes down to how you get comfortable with the growth projections, so you can underwrite the deal and get a good return,” Lindfors said.

In-depth engagement with a portfolio company and its business model is especially important in technology. And China is increasingly a global reference point for business innovation, acting as a leader rather than a follower in areas like online-to-offline services and digital payments. “There is a lot less that is comparable in a developed markets context,” Cheng observed.

Frank Su, a senior principal at Canada Pension Plan Investment Board (CPPIB), which has backed DST and Warburg Pincus, added that the transition in China isn’t just about a movement from mass manufacturing to innovation, much of it services-oriented. The market has also expanded in size and scope, with more importance attached to user numbers and speed of capture. 

“There are a lot of interesting opportunities in growth sectors, but you have to select the right assets,” Su said.

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• Topics
• Greater China
• Expansion
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