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  • Greater China

FOMO is the biggest risk for China investors - AVCJ Forum

  • Jane Li
  • 21 March 2019
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The best way for private equity and venture capital investors to manage their China risk is to not deploy capital if they are only motivated by a fear of missing out (FOMO), GPs told the AVCJ China Forum.

“As a minority investor, we think the best way for us to do risk control is to not to invest. Currently, a lot of investors are driven by FOMO and feel they have to pile in if a company has attracted a lot of attention and capital,” said Jing Hong, a former partner at Hillhouse Capital and founder of Gaocheng Capital.

Gaocheng, which hit a $100 million first close on its maiden US dollar-denominated fund in February, focuses on growth stage investments. It has so far made four investments across artificial intelligence, financial technology, mobile security, and online bookkeeping. The valuations of these companies have since risen by an average of 50% - but Hong warns that investors should not be seduced by popularity.

“For enterprises, while their revenue and cost increases can be calculated, their valuations usually don’t rise that quickly. As an investor, you should be patient and wait for valuations to catch up with its performance, instead of piling because of the pressure of money burning a hole in your pocket,” she said.

Gaocheng avoids Serie A rounds because it only backs companies with stable cash flows and a clear path to profitability. And rather than following other investors into funding rounds, it tries to create niche opportunities, for example by acquiring preferred shares through bilateral deals.

The risk profile is different outside of the growth capital space, but there are still plenty of areas in which investors can slip up. Jessie Yan, a director with consumer-focused mid-market buyout firm Lunar, emphasized the importance of financial due diligence, noting that replacing a portfolio company CFO is often her firm’s first order of business. Meanwhile, Jim Tsao, China chairman at Permira, observersd that risk assessment has become more complex as Chinese companies achieve scale and global scope. Issues such as environmental, social and governance protocols are increasingly on the agenda.

Ultimately, investors must decide how much risk they want to take for what kind of return. Decisions will vary based on strategy, industry insights, and familiarity with management.

“We have invested heavily in content creation companies recently. A lot of people might argue there is too much uncertainty surrounding this segment, but I have strong faith in it as the era of buying traffic by burning cash has already passed in China. Now you need to attract consumers through good quality contents,” said Linda Cai, a partner at Loyal Valley Capital.

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