China GPs target tech angles in consumer plays

When asking GPs about valuations, much rests on whether a business is perceived by the market as internet-enabled or traditional, Jie Gong, a partner at Pantheon, told the Hong Kong Private Equity & Venture Capital Association’s (HKVCA) China forum. GPs are incentivized to emphasize the technology aspect because it can translate into a price premium. However, LPs might be reluctant to play along, in part because they want a portfolio that is diversified rather than tech-heavy.

“You have to peel the onion and understand the genesis of the business, where the entrepreneur comes from. Is it a true TMT [technology, media and telecom] deal or a company with a camouflage of technology?” Gong said.

For most GPs, strong technology capabilities are underpinned by people and partnerships. Nina Gong, a managing director with The Carlyle Group, noted that sector specialization is integral to her firm’s approach, but efforts are made to ingrain an appreciation of technology throughout the organization. Carlyle has a dedicated team that examines every deal through this lens, considering the potential impact of disruption and how it can be addressed. In addition, there are operating partners and senior advisors who have backgrounds in technology.

CITIC Capital is also on a hiring spree, with plans to bring in experts in the internet-of-things and artificial intelligence to complement existing resources in areas such as digital marketing. Eric Xin, a managing partner at the firm, stressed that corporate networks are valuable as well. Tencent Holdings is an investor in CITIC Capital’s holding company while telecom software provider AsiaInfo Technologies is a portfolio company. Both are rich sources of strategic and operational information.

Rebecca Xu, co-founder and a managing director at Asia Alternatives, added that the notion of the “gray hair” in private equity has been turned on its head. Where once seasoned executives were brought in to offer advice, now the experts might be younger than junior members of the investment team. “It takes a generational shift to understand what is going on,” she said.

In some cases, in-house efforts have moved well beyond simply hiring a digital marketing guy. Mid-market consumer buyout firm Lunar has two stand-alone companies that specialize in digital marketing and e-commerce respectively. The former does contract work for third parties as well as serving businesses in the Lunar portfolio because it delivers broader insights into consumer preferences and behavior. Clients include Louis Vuitton.

The e-commerce company helps businesses in different verticals optimize their distribution channels, often working in tandem with the major online platforms. For example, Lunar-owned babywear supplier Yeehoo teamed up with a leading local detergent manufacturer to create a line of baby skincare products that are only available on Alibaba Group’s Tmall platform.

“These platforms are almost like TV stations,” said Derek Sulger, a partner at Lunar. “They need brands like ours to sell. They see you have a good product in this category, and they ask you what you can do to help them make Double 11 [ Singles’ Day] successful.”

ClearVue Partners, another mid-market consumer-focused investor, leveraged these channel relationships in a slightly different way. The firm found an anti-aging supplement product, decided it wasn’t right for a fund investment, but recommended one of its portfolio companies – US-listed 111 Inc, which operates the 1 Drugsstore platform – keep an eye on the segment. It ended up doing a distribution deal with the business.

That product was identified through an algorithm ClearVue built to crawl e-commerce channels in China and generate intelligence on which categories are selling well. If this is the quantitative tool, the qualitative element is anchored by a quarterly app-based survey that takes in 3.5 million consumers across 500 cities, from tier one to tier six. Participants are asked about their confidence in the economy, what apps they are using, their favorite foods and their favorite brands.

Harry Hui, ClearVue’s founder and a managing partner, noted that datasets in China are often incomplete or misleading, so they can play a key part in an investment thesis or value creation plan. “Chinese consumers are among the highest trial consumers in the world and the least brand loyal,” he said, stressing the importance of being able to peel back the layers of a business and make a call as to whether it can transition from tens of millions of dollars in revenue to hundreds of millions.

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• Topics
• Greater China
• Technology
• Consumer
• GPs
• Expansion
• Buyouts
• China
• TMT
• Lunar Capital Management
• CITIC Capital
• The Carlyle Group
• ClearVue Partners
• Pantheon
• Asia Alternatives Management
• HKVCA