Investors endorse 'long Chinese' thesis - AVCJ webinar

“Chinese entrepreneurs going out has become a very interesting trend, because Chinese companies generally have technology and also engineering capabilities,” said Eric Xin, a managing partner at Trustar Capital, noting that Chinese founders can build successful businesses no matter where they are.

Xin made this observation in a broader discussion about the challenges of investing in China amid escalating geopolitical tensions and financial headwinds.

He identified a split in the market, with US dollar-denominated funds no longer able to rely on offshore IPOs. They must consider onshore exits, which could mean more competition for deals from renminbi funds. In this context, backing a Chinese entrepreneur outside of China is attractive because the exit dynamics are unchanged.

Michael Chen, a managing director at Centurium Capital, suggested that private market valuations, which have yet to mirror the declines seen in public markets this year, will reset in 2023. He also expects operationally challenged companies to seek more practical inputs from investors in areas such as digitisation and change management.

The notion that falling valuations could support increased deal flow was echoed by Gunther Hamm, co-head of Hopu Magnolia, Hopu Investment’s growth capital platform. However, he believes a “flight to quality” among investors will continue.

“What that means is even if your valuation compared to your revenue is a decent multiple, if you have high cash burn, no one is going to want to give you capital,” Hamm said.

“In 2023, we’re going to see companies with reasonable valuations, but also higher efficiency, and so on that front, it’s kind of a double whammy in that a lot of investors will be looking at similar companies, but also those companies will have less need for just capital.”

Hopu Magnolia is focused on opportunities in cybersecurity, IT operations, and database systems that are linked to the development of China’s cloud infrastructure. US-China tensions make it difficult for the likes of Snowflake and Databricks to enter China, so there is scope for local companies to build a domestic technology stack, Hamm said.

Centurium, meanwhile, is tracking sectors where valuations have fallen most dramatically, notably consumer. Chen said that price-to-earnings multiples, which reached 25x during the frenzy of 2020 and 2021 are now around 10x-12x, and price-to-sales multiples are as low as 1.5x-2x.

Trustar’s Xin believes there are also opportunities in traditional business services, such as facility management and cleaning, that may have been overlooked. He observed that these areas tend to be dominated by large companies in North America and Europe, but in China they remain fragmented, leaving plenty of room for consolidation and M&A.

Yan Yang, a managing director at BlackRock Private Equity Partners, concluded that despite the challenges around investment in China, the strong fundamentals first drew capital to the market are still present. There are risks, as with any emerging market, and these result in greater scrutiny.

“One could almost argue that the risk premium will be higher with all these uncertainties,” he said.

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• Topics
• Greater China
• Expansion
• Buyouts
• Technology
• Consumer
• Regulation
• IPO
• China
• AVCJ Events
• Trustar Capital
• Centurium Capital
• Hopu Investment Management
• BlackRock