Deal focus: Huaxing gives overseas LPs taste of China medtech

It is a tale of two fundraisings. Huaxing Healthcare Capital, the healthcare investment unit of China Renaissance, closed its second renminbi-denominated fund last month with RMB1.4 billion ($213 million) in commitments. Even though steps were taken to optimize the LP base – existing investors accounted for 50% of the corpus – the vehicle was still heavily oversubscribed.

At the same time, the healthcare team, led by former Actis investment professionals Jason Zhang and Zheyi Gu, were thinking ahead to a potential US dollar fundraise. They wanted to establish relationships with overseas LPs and had a prize asset to whet these investors’ appetites: Dragon Crown Medical, a Chinese medical device manufacturer specializing in orthopedics whose founder was looking for a succession planning solution. Approximately $230 million was required.

“Orthopedics has been one of our focus areas since 2013,” says Gu. “When we first met the founder [of Dragon Crown] he was in discussions with a multinational. We spent 18 months convincing him to sell to our consortium. He liked our philosophy, track record, and understanding of the medtech space, but we still had to sell ourselves to him by explaining how we would improve the company. This was useful in that we got to see it with our own eyes and develop our own views. Due diligence took one month and ended in January – right before COVID-19 started to spread.”

However, the pandemic disrupted the fundraising process itself. Having received strong initial feedback, Huaxing Healthcare found that some US and Europe-based institutions were falling away. They regrouped, drew on support from LPs in the renminbi funds as well as a core group of overseas investors. By the end of April, a consortium was in place and the deal closed last month. UBS served as placement agent for the capital raise.

Spinning out

It marks the latest stage in the evolution of a business established in 2016 after Zhang and Gu spun out from Actis, where they had spent 10 years and six years, respectively. “We did a few mid-market buyouts and roll-ups, especially in the medtech space,” says Gu. “That’s part of the Actis DNA and we inherited it. This is one way in which we are different from others in the market.”

The portfolio included Chemclin, a diagnostics business focused on infectious diseases and oncology tests. An Actis-led consortium purchased Chemclin in 2013 and helped secure the bolt-on acquisition of industry peer Beyond Diagnostics as well as expand the company’s hospital network. An exit came in 2018. They also invested in Nanjing Micro-Tech, a manufacturer of endoscopic medical equipment, and helped the company enter new product verticals through M&A.

Huaxing Healthcare – China Renaissance has a 51% stake in the investment manager, with the team holding the remaining 49% – was formed to continue this strategy. Medtech and biotech are the main areas of interest, but targets are restricted to companies with existing revenue streams, a degree of scale, and usually positive cash flow.

For example, when numerous China healthcare investors were backing pre-revenue developers of PD-1, a class of drugs that blocks a key protein to activate the immune system to attack tumors, Huaxing Healthcare looked further upstream. It committed capital to China’s nascent raw materials suppliers in the expectation that they could challenge the handful of companies that dominate the supply chain globally. These businesses are proxies for PD-1, but they already generate revenue.

“We and Bao Fan [founder of China Renaissance] believe there will be a need for investors who can help Chinese healthcare companies get from one to 10, by providing capital and solutions. A lot of our peers are focusing on getting companies from zero to one, from idea to product. But getting from one to 10, from product to commercialization and scale requires different resources,” says Gu.

Huaxing Healthcare closed its debut fund on RMB1 billion in 2017. According to Gu, the multiple on invested capital (MOIC) is already 3.4x and the IRR is above 50%. Two portfolio companies have already gone public, including Endovastec, a stent manufacturer, and Bloomage Biotech, a producer of ingredients used in cosmetic surgery. Three more are preparing for domestic IPOs.

A bigger check

Over 80% of assets under management (AUM) are in medtech, an area in which the team expects to see more businesses of significant scale emerge through M&A and organic expansion. In addition to the two blind pool funds, there are a string of co-investment vehicles that take AUM to approximately RMB3.5 billion. In this sense, Dragon Crown represents a departure in terms of currency, a step-up in terms of check size, and little change in terms of target and structure.

The 28-year-old company produces minimally invasive medical devices for spinal surgery. Its core product is used to treat vertebral compression fractures by enabling the delivery of bone cement to the impacted area. Patients tend to be aged and suffering from accelerated calcium loss. Dragon Crown’s major competitor in this area is Shanghai Kinetic Medical, which is listed in Shenzhen and has a market capitalization of RMB10.5 billion. Revenue reached RMB1.22 billion in 2019.

Another business line features orthopedic devices that offer a minimally invasive alternative to replacing herniated spinal discs. It is cheaper, does not involve large wounds, and is relatively quick to heal. “We see the trend from open surgery to minimally invasive procedures – it has spread from cardiovascular into other areas and now we see it in orthopedics as well,” says Gu.

One of the reasons the founder opted to work with Huaxing Healthcare was his preference to remain invested in the business, rather than sign over full control immediately. This is the investor’s preference as well. “Aging founders in China who have no successor and want to retire can bring in professional management, but there is a culture shock,” Gu adds. “We can unite the founder, older management and new management, and help the company grow.”

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• Topics
• Greater China
• Healthcare
• Buyouts
• Fundraising
• Renminbi fund
• China
• China Renaissance