Fund focus: LPs endorse Ocean Link's China tourism, tech thesis

PE investors hoping for a surge in take-private transactions as Chinese companies abandon US bourses with a view to relisting closer to home have so far been disappointed. AVCJ Research has records of just five announced or proposed transactions of $1 billion or more since 2019 where financial sponsors have supported privatizations.

Nevertheless, Ocean Link, a local manger that has raised less than $1 billion across three funds, has participated in two of them: it initiated the $8.7 billion acquisition of classifieds marketplace 58.com and joined the consortium that bought eHi Car Services for $1.1 billion. A third take-private involving Hong Kong-listed Zhejiang New Century Hotel Management is currently in process.

Tony Jiang, a co-founder and partner at Ocean Link, says his firm’s relatively high level of activity in this subset of the market is the result of targeting assets that are out of favor. EHi was held back by the perceived threat of Uber and Didi and Hertz’s troubles in the US, while 58.com faced questions about the sustainability of its business model amid rising competition in each vertical.

“Valuations are high in this environment but if you look at the companies doing take-privates, there is often some controversy around them, it’s never straightforward. It's all about how we assess risks and fix these problems,” Jiang explains. “We are not passively backing hot entrepreneurs.”

As evidence, he points to eLong, a hotel and flight booking platform that Ocean Link helped privatize in 2016 at a valuation of $660 million. It relisted in Hong Kong two years later and now has a market capitalization of around $5 billion, but this was no flip. The entire management team at eLong – previously a subsidiary of US-based Expedia – was changed and the business was merged with local online travel agency Tongcheng Network Technology.

Renewed mandate

Take-privates and control buyouts are expected to feature prominently in Ocean Link’s second fund, which closed at $580 million at the end of January. The firm secured a nine-month extension to its fundraising period because LPs were reluctant to sign off on commitments in the first half of 2020, but it still managed to beat a target of $500 million.

Jiang, formerly a director at The Carlyle Group, and Alex Zheng, a co-founder of Plateno Hotels Group, established Ocean Link in 2016 with strategic support from Ctrip and General Atlantic. They were among the LPs in Fund I, which closed at $310 million. Every LP in the debut vehicle re-upped for Fund II, with various fund-of-funds and sovereign wealth funds coming in as new investors.

COVID-19 didn't only impact Ocean Link in terms of investor access. The pandemic also struck at the heart of its investment strategy, which encompasses travel and tourism as well as broader consumer technology companies. Jiang notes that LP sentiment was buoyed by strong conviction in the long-term prospects for travel and tourism post-pandemic.

“A lot of LPs are pushing us, asking how we will take a contrarian view of this market, given a lot of prices for travel assets are low,” he says. “We want to back companies that are having difficulty raising capital because of COVID or their valuations have been impacted by COVID. Our capital will provide a good cash reserve, so they have enough runway until the market turns a corner.”

At the same time, Ocean Link’s consumer technology investments – some of which have benefited from an acceleration in the adoption of digital-first consumption habits – could be viewed as a COVID-19 hedge. Moreover, the firm has made 22 investments to date across all sectors, from two US dollar-denominated funds and one renminbi vehicle, and 80% of them are debt-free.

The travel and tourism businesses can be divided into two categories: those that took an initial hit but have rebounded well, such as domestic resorts and car rental operators; and the likes of TripAdvisor clone Mafengwo and airport lounge business Dragonpass that have international exposure. Jiang estimates that Mafengwo, which is no longer hiring or spending money on user acquisition, could run for up to seven years at its current burn rate without needing new capital.

Parsing the portfolio

Travel and tourism accounts for seven of the 12 companies in Fund I and 40% of the capital deployed. In Fund II, it is expected to be 30-40%, with one out of the four investments made so far falling within this sector.

It is also worth breaking down the portfolio in terms of buyout versus minority growth, which underlines the scale of co-investment that allows Ocean Link to punch above its weight. Co-investment in Fund I deals totaled $500 million and LPs have already put $500 million to work alongside Ocean Link in Fund II deals. Jiang thinks aggregate deployment could reach $1.4 billion.

Half of the capital Ocean Link has invested from its funds across all 22 deals has gone into take-private and control buyout transactions. Include LP co-investment and this share rises to 90%. 58.com is a major contributor – the co-investment check was more than $400 million, according to a source familiar with the situation – but there was also significant LP participation in the likes of eHi and Dragonpass.

In some cases, the co-investment contribution exceeds that of the fund. Jiang admits that alignment of interest concerns have been raised in discussions with LPs, but this hasn’t dampened appetite – in part because it is rare for an individual co-investor to write a bigger check than the fund. There is also a willingness to let Ocean Link scale up when an attractive opportunity emerges.

“We have been in the business for less than five years, so we have a modest fund size, but we did some bigger deals at our previous firms and we want to tackle them here as well. LPs are sympathetic to that,” he adds. “And while co-investors do follow the GP’s lead, they are also spending a lot of time on these deals, so they develop their own convictions about the value.”

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• Topics
• Greater China
• Fundraising
• Buyout
• Growth
• Technology
• GPs
• China
• Ocean Link
• TMT
• Travel