Fund focus: Qingsong plays the long game

Managers of renminbi-denominated funds are often characterized as opportunistic, short-term oriented, and obsessed with cash flow – classic victims of a fund structure that has a narrower investment window than the international norm. Qingsong Fund is the exception to the rule.

The firm, which recently closed its sixth local currency vehicle at RMB1 billion ($153 million), taking its total assets under management to RMB3 billion, prefers to make long-term commitments to entrepreneurs. This prompted Xiaosong Liu, Qingsong’s founder, to ask Zhihan Wang, founder of semiconductor start-up Bronze Technologies, how long he planned on running his business. Wang replied 20 years, which gave Liu the conviction to invest. That was in 2009.

“I’m an entrepreneur, so I know it takes a long time to build a solid business. Good companies are like the snowballs described by Warren Buffett – if you roll them over just a few times in the snow, you won’t make much money. More importantly, if a founder is short-termist, you can’t invest in him. He might change the track or shrink back from facing difficulties,” says Liu.

Liu founded streaming service Duomi Music and digital entertainment business A8 New Media Group, which now trades in Hong Kong. He also incubated live video start-up Inke. However, he is best known as one of the earliest investors in Tencent Holdings, having paid RMB100,000 for a 5% stake 18 years ago. Liu made several partial exits, but decided to hold on to his remaining shares. It was a personal lesson in the value of long-term investment.

Qingsong closed its debut fund at RMB100 million in 2012, sourcing 100% of the capital from market-oriented investors. It remains the same in Fund II, which closed at RMB333 million three years later. When the firm raised RMB1 billion for Fund III in 2017, government-related LPs accounted for over 30% of the corpus. The level rose to 43% in the latest vehicle.

While Liu likes the nine-year, 7+1+1 structure of his funds - a rarity in the renminbi space - he is frustrated by the changing LP dynamics. A US dollar fund will be launched later this year.

Still, the nine-year-old firm enjoyed its biggest-ever harvest in 2020, generated proceeds of RMB700 million from eight exits, with an average multiple of 45x. A full exit from wedding services provider Hunliji delivered 70x, while partial exits from personal care brand HomeFacial Pro and online tuition platform Zhangmen came in at 140x and 80x, respectively. HomeFacial alone has returned the entire Fund II corpus.

The goal Liu has set for his team is to achieve distributions to paid-in (DPI) of 100% after four years. But there are some assets where he sees huge further upside and doesn’t want to let go so early. The solution is a continuation fund, which launched last year that closed at RMB300 million. It is hoped the vehicle will provide an exit to investors in need of liquidity.

About 70% of the Qingsong portfolio comprises data-driven companies. “If your business model is not data-driven, it’s like entering a battlefield with your eyes closed,” says Liu. “Data-driven means that today's operating data will little by little improve tomorrow's competitiveness. Data-driven companies will end up with all the momentum, based on gradual daily accumulation.”

Driven by industry research, Qingsong backed a range of technology-enabled education and retail businesses several years before the sectors turned hot. An entry into the online education space came as early as 2013, with the firm reasoning that rising broadband speeds coupled with lower costs would transform operations.

“We screened almost all the relevant companies, and backed 30 of them,” Liu recalls. “Each one ended up performing very well,”

Zhangmen was among the 30. The company’s founder was a postgraduate student when Qingsong contributed seed funding in 2014. Last year, Zhangmen consolidated its leadership position with a $400 million funding round.

For Qingsong, online education is now a closed book. Deep technology has become more of a priority and the firm established a RMB300 million fund last year dedicated to this space. Healthcare is expected to feature prominently in the portfolio.

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• Topics
• Greater China
• Fundraising
• Renminbi fund
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• China
• Qingsong Fund
• TMT