Deal focus: Loyal Valley realizes $600m from the Bilibili show

Bilibili enjoys a special affection among China’s video-streaming masses. It might be the platform’s signature bullet chatting feature, whereby real-time comments from viewers fly across the screen like bullets. Sometimes, the comments are more entertaining than the videos.

“If you compare the bullet-chats on Bilibili with those on Tencent Video or iQiyi for the same content, the quality, quantity, and atmosphere are quite different,” observes Lisa Ye, a partner at Loyal Valley Capital.

One explanation for this is that Bilbili sets a high bar. Users must pass a membership examination comprising more than 100 questions to qualify for bullet-chatting. Bilibili’s userbase is another. Around 86% of its monthly active users (MAUs) were aged 35 and below in 2020, higher than any other major video platform. Bilibili has also been praised for educating young people, not just peddling frivolous content.

Founded in 2009, the company reached a turning point in 2014 when angel investor Rui Chen formally joined as CEO and chairman. The founder of software company Cheetah Mobile, which went public in the US the same year, Chen is credited with putting Bilibili on the path to rapid scaling and commercialization.

“I had in-depth communication with Chen in 2015, and I was impressed by his insights into anime culture. He was a very experienced anime user, and his understanding of users and the entire Bilibili ecosystem exceeded my expectations,” says Ye.

Taking a leap

Noting a rapid uptick in the company’s user numbers at the beginning of 2016, Ye introduced Chen to Loyal Valley founder Andy Lin. This resulted in a $100 million investment at a pre-money valuation of about $900 million in May 2016. This was part of a Series C round totaling $360 million, according to AVCJ Research’s records.

Bilibili completed one more funding round and then listed on NASDAQ in 2018, raising $483 million and achieving a market capitalization of about $3.3 billion. Loyal Valley was the second-largest institutional shareholder with a post-IPO stake of 7.7% stake, behind CMC Group on 10.5%. IDG Capital, Legend Capital, Qiming Venture Partners, and Tencent Holdings are also investors.

Loyal Valley didn’t sell any shares in the IPO. It began a concerted series of sell-downs in the second half of 2020, just as Bilibili’s stock price started to climb in anticipation of a secondary offering in Hong Kong. By the time the company listed in Hong Kong in March, its market capitalization was $33 billion, a 10-fold increase from the US IPO.

Loyal Valley has divested about half of its position, realizing close to $600 million in proceeds. The overall IRR for Bilibili is above 110%. “We have strong confidence in the company’s long-term value, but we also needed more of a balance between the paper return and fund’s DPI [distributions to paid-in],” says Ye.

In the fourth quarter of 2020, Bilibili’s average MAUs hit 202 million, up 55% year-on-year. The mobile app had 186 MAUs, a gain of 49%. This is a result of a broadening of the traditional anime offering to create a more varied content ecosystem. It has also started investing in in-house content, from anime series to documentaries to variety shows, although 91% of content is still user-generated.

Content diversity has led to a healthier economic structure. The video game contribution to revenue fell from 71% in 2018 to 40% last year, while the value-added service or membership fee share rose from 14% to 32% and advertising went from 11% to 15%. E-commerce – sales of animations, comics and games-related merchandise – has been a revelation, jumping from 3.5% in 2018 to 12.6% in 2020.

King content

Even though revenue has grown nearly threefold during this period, reaching RMB11.9 billion ($1.83 billion) in 2020, losses have widened, mainly due to sales and marketing expenditure. And then some users complain that Bilibili is losing its identity and becoming more like Douyin or iQiyi. Ye, however, is not concerned.

“When you move beyond a small circle to more general users, you must embrace different things and enrich the content ecosystem, to serve more diverse demands,” she explains. “But we can leverage algorithms to recommend customized content to each individual.”

Besides Bilibili, Loyal Valley has backed ByteDance – the parent of Douyin – and Netease Cloud Music, relying on the same investment logic. When the private equity firm began ramping up its activity in 2016, the early wins from mobile internet were nearly gone. Penetration was already very high and user growth had slowed.

“In the second half of the mobile internet era, everyone is competing for users’ time. And the key lies in content. That’s why we backed this kind of content-based platforms,” says Ye.

Bilbili appears to be faring well in this battle. Average daily time spent per active user on its mobile app was more than 80 minutes in 2020, compared to an industry average of 29.8 minutes. During this period, users generated 5.1 billion average monthly interactions, up from 2.1 billion in 2019.

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• Topics
• Greater China
• Open market
• Media
• Technology
• China
• TMT
• Loyal Valley Capital