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  • Greater China

Deal focus: TR Capital doubles down on China tech

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  • Tim Burroughs
  • 30 June 2021
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Secondaries specialist TR Capital has established a base in Shenzhen with a view to sourcing more deals in China’s red-hot technology sector. Online used car trading platform Bochewang is the latest example

At $350 million, TR Capital’s fourth fund is twice the size of its third, but the geographical allocation is unchanged. The specialist secondaries investor expects to deploy 60% of the corpus in China, as has been the case since the firm’s inception. There will also be a consistent 50-50 split between fund restructurings and direct acquisitions of equity positions in companies.

This gives some context to TR’s two most recent developments: the opening of an office in Shenzhen to complement existing presences in Hong Kong, Shanghai, and Mumbai; and leading a $95.7 million investment in online used car trading platform Bochewang, a transaction made possible by several renminbi-denominated investors having to cash out so the company can pursue an offshore IPO. In short, TR wants to be closer to the action in the expectation of doing more China technology deals.

“It was important to be the first secondaries firm to open an office in Shenzhen. It is the most innovative place in the world, probably more so than Silicon Valley. Having a presence there is critical to the development of TR Capital. Opening an office in Shenzhen is a bit like opening an office in Silicon Valley in the 1980s,” says Paul Robine, the firm’s founder and CEO.

“A lot of venture capital firms and growth capital firms have been investing in Shenzhen and the Greater Bay Area (GBA) over the past 10 years. A natural next step is to start seeing more secondary deals involving these innovative technology companies. We can provide liquidity to funds looking to sell assets and solutions to companies that have shareholders that want to sell out.”

TR already has several investments in the area, among them RoboSense, a developer of LiDAR systems used in autonomous driving, Adaps Photonics, a manufacturer of 3D sensor chips that feature in a range of electronic devices, and WeRide, an autonomous driving company. The common thread is deep tech, a key competitive advantage for Shenzhen given its status as China’s preeminent hardware hub.

Beijing-based Bochewang, which sources salvage cars from insurance companies and auctions them off to dealers who repair and resell or strip the vehicles for parts, doesn’t fit this profile. However, the opportunity represents familiar ground for TR. The firm has completed several deals predicated on restructuring companies offshore so they can go public in Hong Kong or the US. For regulatory reasons, not all onshore investors can participate in this journey, so there is an opening for secondary investors.

These transactions involve single assets and portfolios. Last year, TR backed a $100 million renminbi-to-US dollar restructuring of seven portfolio companies held by Kinzon Capital, a VC firm keen to gain a foothold in the US fund market. TR had its pick of 19 companies across various Kinzon funds. While Bochewang is a Kinzon investee, the company was never considered for inclusion in that deal.

Kinzon featured in all three of Bochewang’s previous funding rounds. Other investors include New Horizon Capital, Ping An Insurance, Tsinghua University-owned Suzhou Automotive Research Institute, Sino-Ocean Land, Far East Horizon, and China Pacific Insurance, according to AVCJ Research. The identity of the seller has not been disclosed.

“There was a large Chinese institution that couldn’t go through the restructuring process and had to sell, that was the origin of the deal,” says Frederic Azemard, a managing partner at TR. The firm contributed more than $45 million, has taken a board seat, and will help Bochewang continue to scale its operations and develop its range of services. Initiatives are likely to include building out the vehicle recycling operation and implementing big data systems to improve pricing algorithms.

Notably, the transaction comprised only secondary shares and the company last raised a meaningful amount of primary capital in 2017. Business development initiatives are likely to require more investment – hence the expectation of an IPO within three years – but for the time being Bochewang is profitable and not in desperate need of new money.

In this respect, the company stands apart from most of China’s online used car dealers, which focus on B2C and C2B models and typically rack up significant sales and marketing expenses as they battle for market share. “Sourcing from insurance companies – the largest of which are shareholders in the company – creates a high barrier to entry,” says Azemard. “They are the clear market leader with a 50% share, while the next largest competitor has 5%.”

The international reference point for TR is US-listed Copart, which has 200 locations in 11 countries, a market capitalization of $31.6 billion, and generated $2.2 billion in revenue last year. Copart puts up more than 175,000 vehicles for auction every day, while Bochewang facilitates the sale of about 70,000 per year. Azemard believes the gap between the two businesses will close as more vehicles in China reach the age where the cost of repairs exceeds the cost of replacement, thereby creating more supply.

Bochewang more than fulfilled TR’s basic selection criteria: an established or soon-to-be market leader; a path to profitability within two years of investment; and a path to liquidity within four years of investment. That liquidity event is usually an IPO, but Robine expects to see more M&A exits as the technology ecosystem continues to mature.

The Shenzhen office – which currently accounts for three of TR’s 25-strong team – comes into play here as well. The fortunes of Shenzhen and Hong Kong could be drawn together and ultimately defined by the success of GBA, the former serving as a center for innovation and the latter as a financial hub. “The mix of these two very different places is going to be powerful in the near term and the long term,” Robine adds. “We want to be part of it.”

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