Deal focus: Inspiration snares rare China mid-cap tech buyout

Buyouts have yet to take hold fully in China, accounting for just 16% of the USD 126.6bn private equity investors put to work in the country last year. A handful of USD 1bn-plus deals accounted for nearly three-quarters of the buyout total, suggesting a sparse middle-market for such transactions.

A couple of those big buyouts happened to be technology related. Generally, the sector is highly polarised. Buyouts have contributed less than 10% of investment in the past four years while growth capital rounds – often featuring minority commitments by global multi-strategy firms most readily associated with buyouts – have flourished.

The size of Inspiration Capital Partners’ (ICP) investment in Antute Technology, a third-party maintenance (TPM) IT service provider, was not disclosed (though the USD 150m target for the firm’s debut US dollar-denominated fund may serve as a reference point). The deal stands out by virtue of its unusual characteristics: China, mid-market, technology, control.

Founded in 2000, Antute provides hardware and software maintenance services to more than 1,000 enterprise customers through a national network of 32 service centres and more than 300 staff. Banks, securities firms, telecom operators, and government agencies feature in its customer base, including China Construction Bank, China Life, Huatai Securities, China Mobile, PetroChina, and ZTE.

Orphan to trophy?

Curvature, a US-based TPM peer, acquired the company early in its life. However, when Curvature was sold to Park Place Technologies in 2020, creating the largest TPM provider to data centres globally, Antute was left behind. The tortuous deal approvals that have emerged amid rising US-China tensions, especially involving potentially sensitive technologies, were too much of a challenge.

Partners Group, owner of Curvature prior to the Park Place transaction, sought out a buyer for this orphan asset. It wanted a quick and easy process, even if this meant turning down higher offers.

“The mid-market space is relatively uncrowded, and the seller preferred to deal with us than domestic strategics because of concerns about certainty and speed of closure,” said Hwachie Lee, a managing partner of ICP (pictured, left, with fellow managing partner Tim Li).

He declined to identify Partners Group as the seller, but its ownership of Curvature – achieved through a merger with SMS Systems Maintenance Services, an existing portfolio company, in 2017 – is well known.

ICP, which focuses on mid-market growth and control deals, engaged Bain & Company to perform due diligence. The latter concluded that the TPM IT services in China would grow 14% a year between 2020 to 2025 in China, driven by increased service demands for critical IT infrastructure as well as government initiatives around digital transformation.

The due diligence process also helped shape ICP’s transformation plan for Antute by offering insights into potential customers as well as the size and growth prospects for the overall market.

“We’ve been looking for targets in digital services. The due diligence contributed to our understanding of the opportunity set and this meant we could devise an execution plan from day one. We already have a rough idea of what the company should look like in five years. What we are doing now may take a year or two to be reflected in the results," said Li.

The private equity firm embarked on the process with a degree of existing internal domain expertise. Last year, it invested in Value Simplex, a software company that provides digital infrastructure to China's asset management industry.

Transformation plan

Antute is considered a rarity because it meets all ICP’s major criteria for a buyout: a reasonable entry valuation, a cash flow positive position, and scope for value creation. Lee added that switching the company’s designation to Hong Kong – ICP is based in the territory – may also be beneficial in terms of addressing the Chinese market and creating a better alignment of interests.

“Antute was part of a global multinational, and its parent did not invest in the business; in fact, it took regular dividend distributions from the business,” he noted. “We will make investments in areas like recruitment and technology.”

Step one is to enlarge the sales team with a view to increasing customer numbers and developing new customer types.

Healthcare is a key target and ICP hopes portfolio synergies will come into play. Its first investment was in New Frontier Vitality, an integrated post-acute and geriatric healthcare platform created by New Frontier Group. ICP has already introduced Antute to New Frontier Group, which has a healthcare portfolio that includes the largest hospital chain in China.

Secondly, ICP wants to diversify Antute’s revenue streams. The company is heavily reliant on hardware maintenance services, but there are substantial opportunities in the relatively new and fast-growing software maintenance space. These include cloud migration and implementation, data management, and open-source software and security products.

Finally, the private equity firm will look to improve profit margins by making improvements to payment collection, cash flow management, and expense and financial management.

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• Topics
• Greater China
• Buyouts
• Technology
• Trade sale
• Support services
• China
• Inspiration Capital