China: Alibaba’s Koubei closes $1.1b investment led by Silver Lake

A Benjamin Franklin U.S. 100-dollar banknote and a Chinese 100-yuan banknote depicting the late Chinese Chairman Mao Zedong, are seen in a picture illustration in Beijing

Koubei, an affiliate company of the Alibaba Group, has completed a $1.1-billion equity financing led by private equity (PE) major Silver Lake. CDH Investments, Yunfeng Capital and Primavera Capital also participated in the round.

This transaction provides Koubei with a strong capital base to execute on its aggressive growth strategy, with Alibaba intending to use Koubei as a vehicle for competing with Tencent-backed WeChat, which has expanding its footprint into domains such as online payments, in-store payments, ecommerce, fintech, and other areas competing with Alibaba’s service ecosystem.

The post-money valuation of Koubei is now estimated at $6.9 billion with aggregate equity funding raised at $2.1 billion. This places Koubei firmly in unicorn territory (i.e. $1 billion market capitalisation) and closer to decacorn (i.e. $10 billion market capitalisation) territory.

This development was reported in a December quarter 2016 announcement by Alibaba Group, which noted that the transaction occurred this month. Koubei, a local service joint venture (JV) with Ant Financial, generated RMB73.1 billion ($10.5 billion) in payment volume transacted through Alipay during the December quarter, representing a 52 per cent increase over the prior quarter.

Koubei originated as a life search engine in 2004 providing information on living consumption, restaurant entertainment, house renting, house buying, working, travelling, and more. Its two major channels are restaurants and entertainment transactions. In addition to this is also provides release, query, and transaction services about house renting information and secondhand house dealing information, in addition to a credit system in the field of domestic classified information.

This positions it as a player in China’s growing online-to-offline sector (O2O), competing with other Chinese Internet majors to attract and retain consumers in their networks.

e-marketer_china-o2o
Growth of Chinese O2O market. Credit: e-Marketer

Increasingly sophisticated middle-class social shoppers are having an impact on Chinese e-commerce, according to a McKinsey survey, which indicates that growth potential exists in the travel, dining and transportation services segment .

However, McKinsey also notes that a flood of liquidity since 2015 has created market distortions in the form of deep discounts and subsidies in China’s O2O market. This is likely to continue with Alibaba backing Koubei and Tencent backing Meituan Dianping; both Internet service majors will be seeking to tie customers into their respective service and product ecosystems.

The trend of women driving O2O commerce will also see both firms tailoring their market and product strategies to appeal to female customers. According to an eMarketer report, consumers with a higher education level were more likely to engage O2O service, with the most common service that was engage being food – including both restaurants and food delivery – which ties into higher usage by women.

Additionally, with low-tier cities seeing higher expenditures on O2O commerce than high-tier cities in China, this latest investment will likely see Koubei tailor its growth strategy to target these various cities, with the additional angle of connecting them to Alibaba’s retail ecosystem.

In the long term, given news of discussions with Russia’s Sberbank of a JV, lessons from Koubei’s growth strategy could also aid in tailoring Alibaba’s growth strategy for Russia and Central Asia, using their growth strategy for China’s Tier 3 and Tier 4 cities as a model.

mckinsey-o2o-cities

In an exchange with the New York Times, Ken Hao, a Silver Lake managing partner and managing director, said, “This is how Alibaba wants to get those people — the customers who go to restaurants or to local convenience stores — to transact and bring them more fully into the Alibaba ecosystem.”

Silver Lake has previously backed Alibaba, having invested $500 million into the e-commerce major in 2011 and 2012. This investment yielded a stake valued at $5.1 billion during Alibaba’s initial public offer (IPO).

In a December 2016 report, Yunfeng Capital, a fund backed by Alibaba co-founder Jack Ma, and PE firm Silver Lake were reported to be planning on investing in Koubei, which was established by Alibaba and Ant Financial to compete with Meituan Dianping.

On-demand local services have attracted major spending in past years and have become a costly battleground for Chinese internet companies from Alibaba to Tencent Holdings Ltd., as more people turn to the web to order take-out, schedule beauty treatments and hire domestic helpers. Alibaba was originally an investor in Meituan along with Tencent but fell out with its partners and exited the venture to focus on Koubei.

Also Read:

Alibaba-backed Koubei invests in Shanghai restaurant booking app

Alibaba leads bid to take HK retailer Intime private in $2.6b deal

Alibaba reshuffles entertainment units, to raise $1.5b investment fund

Alibaba Q3 revenue soars 53% to $7.8b, raises forecast for 2017

Alibaba Group invests $6m in Israeli AR startup Lumus

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.