How Asia-focused PE majors work with the tech overhang in China deals

Commercial buildings stand illuminated at dusk in Hong Kong, China, on Thursday, Dec. 27, 2018. Photographer: Justin Chin/Bloomberg

General partners need to be more discerning when it comes to evaluating tech investments as almost every potential deal, be it in the traditional or new economy space, has a technology layer that can drive valuations to new highs, according to top executives of Asia-based private equity firms.

Fund of funds Pantheon Ventures partner Jie Gong said, the overweight of tech deals in China is somewhat becoming a challenge for LPs like herself.

“Due to the high valuations that tech companies can fetch from the market, aspirational GPs and entrepreneurs very much want to make their companies into tech companies mode and have every incentive to enlarge that technological layer into being the core of the company,” she said.

During a panel discussion at the recently-held HKVCA China Private Equity Summit 2019 in Hong Kong, she observed, “…from a diversification point of view, we don’t want our portfolio to look like an overall tech fund, beating the whole purpose of having segmentation across various stages of the lifecycle of a business.”

Therefore, she added, it was important for GPs to maintain the diversification across the private equity industry by understanding the genesis of each business.

“We need to ask ourselves is this a retail company or a tech company – peel the onion several layers and understand what the business is all about – Is it a deal with a layer or even with the camouflage of technology,” added Gong.

Gong was joined by The Carlyle Group managing director Nina Gong, CITIC Capital senior managing director and managing partner Eric Xin, ClearVue Partners founder and managing partner Harry Hui and Lunar Capital partner Derek Sulger.

ClearVue’s Hui concurred with Jie, adding, companies will need to work out a sustainable business path to woo Chinese consumers, who are among the least brand-loyal.

“In China, you can see that there’s a lot of initial interest in startups but very quickly you can see that these initiatives are not sustainable.  The Chinese market is extremely competitive and consumers are very fickle. You need to truly understand what the pain points are to truly succeed and thrive in a market that is a little bit more mature than it was a couple of years ago,” he said.

Shanghai-based ClearVue is currently looking to raise $600 million for its third fund, ClearVue Partners III. It had secured $200 million of commitment from the investment council of the $75 billion Oregon Public Employees Retirement Fund this February.

Carlyle’s Nina, who specialises in consumer retail and e-commerce deals, noted in every deal, there’s always a tech angle.

“In the last 18 months, 64 per cent of deals [which are] $150 million and above are TMT/new economy deals. Every deal we look [at] there’s always a tech angle. For other traditional sectors, they’re driven by AI/automation – so every deal is a tech deal,” she said.

While CITIC Capital Partners, the private equity firm of CITIC Capital, does not invest in TMT (telco, media and technology) deals, Xin pointed out that, in China, technology is indeed changing everything through digitisation.

“For us, buying a traditional business and overlay it with technology/digitalisation is one of the major value-adds, if you can’t do that, the business you just bought will be out of business in the next few years,” he said.

Although the market is saturated and brands get lost, but companies still have consumers that are evolving to be increasingly loyal who are still looking for something that is unique and yet, traditional, said Lunar Capital’s Sulger.

“We believe if you take brands or business that have this power, and the right products you can satisfy the enormous gap between running the business today and how is it going to be tomorrow – these are things that can be solved with good technology,” he said.

Commenting on valuations, Sulger said, the firm still goes by good old “buy low, sell high” philosophy. “The good thing about China is that it is deep and versatile enough so you can still buy low.”

Last but not least, Pantheon Ventures’ Jie placed a huge emphasis on data. She noted 90 per cent of data across the world was only created in the last two years.

“If you think about the increasing prevalence of IoT (Internet of Things), that [data] is going to only grow exponentially from here. If there’s one thing I’m leaving it here is that, as an LP, I think the current GP set is doing a pretty poor job utilising the abundance of data in their due diligence, let alone post-investment value creation,” she said.