Having a long-term track record of investments in North America and Europe in the mid-market private equity buyout segment, Investcorp forayed into Asia in 2017. Three years on, the Middle East-headquartered private capital manager’s assets under management (AUM) in Asia stands at about $3.2 billion, per its annual report.
“We have already committed over $1 billion to several private equity funds that we have set up ourselves and together with partners in China and Southeast Asia,” Duncan Zheng, Investcorp’s head of private equity China and Southeast Asia told DealStreetAsia in an interview.
The sectors Investcorp is betting big on are technology and consumer segments in Asia, apart from healthcare that has got a fresh lease of life amidst the COVID-19 pandemic.
While Investcorp does not still have any investments in Southeast Asia, “we’re quite active in our pipeline when it comes to opportunities in Southeast Asia,” said Zheng. “We want to focus on the more advanced economies such as Singapore, Malaysia, Indonesia, and not the frontier markets,” he added.
In China, Investcorp has forged a slew of partnerships. While it launched China Everbright New Economy Fund in 2018 in collaboration with China Everbright to invest in the next wave of technology leaders in the country, in 2019 Investcorp tied up with state-owned China Resources Holdings to take over whole food retailer City’Super in Hong Kong and Shanghai.
Investcorp’s portfolio companies in China include Meituan, the e-commerce platform that operates mobile apps including Meituan, Dianping, Meituan Waimai, and Mobike, among others.
In September 2020, Investcorp launched a new platform to invest in Chinese healthcare companies. As part of this initiative, Investcorp acquired minority equity stakes in Lu Daopei Medical Group and WeDoctor.
Edited excerpts of the interview with Investcorp’s Zheng:
Investcorp already has quite a few investments in China. What are the opportunities ahead? Will healthcare be your next core investment target?
The consumer segment is quite special. Also, our healthcare fund focuses on improving healthcare companies that already have substantial profitability and a lot of resiliency despite the impacts of macroeconomics. We usually do not take a controlling stake but become a value-added shareholder in our portfolio companies.
A host of private investors focus on similar sectors. How do you face the competition?
Investcorp has a very big history. We have over 180 investments in various structures. So, we discuss with companies’ management that we can bring a lot of sectoral knowledge – what has worked, what has not. I think that is a big differentiation in terms of operational value creation. And secondly, there are not too many institutional investors from the Middle East operating in China.
China is a market that is well covered by the US and European [headquartered] private equity firms. There are also local private equities, but Middle Eastern institutions have only started investing in recent years. We help Chinese companies diversify their shareholder base.
What has changed in terms of your investment and exit plans in China amid the COVID-19 pandemic and geopolitical uncertainties?
Regardless of the geopolitical developments, we focus on healthcare, consumer, and technology segments. We have observed through our own investments how these businesses cater to demand within Asia, from China and Southeast Asian countries. These are not export-oriented manufacturing or traditional sectors where international trade or geopolitics have a significant impact. Healthcare investments cater to a large gap in supply and demand for many of the healthcare services in China. And the consumer side is mostly looking at fundamentals of secular demand from a local domestic consumption perspective. So, these companies that we have invested in and those who we are trying to invest in, don’t really see an impact of geopolitics. They have the resiliency to withstand macro shocks.
With regulatory changes in China, a host of domestic companies are looking to launch their IPO in the local stock exchange, paving exits for investors. What is Investcorp’s strategy?
Over the last few years, there has been a concerted effort from the government’s side to connect more and more domestic stock markets with outside stock markets. The regulatory and the foreign exchange framework have improved for investors like us, and for domestic investors. Now, we have the Shanghai Stock Exchange and Hong Kong Stock Exchange connected to Hong Kong directly. So, there has been a systematic increase of options for people to access domestic markets – and also for domestic companies to access outside markets. The overall theme is to create more connections between the domestic RMB market and the foreign currency market outside China. And in that regard, Hong Kong is playing a very important role since Shanghai and Shenzhen are connected through Hong Kong to the rest of the world.
Will you prefer to have an IPO or listing when trying to exit from your portfolio companies?
I think both. You have to look at the overall Chinese private equity market. Around 10 years ago, private equity was probably 95 per cent minority growth capital invested and only 5 per cent buyouts. Today, it is probably more developed with 75-80 per cent growth capital and 20-25 per cent control buyouts. As the private equity industry in China matures like PE markets in the US and Europe – where majority deals are actually controlled buyouts instead of minorities – exit routes through M&A, control buyouts will increase substantially. But as we speak today, most of the exit options are still through IPOs. Chinese entrepreneurs, today, have the regulatory option and flexibility to structure their companies for either NASDAQ listing or domestic shares listing or Hong Kong listing. So, there’s really no legal limitation as to how and where they can be listed. It is rather which capital markets provide the most meaningful views and valuation for companies in different sectors.
Are fundraising activities, in general, slowing down?
We can mostly confirm what you see on platforms like ours with a long history and track record. Of course, it’ll be more difficult for smaller and new players to raise capital. Fortunately, in China, we can fall back on the long history of Investcorp in the West, and our global footprint on the large institutional setup. We are not really considered a first-time fund here. So that in that sense, we are not seeing fundraising issues.
Are you raising new funds for China and Southeast Asia?
We are in active investment mode right now. We’re actively looking at new opportunities to deploy capital. But sooner, once the investment cycle comes to an end, of course, we would be back to the market and look to launch our next set of product-funds related to three sectors [technology, consumer, and healthcare].
What have your LPs said about the prospect of investments in China and Southeast Asia? After the COVID-19 pandemic, is there anything that has changed in your investment policy?
This year, we were able to get first-hand data and gather experiences on how China is doing compared to Europe or the US and the rest of Asia. Our LPs are very sophisticated institutional entities and they have a lot of points of reference and information. The general sentiment has been quite strong. The way China could control the spread – and now having no cases for quite a while – has enabled the country to recover. That really has strengthened people’s confidence in the country and the system.
Could you throw some light on the challenges and opportunities in Southeast Asia?
Our strategy for Southeast Asia is actually to primarily focus on the more advanced economies such as Singapore, Malaysia, Indonesia, etc, and not really the frontier markets. We should look at who has been investing in Southeast Asia systematically over the last decade. A lot of Chinese companies like Alibaba and Tencent have invested in Southeast Asia for almost a decade. Thus, we see the same behaviour [that we say in China] in technology, healthcare consumption, to repeat in Southeast Asia. A lot of the investment teams and the PE-VCs have been there. It’s a question of who can execute and who brings the capital and know-how.
Has Southeast Asia’s private equity industry benefitted from the US-China trade war?
China’s fast development over the last few years has contributed tremendously to the growth of Southeast Asia.
In general, we steer away from geopolitics. Instead, we look at underlying drivers of why things have grown in the past and why they should keep growing going forward. A lot of growth capital resources have come from China into Southeast Asia, to lift up the entire region.
What is your take on the exit strategy in Southeast Asia?
Exit is always hard, regardless of where, even when you are in Europe – if the business does not perform, it’s difficult. But in general, for any investment we get into, the important part is to know the options one would have when it comes to exits. For any investments, we would do our homework to identify who could be the strategic buyers or the best place to do an IPO. After all that analysis, we would decide whether to invest or not.