Having deployed over $300 million of its billion-dollar Global Voyager Fund, Ping An Insurance, China’s largest insurer by market value, is in preliminary discussions to bring in third-party institutional investors through a new fund.
“We have been approached by a few possible investors and partners who are interested in what we do, particularly from strategic investors who have similar interests to Ping An,” Jonathan Larsen, chief innovation officer of Ping An and chairman & CEO of Ping An Global Voyager Fund, told DealStreetAsia in an interview in Hong Kong. “We are beginning to explore the possibility of bringing in third-party LPs.”
One benefit of bringing strategic partners into the fund, he said, is that these institutional investors, as limited partners (LPs), could potentially become users and partners of the fund’s portfolio companies.
“I think they’re going to be much more committed when they actually are shareholders in the [portfolio] company than if it’s just an arm’s length relationship,” said Larsen.
Larsen joined Ping An in May 2017 and has been leading the firm’s Ping An Global Voyager Fund, a $1-billion corporate fund solely financed by the Shenzhen-based company to spearhead investments in the global fintech and digital health industries.
The fund principally sources deals outside of China targeting growth-stage companies that can generate lucrative returns and bring synergies to the Chinese insurer.
So far, Ping An Voyager Fund has invested over $300 million in 13 companies across the US, Europe, Israel, China and India. The fund primarily focuses on established businesses that are already profitable or breaking even. It typically injects $20-30 million into each deal; its largest transaction so far is $45 million in German startup Finleap that builds fintech companies.
Larsen said that the fund’s current internal rate of return (IRR) has crossed 35 per cent on a mark-to-market basis – if calculated under a conservative methodology. Having closed four deals in the first half of 2020, the fund has built “a robust [deal] pipeline” and is expected to enjoy the initial public offering (IPO) of a few portfolio companies in the following months.
“We’re still early into this journey, but we’re encouraged by what we’ve seen so far,” said Larsen.
How has this year been for you in terms of deploying capital worldwide?
Quite productive. In the early stages of COVID, we were apprehensive about what that might mean for our ability to get deals done and to continue building the fund that we had started three years ago. But we’ve actually had a pretty good H1 and deployed about $100 million of capital. In H1, we invested in iCapital Network, Taulia, PlusDental, and Better.com.
In February, the first thing we did when COVID really struck was to perform a risk assessment and to put in place in more granular monitoring of our portfolio to understand their cash position.
For companies that are in the space and at the stage we’re looking at, the cash runway is the most important point. While in some ways, it’s still a very hot market with an abundance of available capital, investors are clearly being very selective. For less well-known companies and sectors that haven’t yet proven themselves, attracting new capital can be difficult in an environment like this.
In terms of new transactions, there has been fallout from COVID. Plenty of entrepreneurial companies have had to go into hibernation mode or are just struggling to survive. For example, Monzo Bank in the UK said that they’re in survival mode. But the company was riding high in terms of investor appetite six months to nine months ago.
There’s no doubt that there will be casualties as a consequence of this crisis. Some of that will simply be accelerating the demise of companies that probably wouldn’t have survived anyway. But in other cases, it’ll be just a function of the availability of capital.
Were you walking away from new transactions?
Not at all. In H1, we were acting on leads and opportunities that we had initiated prior to COVID. It was the natural tail of what we were already working on, so COVID didn’t have that much effect. Of course, we had to take COVID into account as to the effects it might have on the investments we were making, which we did. In some cases, we were able to renegotiate transactions as well.
We did see our pipeline start to run a bit thin entering into H2. But in the last month and a half, we have been able to reach out to a lot of companies and to build a robust pipeline. I think we’ll probably end up doing a few good transactions before the end of the year.
Do you have any deal-making targets for H2 2020?
For the team we have and for the kind of intensity we apply to each transaction, we think deploying somewhere between $100 million and $150 million per year is the right range for us.
We’re trying to make, firstly, very good financial investments, so we want to be sure about what we’re investing in. Secondly, we’re trying to build relationships that can create future value. Every investee company is a partner for us. That’s why the chemistry of the partnership, the alignment of objectives, and the capabilities that either side is going to rely on are extremely important.
We’ve invested slightly over $300 million in a total of 13 companies, including one in China, one in India and the rest across Israel, the UK and continental Europe. Our typical investment size is $20 million to $30 million. Typically, we look into companies that are five to eight years old and are delivering strong revenues – not necessarily profitable, but probably approaching breakeven or cashflow positive [points].
We usually invest in businesses that have grown from zero to one, with established abilities to price the product and to generate a user or client base. Their unit economics should be fairly clear, so we know that they’re growing with a positive margin. What we really do is investing in the next stage of the business, which is scaling from one to N.
We focus on investments in the fintech and digital health areas. When Peter Ma, co-founder and chairman of Ping An Insurance asked me to join the firm and set up the billion-dollar fund, the original objective was to create a fund that would look principally outside of China and certainly outside of Ping An to find next-generation business models that were investable, as well as places where we could not only deploy funds in areas that we were highly confident to see growth and returns but also create relationships with companies to bring synergies.
How do the uncertainties in China’s relationship with India and the US affect Ping An’s international expansion plans? What about the global deal-making activity of Ping An Global Voyager Fund, which comes across as an investor with deep China roots, and investing in areas that are closely related to users’ financial and health data?
Firstly, 99.9 per cent of Ping An’s business is in China today. And we don’t have particularly ambitious international expansion plans at the moment.
We do have some international operations, including our OneConnect business, which is beginning to show considerable success in Southeast Asia based out of Singapore. We have a very small office for Lufax in Singapore as an offshore wealth distribution platform, as well as a partnership with Grab in Indonesia. Of course, we have investments globally in firms like HSBC. But at this stage, because we don’t operate in a significant way across many jurisdictions, I think we’re insulated from geopolitical tensions.
As far as our investing activity is concerned – specifically in relation to the US – our transactions are pretty small, non-control transactions. We never have access to customer data from our portfolio companies in the US and worldwide by virtue of our shareholdings alone. And we’re not operating in areas of sensitive technologies. At least so far, those restrictions have not been a barrier. Of course, that could change. But I think we’re fairly optimistic that we’ll be able to continue pretty much as we have been.
The question is: Do people want to work with us irrespective of any geopolitical issues? The answer is yes.
Generally, people view us very positively because we’re the only non-governmental, large-scale and professionally managed Chinese financial institution with a very good track record of over 32 years. I’d say 99 per cent of the people we talk to are thrilled to be talking to Ping An.
More broadly, what do we really offer? We’re investing in companies and bringing capital to them. That’s usually welcomed. I think most countries welcome international investors who are prepared to fund their entrepreneurial companies. Meanwhile, the reason why we’re investing is either to bring our capabilities to help the company grow faster or to open a door for it to enter China. It’s really hard to see why that would be a threat to anybody.
When the fund was launched in 2017, you told Financial Times that you were expecting to fully deploy the fund in three to four years. Why has the target shifted?
It’s probably a longer timeframe than we originally envisaged. Part of this is just us finding our feet.
At that time, we were thinking of extending our range to some much larger transactions such as pre-IPO deals. And we originally had a hypothesis that part of the fund would go into other funds, which could be a helpful way to cover the early-stage world where we certainly weren’t going to be set up to do ourselves. As it turned out, we’ve invested in New York-based health incubator StartUp Health and London-based early-stage fintech investment firm Anthemis.
But what we found is that it’s quite a long period from early-stage to growth stage, so it doesn’t really deliver quick results in terms of leads for us. Moreover, as we have established ourselves in the last three years, we really haven’t had any trouble at all in getting to the companies that are in our strike zone and we want to invest in. So, it’s actually not that relevant to have this feeder fund idea. The two things at each end of the spectrum have changed in our thinking.
It doesn’t mean we would never do a larger transaction. But I think we’re just very comfortable in this range of between $20 million and $30 million. Our largest transaction so far is $45 million, while the smallest is $10 million. Nowadays, we only do direct investments with a focus on growth-stage companies.
What does it take for you to make a larger transaction?
It would be the same kind of companies from the same sectors. The larger the company, the more sensitive we’re going to be to valuation parameters, and the more focused we will be on pure financial evaluation.
As a matter of style, we generally want to be with companies for seven years as an average capital deployment period, helping the firms grow and building relationships for Ping An. That’s why the idea of investing in a firm nine months before its IPO doesn’t really fit that well with what we’re trying to do strategically anyway. We’re not ruling it out, but it’s just not something we focus on particularly.
Do you expect to take larger stakes in investee companies?
No. We’re very happy taking minority stakes. And we’re not interested in control positions. The stakes we have in our portfolio companies range from 3.5-20 per cent.
The kind of companies that we want to invest in are not interested in being controlled by somebody else at this point in time. Maybe that will change when one of the exit paths is to sell to a strategic investor, but that’s not what we’re doing right now. We’re trying to be supportive and to participate in the growth of entrepreneurial companies that are finding their way in the world themselves.
That’s enough for you to have a say on the Board?
We are normally on the Board, not always, but normally we have Board Observer Rights at least. In some cases, we have board rights and we choose not to exercise those for a period of time if we’re very comfortable with the way things are moving along.
But much more important is the relationship that you build with the founders and the management team. I’d say so far, we’ve been blessed with excellent founders and managers who always ensure transparent relationships and genuine two-way dialogues. The last thing we want to do is to get in the way, but we want to be helpful when we can.
Even as the billion-dollar fund has only invested about $300 million so far, is Ping An preparing for a new vehicle in the coming years?
We have been approached by a few possible investors and partners who are interested in what we do, particularly from strategic investors who have similar interests to Ping An. So, we are considering and beginning to explore the possibility of bringing in third-party LPs. But that’s still at a preliminary stage.
We don’t know when that might happen or whether it will happen. But it’s something we’re contemplating.
It’s a bit like when we invested in iCapital, alongside other investors like BlackRock, Goldman Sachs, Carlyle, Blackstone, Credit Suisse, and UBS. The great thing about having those investors as shareholders is that they’re all partners and users of the service. I think they’re going to be much more committed when they actually are shareholders in the company than if it’s just an arm’s length relationship.
One of the things we’re thinking is that by bringing other strategic partners into our fund – particularly for the stage of companies that we’re investing in – we will be able to bring in those companies [LPs] to be users and partners of portfolio companies as well. That can be similarly accretive to the business case for individual investments.
If the idea of bringing in third-party investors is implemented, do you think the fund will be larger than $1 billion?
We’ll see over time. One of the things that you really don’t want to be doing in our business is being in a hurry to deploy capital.
It’s just quite a long process of reaching out to people, sounding their interests, and going through all of the legal registration requirements.
What are the major trends in deal-making that you are seeing in the fintech and digital health industries?
In the fintech sector – from an investment and a partnership perspective – we think there’s probably more value in B2B than B2C companies or in B2B2C than B2C alone.
In general, there are some very good B2C fintech firms such as PayPal, as well as Klarna and AfterPay in the “buy now, pay later” sector, and Credit Karma in the credit monitoring space. But only a small number of players are able to scale. It’s usually very difficult for startups to acquire customers at scale and to be profitable within a meaningful time period. So, we tend to be very cautious in the direct consumer space.
Of course, B2B is not easy either. Because you need connections to get your first five to six clients to really establish yourself as a B2B player. But we do see the whole industry reshaping around cloud-based SaaS platforms. On-premise software vendors are getting replaced by subscription services offered by multi-tenant cloud providers over time.
We see that in the three layers of the new architecture of finance, which include companies that help to upgrade customer services and experience from offline to online; in the infrastructure layer – core platforms that actually run banks or insurance companies; and in what we call the intelligence layer or the analytics layer – advanced analytics being applied to all kinds of things.
And interestingly, it’s actually quite a similar picture in the health space. A lot of digital health solutions are about bringing solutions to customers using mobile devices or other devices plugged into mobiles. There’s an enormous space that remains open to the provision of next-generation solutions to deliver health record systems that are completely confidential and accessible to all providers.
I think there are only one or two countries in the world, such as Israel, that have anything close to a universal, centralised health record system. In most countries, your health record is wherever you last went to the doctor. There’s no way of aggregating it and no way of sharing all that information with the next doctor you visit.
In the intelligence/analytics layer, we’re seeing a lot of technologies, particularly AI, become relevant to diagnostics. In this area, we invested in China-based Airdoc, which develops deep learning techniques based on massive data labelled by medical experts and can recognize nearly 30 kinds of common diseases, and Riverain, a provider of clinical AI software used to detect lung disease at its earliest stage.
What is your plan for investing in India and Southeast Asia in the following months?
We are not a geographically focused fund, but a global and thematic focused fund.
I think COVID seems to be hitting India pretty hard. And the problem doesn’t seem to be going away before an effective vaccine could be deployed at scale globally. We’re observing India with interest, depending on the sector and the company. We certainly have no preordained bias to or for India.
Southeast Asia is particularly challenging as well because it comprises many different countries. Every market has its own unique conditions, so any business that’s trying to scale across Southeast Asia is confronted with this problem. It’s just a very complicated place to do business.
What we tend to see is that the new models that change the paradigm usually come out of developed markets. Usually, it is in the emerging markets where we see ways of adapting and deploying those models at scale, given the unique local market conditions and infrastructure. It’s certainly not universally true. But I think, for the most part, the kinds of platform opportunities we see are coming from developed markets.
Are any of your portfolio firms going public soon?
All of them theoretically can. A couple of them are in discussions to do so. Our fund IRR is north of 35 per cent on a mark-to-market basis, using a conservative accounting methodology. We’re still early on this journey, but we’re encouraged by what we’ve seen so far.