AVCJ Forum: Corporate Investors Unveil Rise in PE Investments

BEIJING,March 28,2019 --China Everbright New Economy team,as an independent GP,has an influential effect on the PE investment market. BAT and other Chinese tech giants have stayed prevalent as corporate investors while only dabbling in the VC/PE society; a trend is emerging,however,where they are getting more and more involved in actual PE investment. Chinese corporate investors,consisting of state-owned enterprises (SOEs),mega-size private groups as well as unicorns,are playing a new role in the investment world in China.Following a start as PE beneficiaries,they are now rising as powerful players in the games of joint investments and exits,and are emerging as leading market players.

From left to right: Tim Burrough,AVCJ Managing Editor; Victor Ai,Head of China Everbright New Economy; Stephen Dai,Managing Director of Legend Holdings; Fred Fei,Managing Director of SAIC Capital; and Sandy Xu,Founder & Managing Director of Myrtus Capital.

Relying on long term industrial experience,most corporate investors have established specialized investment platforms or specifically engaged funds. OnMarch 20,guests at the AVCJ China Forum were treated to a panel discussion reviewing the opportunities and challenges arising from this new PE investing wave. Guest presentersincluded Victor Ai,Head of China Everbright New Economy,Stephen Dai,Managing Director of Legend Holdings,Fred Fei,Managing Director of SAIC Capital,and Sandy Xu,Founder & Managing Director of Myrtus Capital. This group included independent GPs and representatives of corporate investors.

What is more valuable:financial returns,or strategic synergy?

Asked whether a corporate investor's preference is on strategic or financial benefits,Victor Ai,head of China Everbright New Economy platform,observed that,"My focus would be on both,as Everbright New Economy funds are fairly unique in its series. Keeping pace with soaring growth of China's emerging industries in the last few years,China Everbright Limited has become one of China's major cross-border asset management platforms,and has allocated around 40% of its resources to those new domains. Over the years,China Everbright has made great moves,from its role as a corporate investor to an independent GP. The New Economy group stands out as an independent and market-oriented GP team. In merely three years,Everbright New Economy has grown its asset management to a scale up to RMB30 billion.

Everbright New Economy in its genetic structure is both a corporate investor and an independent GP as well. While GPs normally target investments for financial returns,corporate investors tend more likely to adhere to the investee's business plans and development strategies. When it comes to the New Economy platform,emphasis is placed on financial returns as well as the value add arising from participation in our eco-system of portfolio companies,seeking synergistic effect across the board.

Take the case of AI and IoT (AIoT). Everbright New Economy has been highlighting,and promoting their applications in traditional industries. Everbright has made the judgment that it can apply AI and integrate it with traditional industries,such as finance,healthcare,security,tourism,real estate and manufacturing. The benefits include industrial upgrading,in turn leading to wealth creating opportunities. The steady buildup of the AI-based investing ecology featuring AI-Enabled Industries with multi-dimensional (technologically and practically) synergy has been taking shape in our portfolio companies like SenseTime,4Paradigm,Terminus,Meituan Dianping,iQIYI,NIO,JD Logistics and NetEase Cloud Music,to name just a few.

Stephen Dai,shared his views on AI: As AI,IoT and other underlying technologies move forward,the synergy across industries expands at a fast pace. Grounded on industrial chain ecology,corporate investing benefits more from the trans-border extension of industries,given that short-term financial returns are not the priority.

Decision-making differences caused by an imbalance of resources

With more attention on strategy,resources emerge as akey factor in our investing decisions. In the process of decision-making,a corporate investor would first explore the synergistic effect or industrial relevance of an investment. Upstream investors would base its investment on understanding of the industry as one part of the industrial chain,and invest wholly in the business,thus maximizing the merits of the cross-business synergy on the industry chain. Compared to GPs,corporate investors therefore enjoy more applicable business resources,thus boosting prominent strengths in terms of resource-enabling.

"We run an autonomous business,yet have access to all resources of Everbright. This is good for the Everbright New Economy platform as it allows for a balance between the 'strategic synergic' investing philosophy and the 'financial investor's' perspective. This approach ensures synergy between financial investment and cross-business operations,as well as symbiotic investments upstream and downstream,thus guarding over investing decision on a wider perspective and the employment of resources from all end," added Victor Ai.

Since its founding in 2015,Everbright New Economy has sustained a stunning growth of business. The success is owed to the team's strong deal-making capability,and know how in industrial and market resources in both upstream and downstream of the industry. One of these investments is Terminus.It has grown into one of the most competitive companies in the field of AIoT and is now among the largest of China's AIoT unicorns.

In the long run,a robust system for industrial investments in time shall prove increasingly crucial. The Everbright New Economy Fund with its proven capacity to commercialize can add value to our portfolio companies because ofthe ability to bringproducts to the right markets. In the cases of SenseTime,4Paradigm and Terminus,the New Economy team added value by introducing industrial resources where they were urgently needed,including government and customer connections,and helped to perfect operation links to optimize commercialization.

In addition,the New Economy platform's first USD fund registered a successful close early this year at USD483M with strategic contributions from topline overseas investors.Everbright New Economy has developed the capacity to manage funds in dual-currency (USD and RMB) for cross-border investments. Our assets under management amount to RMB30 billion and includes about 70 projects.

As confirmed by Fred Fei,"A good financial investor is also an industrial investor." His true value is when he can help the portfolio companies streamline their businesses and develop markets from their upstream and downstream links,expand market domains,recruit talents and promote their managements.

Sandy Xu,Founder & Managing Director of Myrtus Capital,explained that,"LPs and GPs are attaching growing importance to industrial resources. In unfamiliar fields,Myrtus Capital would prefer to work with Fund of Funds or GPs who bring in both experience and resources,for the aim of creating greater value for portfolio companies. "

Opportunities and challenges facing transnational synergy

Most recently,as transnationals like Qualcomm,Samsung,Alibaba and Tencent,and Internet leaders including Xiaomi,SenseTime and AI Speech are seen setting up funds,strategic corporate investment turns to extend the boundaries of existing businesses for growth. This pushes more innovation and collaboration.

"In fact,corporate investors and GPs are mutually synergistic in the PE ecology,and their cooperation will continue to inspire and bear fruit," noted Victor Ai. The Everbright New Economy team has cooperated effectively with a number of prominent investors including market leaders such as Sequoia,Hillhouse Capital and IDG Capital,as well as corporate investors like BAT,Xiaomi and Focus Media. We have co-investments with companies such as iQIYI,JD Logistics,Circle,NIO and Xiaopeng.

Cooperation is competition.Tencent,spent more than RMB100 billion last year investing more in early phase projects,just likeSequoia. Is Tencent a rival,or acompetitor of Sequoia? Neil Shenexplains that,"there is competition,and there is cooperation." In fact,the PE markets are full of challenges,and opportunities. As company valuation grows,investors are more inclined to search for quality startups with sound valuations.

All panelists agreed that giants like BAT are growing moreprominent in the PE industry but they are not dominant. While investing in a long list of businesses alternative to their core business,they are having their attention distracted and resources diluted by challenges with their core businesses. In the next decade,it was suggested that BAT and other similar businesses will not be able to sustain any advantages in the tech-driven industrial upgrades,thus leaving huge chances for corporate investors and GPs focusing on certain lines of similar industries.

As corporate investors increasingly become an important force in China and the global venture markets,we should lose no opportunity to seek better and more profitable solutions through win-win cooperation between corporate investors and GP's.

Photo - https://photos.prnasia.com/prnh/20190327/2415901-1