How has the slowdown in technology investment and softer GDP growth affected China’s ‘New Economy’ of fast-growing technology industries?
China's economy has entered a ‘new normal.’ As of June 2019, the number of mobile internet users in China hit 847 million, an increase of only 0.5% compared to the end of 2018. But private equity investors continue to invest in innovation-driven enterprises, with a focus on productivity improvement and synergy. Despite the slowdown of overall GDP in China, the revenue of internet giants such as Tencent and Alibaba continues to grow at a rate of more than 20%. The New Economy now accounts for about 16% of China's GDP, with 2018 output growth of 12.2% year on year, outpacing GDP growth in current prices by 2.5 percentage points.
What key trends do you see driving attractive risk/return opportunities?
The first trend is the change in consumption patterns, which can be summarized as the Five New.
- New Consumers: Generation Z cares about attitude, not just basic functionality; they are looking for high-quality, stylish goods at fair prices. Meanwhile, the ‘silver economy’ is creating investment opportunities in health, leisure, and tourism that caters to older generations.
- New Media: China has 430 million daily active viewers of short videos. Each viewer spends 60-70 minutes per day on platforms such as Douyin, known outside China as TikTok. Integrating Douyin with online shopping site Taobao creates a powerful e-commerce ecosystem that’s reinforced via influencers, whose video posts generate buzz and drive even more traffic.
- New Channels: The cost of user acquisition through online channels has increased significantly in the past two years. But new channels, such as offline shopping malls in lower-tier markets, offer a more competitive user acquisition cost.
- New Brands: China has many export-oriented original equipment manufacturer (OEM) companies. As a result of the US-China trade war, many OEMs are actively looking to establish their own brands. And on the demand side, as Chinese GDP per capita approaches $10,000, consumption upgrades are more accessible to the general population. An example of a New Brand is NOME, whose products span lifestyle goods, products for the home, and food.
- New Infrastructure: The on-demand food delivery industry has created a very well-developed delivery network across Chinese cities – even better than that of traditional courier services. Same-city delivery now only takes 30 minutes. This is creating opportunities for other types of delivery businesses – not just food, but medicine, for example. As long as these networks are located in the same city as the inventory, any type of good can be delivered locally, and fast.
The second trend to mention is the industrial internet. As labor becomes more expensive, non-digital companies are beginning to conduct more business online and are embarking on digital transformation journeys. And new technologies – like artificial intelligence (AI), big data, and cloud services – are helping businesses to improve efficiencies in the flow of information, production, and transaction, thereby lowering their costs. This process is still at an early stage, but it has lots of potential as consumer internet companies, such as Tencent, invest heavily in the sector.
The third trend is technological innovation & advanced manufacturing. The ongoing trade war is forcing Chinese companies to develop in-house technology, which creates investment opportunities in high-end manufacturing, 5G, AI, and chips. 5G, for instance, enables capabilities like wireless control and communication for equipment, advanced logistics tracking, low latency industrial AI, and sensitive augmented reality (AR) and mixed reality (MR) cloud applications.
The number of players in China’s private equity industry is growing. What advice do you have for LPs looking to select the best GPs?
We believe that to be successful in this industry, you need three key strengths:
Visibility and insight into the most promising deals
This requires a strong pipeline of advisory services, an extensive network within the entrepreneur and investor community, dedicated and full coverage of new economy sectors, first-hand market intelligence and an in-depth understanding of the latest industry trends.
Ability to invest in exclusive opportunities
Entrepreneurs and start-ups must see you as a valuable investor and strategic advisor, capable of bringing long-term value and advice. That’s how you generate transactions that are exclusive or offered to only a very limited number of private equity firms.
Ability to provide comprehensive solutions
Having a platform of financial services is attractive to both limited partners and portfolio companies. Whether their business needs involve financings, industry consolidation, strategic investment, divestitures, or going public, they want seamless support.
Huaxing Growth Capital started in 2013 as the investment management arm of an established financial institution, China Renaissance. How did Huaxing come about?
Huaxing primarily focuses on the formation, management, and investment of private equity funds, and is a natural extension of our advisory services. It allows us to participate in our clients’ value creation, by leveraging our platform and network strengths to bring significant value to both portfolio companies and limited partners.
This article is taken from the 2020 Preqin Global Private Equity & Venture Capital Report. For more expert commentary on the private equity & venture capital industries, please visit preqin.com/gper
China Renaissance Group
China Renaissance Group (CR Group) is a leading financial institution that combines private placement advisory, M&A advisory, direct investment, equity underwriting, sales, trading and brokerage, research, structured products, asset management, wealth management, and other financial services. Providing one-stop financial services across mainland China, Hong Kong, and the US, CR Group operates a competitive and unique international network that connects China’s capital markets with the rest of the world, serving new economy entrepreneurs and investors globally.
Fan Bao is the Founder, Chairman, and CEO of China Renaissance Group, China’s leading financial institution serving the New Economy, which he founded in 2005. Fan was Chief Strategy Officer of AsiaInfo after spending seven years in investment banking, at Morgan Stanley and Credit Suisse. Fan is a guest lecturer at PBC School of Finance at Tsinghua University, and a postdoctoral supervisor at the Shenzhen Stock Exchange.