The Pandemic hit the Chinese PE industry but tech-driven investments get an unexpected boost. Rafael Ratzel of Beijing based TH Capital talked about the various PE investment themes post COVID-19 in China.
05 August 2020
Private equity has been a popular option for global investors in their China asset allocation. But how much damage has the COVID-19 pandemic made to the PE industry in China and is it a good time to invest? If so, what sort of investment themes to pursue?
ATC interviewed Rafael Ratzel, Executive Director & Head of International Investments of TH Capital, who argued that although the PE industry was hit by the pandemic, the tech-driven investment themes have actually received an expected boost. He shared his thoughts on the investment opportunity in 5G infrastructure, healthcare, semiconductor, aerospace and autonomous driving.
“If you look at the details, it’s very favourable investment terms with a significant upside that enables us to really create higher returns in a stable and predictable manner over a long period of time. So I think, that’s the really the unique characteristic of Chinese private equity.
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Q: How has the COVID-19 pandemic affected the PE industry in China generally and your firm in particular?
- For the private equity industry:
- COVID-19 hit Chinese PE firms early and resulted in an industry consolidation;
- Valuation has come down a lot from the level in 2019;
- But COVID-19 has not changed the development trend of the PE industry.
- For our firm particularly:
- Our business has actually accelerated since COVID-19, with 3 IPOs;
- The stimulus package and support in the high-tech infrastructure created opportunities in the areas which in line with our investment themes;
- We can see the reduction of deal flow and investment activities, but we do still invest.
Q: How would you assess the opportunity in the “new infrastructure” such as 5G, IoT, etc?
- China’s goal of becoming a high-tech nation will be fulfilled by structured investment in high-tech infrastructure;
- Before COVID-19, “High-tech infrastructure investment” is a very clear theme supported by policy, government, domestic enterprises and private investment. This situation accelerated with COVID-19;
- 5G is a key part of “High-tech infrastructure investment” theme, because 5G will be the entire infrastructure layer for anything that created in a remote environment
Q: How do you capture the opportunity of “High-tech infrastructure”?
- We developed our own proprietary industry research methodology over the last ten years which has been applied in 5G scenario;
- We dissect the entire 5G value chain from systems and infrastructure providers to subsystem providers, application providers, their suppliers and entire supply chain. We invested along the supply chain over the last two years;
- We look for companies with technological advantage, high margin, and defendable market position that ensure long-term profitability. It’s very IP (Intellectual Property) and technology-focused and usually the top 1 or 2 providers in each of the niche segments.
Q: You have also invested quite heavily in the healthcare sector. Could you explain the investment themes?
- We see clear needs for the development of domestic competence and technology in the healthcare market. We invest in biotech, pharmaceutical and medical devices;
- We follow the same philosophy mentioned in the 5G scenarios above (high margin, good profitability, etc.).
- We usually invest in the top-ranked producer that enjoy a huge competitive advantage in penetrating big clients who are often state-owned players.
Q: Any other industry sectors that you are bullish about in China?
- Semiconductor industry:
- Opportunities arise out of the China-US trade conflicts;
- Domestic semiconductor industries are greatly supported by government, SOEs (State-owned enterprises) and Chinese tech-giants. And we invest along the whole value chain;
- In the global context, the semiconductor industry is competitive and not a typical private equity industry, but in China, semiconductor companies have attractive profiles.
- Aerospace industry:
- The duopoly of Airbus and Boeing being split up may happen and new competitor, an aircraft producer in China called Comac has come into the picture;
- The macro trends based on this needs of commercial aircraft in China makes aerospace another big growth area.
- Autonomous driving:
- China is getting more and more competitive globally due to the regulation and environment being created for testing and applications;
- Adoption from the market sides is also a strong push.
Q: What are the advantages of private equity investments in China, compared with other asset classes for global investors who are thinking participating in the China market?
- Significantly higher return: not only the maximum return in single case but also stable return;
- Significantly lower risk: the assets under our investment are highly profitable, very cash-generating and have very clear exit track. 90% of our exit channel is IPO;
- High valuation capital market for tech sector IPOs: valuations are between 50, 80, sometimes up to 100 PE multiple in the IPO we had in the last 12 months;
- To summarise, a high return with moderate risk, stable and predictable over a long period of time.
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