A: From a fund level, we have a pretty consistent pace. On a particular country, we may think through if this year we should be aggressive or cautious.
In China, we try to do more cross-border deals now, rather than just China-focused deals, to diversify our risks. I would say we are cautious, but still keep a consistent pace.
Q: Let’s take the example of Rise, an English language tutoring chain in China. How did Bain Capital apply these principals to the company?
A: Rise is historically a classroom tutoring service for English language learning. The business faced some challenges, including increasing rental expenses. We advised on how to increase the utilization of classrooms, how to make usage of the classrooms during off times, and how to use online channels to make learning more efficient.
We also helped the company to improve teacher retention, as teacher turnover in the industry is very high. We came up with plans to give teachers more flexible schedules and outsource non-essential tasks to others.
Q: With mushrooming online education companies and traditional education institutions embracing online channels, what are the pros and cons of each model and what will be the industry’s future?
A: The Internet will be part of our lives in the future, there is no question about that. I think for younger kids, offline is still necessary as they lack the discipline and it’s hard to evaluate the effect of online learning at their age.
We helped Rise to develop a middle school curriculum, as we think this segment is a white space and no one in China has a strong program. The program is purely online with students staying at home and studying online, maybe coming to the classroom once a month to have a Q&A and assessment with teachers.
Another concern for purely online education model is that so far, there have not been any profitable business models and how to create a profitable business remains an open question.
Q: The education sector is very segmented in China. Do you see more merger deals taking place?
A: I do see more merger deals and generally an industry consolidation. As there are many new entrants, I would imagine there will be a lot of investor interests in the sector, but the challenge is that valuations are also very high.
Q: Your plan for Rise is to do an initial public offering?
A: One way is to do an IPO, but we are also open to selling the company to another education platform. The business is trending very well, so we will see if it can get to a size to be a public company in the next two to three years.
Q: Another Chinese company Bain Capital backed is Gymboree, a kids apparel and early education company, from which you just recently exited. Can you tell us about how you exited?
A: This is an interesting story. Our U.S. fund actually invested in Gymboree U.S. first. I approached our senior partners in the U.S., saying that my kids were in the Gymboree Play & Music program and China represented a great opportunity for the company.
Later on, we bought the China master franchisee and helped it rally the franchisees in China, especially the Play & Music business. We spent a lot of time educating the market, and the business grew very healthily.
Zeavion Holding, led by Chinese entrepreneur Jack Shi, wanted to acquire the global Gymboree Play & Music business and all the related intellectual property. So we sold the unit to the buyer in July, and now they own 700 Gymboree Play & Music centers in around 40 countries, but the apparel and clothing unit was not included in the sale.
Q: How do you consider the different exit options during your investment analysis?
A: We never use the A-share market multiple in our analysis, as an A-share IPO is highly uncertain. We usually take control positions in companies, which means we need three years of historical numbers to apply for an IPO, plus the waiting time for an IPO and a three-year lock-up, not to mention gradual sell-down that can take a lot of time.
So for a global private equity investor, an A-share IPO is almost not a choice unless you are a minority shareholder and tag along. We actually find strategic buyers offer reasonable valuations.
In addition, in some exits when we sell to strategic buyers, we will also take some of the buyers’ shares. When we sold auto parts maker ASIMCO Technologies to Hong Kong and Shanghai-listed Zhenzhou Coal Mining Machinery Group, we took some of the buyer’s shares. That way, we were able to benefit from the A-share trading upside.
Q: What’s the biggest challenge in portfolio management, in your experience?
A: The biggest challenge is to obtain trust from the management team. It’s easy for companies to welcome us as an investor, but once changes are needed to improve the business, it could be painful. So the most important thing is to align the management team. I find execution is not that hard.
Q: Lastly, Bain Capital has done lots of restaurant deals elsewhere but not in China. Do you not like the restaurant business in China?
A: We actually spent a lot of time on restaurants sectors in China. We are looking at two or three potential targets, so we will see if we have the opportunity to invest.
There has been a strong headwind during the past few years for restaurants as business models were impacted by food delivery platforms and consumer habits were changing. But there could be some opportunities here if you have the capability to turn around businesses.
About Wang Lihong:
Wang Lihong is managing director at Bain Capital in its Hong Kong office. She is responsible for investments in the industrial, energy, financial and business services sectors. Before joining Bain Capital in 2006, Wang was an executive director at Morgan Stanley Dean Witter Asia Ltd., where she focused on execution of China-related financing and M&A transactions. Before that, she worked at J.P. Morgan and Credit Suisse First Boston.