Conrad Tsang: Chinese LPs Need To Focus On Consistent Returns, Not Single Home Runs

Conrad Tsang, founder and chairman of Hong Kong-based investment firm Strategic Year Holdings Ltd., sat down earlier this week with China Money Network on the sidelines of the China Private Equity Summit 2018, organized by the Hong Kong Venture Capital and Private Equity Association (HKVCA).

Tsang founded his own firm in 2015 after spending 13 years at Baring Private Equity Asia, last serving as managing director at the global private equity firm. During the early years of his career, he was with Merrill Lynch Asia Pacific doing equity research with a focus on the media and retail sectors. He was chairman of HKVCA between 2013 to 2015, and currently leads the Real Assets Committee of HKVCA.

He shared observations on the growth of the Chinese private equity industry, and where he believes future investment opportunities lie.

Q: Since you have been involved with HKVCA for a long time, could you share your observations about HKVCA conferences. What kind of changes have you witnessed?

A: First of the all, the association and the conference have become bigger and bigger. I have been in the PE/VC industry for almost 20 years now, getting involved in HKVCA for about 12 to 13 years. When we ran conferences like this 15 years ago, it was very hard to recruit speakers and participants. People didn’t know about this industry and were not interested. But this year we had over 70 speakers and 500 attendees, media partner like you and 20 supporting organizations. I have to give credit to the industry itself, which has grown a lot over the past 10 to 15 years, aggregated money investing in Asia. It has become the second largest such sector globally after North America.

Q: You are referring to the PE/VC industry?

A: Yes. A lot more people are coming into this industry. Many of our peers came out of firms and started our own companies. I myself established Strategic Year Holdings Ltd. in 2015, after working with another firm for 13 years. Maturity of the skill set and experience of investing in Asia are all growing. I continue to see more and more opportunity and upside for our industry. Of course there will be bumps along the way too.

Q: What do you see as the biggest challenge facing the industry then, in Greater China?

A: For greater China, the biggest challenge is competition and valuation. Good things is the Chinese economy is a US$14 trillion economy. It has become so big that there are certain sectors that are deep enough for people to focus on rather than just being a generalist fund. For example, when people come out to raise funds 10 to 15 years ago, you could have a China country fund. Today that’s not enough, you need to be raising a China health care fund, for example.

Q: Funds need to be more niche, more vertical and with deeper expertise…?

A: This year is the first year that we have a lot more vertical industry sessions during the conference. Markets become deeper, which is a natural progression, mitigating some of the competition and valuation. With different sectors and different cycles, there are always sectors people like to focus on.

In the past, people were complaining that some sectors were too hot. I joked "Invest in semiconductors!" Of all our members there was only one fund focusing on semiconductor, and it had quite a challenging time raising money and finding deals. Now, everybody are thinking about investing in semiconductor. All of a sudden hundreds of billions worth of capital is pouring in.

Q: What kind of concerns, if any, do you have regarding this phenomenon in China where private investments "follow" state policy?

A: We as private sector practitioners investing in China need to watch very closely for policy development. One needs to swim with the tide, not against it. If you go against the tide, it’s often hard to generate good returns. My first preference is to find some under-appreciated sectors that people are not aware of yet.

Q: Any examples?

A: There are but I can’t say. The market is big enough that you are still able to find something niche within sectors that are less covered. One thing we strategically do not do is to participate in auctions. And we don’t chase after hot deals. If I meet a company who says "If you give me a term sheet it will be the 21st we have on the table," I will just walk away.

Q: What are some major trends you see for the industry going forward?

A: The consumer upgrade theme will continue to evolve, and there are a lot of niche markets where opportunities will exist. Another one is the GP/LP dynamic, where we will see that Chinese LPs will demand flexibility such as deal specific fund and commingled funds.

Northern American or European LPs would look at your resume, your team, the platform and track record, but Chinese LPs would want to see your deal list. That’s why we are likely to see more deal specific funds in the future as Chinese LPs prefer such arrangement.

Q: Will the industry deliver the returns promised to investors?

A: At Strategic Year, we try to go for consistency in returns. Our return target is 25% IRR. I think some of the more aggressive VCs in China made promises of between 8 to 10 times return to investors. Eventually Chinese LPs will realize that absolute number of return for one particular deal or fund is less important than what kind of consistent return GPs can deliver to them.

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Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Nina Xiang is the co-founder and managing editor overseeing editorial content and product development at CMN. Before founding CMN in 2011, Nina worked at BusinessWeek magazine in Beijing and Institutional Investor magazine in New York, writing about business and financial services. While in New York, she also served as part-time correspondent for Shanghai's financial television channel, China Business Network, as well as China Radio International, China's national English-language radio network.