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Malaysian based Kairous Capital is known for their farseeing positions - forging partnerships with Chinese firms with overseas operations. The international fund is well ahead of the game sensing early the potential of Chinese companies even before their Chinese counterparts did.
Kairous Capital had invested in iPayLinks with an impressive Internal Rate of Return of 171.2% as of June 2018. Last March, Tencent invested in iPayLinks doubling its valuation from the time Kairous poured capital into the company. With the help of Kairous, iPayLinks has become one of the fastest growing companies in the cross-border payment space.
Founded in 2015 by Joseph Lee and See Toh Kean Yaw, Kairous focuses on cross-border tech investments across SEA, China and GCC. Recession notwithstanding, Kairous set up an office in Shanghai last year. So far, Kairous has invested in nine companies of which five are Chinese and the rest are from Malaysia.
Joseph Lee has worked for a regional venture capital firm and Kuwait Finance House (KFH) before founding Kairous. He has 15 years of experience and expertise in cross-border PE&VC investments and has successfully invested in more than 20 companies in China and SEA.
The Passage interviewed Joseph Lee to find out more about the cross-border investment opportunity in the region, Malaysia's indispensable role in SEA market and how Chinese firms can cash in on their technology edge while going overseas.
Edited excerpts
TP: Give us a lowdown on Kairous Capital.
JL: China and Southeast Asia were my focus areas while I was working for KFH and the VC firm before that. I led the investment in these regions from 2006-2012 while I was in KFH. We had invested in healthcare in Singapore, manufacturing and agriculture in Indonesia, and some substantial investment in China and Philippines. We had also invested in a hospital in Bangalore.
Post KFH, I, along with my partner, decided to focus on investments in these areas and Kairous was founded in 2015 to help local companies planning to venture overseas.
I had helped bring two companies to SEA during my previous stints. I had seen the cross-broader space up close and know how to bring Chinese companies to SEA.
I tried to develop a strategy, starting with picking a local player, and positioning ourselves as the go-to cross-border investment group focused on investing in Chinese companies with overseas ambitions.
Chinese tech space was growing rapidly back then. I was shuffling a lot between China and Southeast Asia. I had realised the gap between China and SEA is huge in terms of technological advancement compared to other industries like manufacturing. Our strategy is basically to arbitrage between the two regions.
Arbitration is much easier in the tech space compared to other industries. For example, if you are in manufacturing, you need to rent land, and such things take time. Tech space has no such hassles.
Tech is a different ball game. At Kairous, we offer capital and customisation for cross-border companies.
TP: What is Malaysia’s significance in Southeast Asian market?
JL: Southeast Asia can be mainly divided into two groups. Malaysia, Singapore, Indonesia and Philippines -with English as common language- are similar in a lot of ways. The second group composes of Vietnam, Thailand, and Cambodia among others.
Indonesia, with a population of 200 million, is the preferred choice for the Chinese companies going for the size. Whereas, companies favor Singapore and Malaysia for setting up headquarters.
It's also about the industry, not just the location. For example, if you are in the banking industry you are likely to end up in Singapore. Same goes for deep tech firms.
But if you are an internet-based company, Singapore doesn’t make sense as the population is small. Big industries need big markets, like Indonesia. But on the other hand, we consider Indonesia as a tough market to crack. Lots of Chinese companies choose Indonesia as their first stop.
Malaysia’s living cost is much lower than Singapore, and has more people who can speak Mandarin and English well. Chinese population in Malaysia is about 20-35%, and among them around 16% can speak both languages pretty well.
Malaysia is ideal for launching and the training of personnel. And then later, you can take the company to other parts of Southwest Asia.
For example, Tencent first rolled out WeChat payment in Malaysia outside of China. Malaysia has 32 million population, almost same as Shanghai. Another example is Dingtalk. Their first stop was also Malaysia. The country has some advantages you cannot find even in Singapore.
TP: Recently, a Chinese fintech company has received investment from Sequioa India. Is it the beginning of a new trend?
JL: Yes. We started out as an international capital interested in investing in Chinese companies with global expansion plans. We saw the opportunity in 2015-2016. Not too many people were looking at the space back then. And not many Chinese companies wanted to venture out. Putting money in where you see the opportunity is one thing, and whether you understand Chinese companies is another.
In China, we worked closely with lots of funds. They want us in as local partners here for investments going overseas. So far the relationship with RMB funds has been going well.
We also help them with localisation. When we first invested in the cross border payment company iPayLinks, not too many RMB funds were keen on putting money in companies venturing out. Now, the situation has changed and 30-40% of RMB funds are looking at such companies. We will also see more international funds tapping the space.
TP: What is your advice for Chinese companies targeting overseas markets?
JL: The Chinese market is competitive and huge. China also has the advantage of technology. When I was working in the KFH, we had invested in a company in China. The Shanghai-based company stood out because of the technological edge. I helped them in acquiring a local company. So the step one is to get noticed for your technology and the second step is M&A.
It’s also important to recruit the right GM who can pick the team in the local market. I believe the local market have to be developed by the local team, and not by the Chinese team.
For iPayLinks, we suggested that we first get to know the market before connecting with the local player. Then you set up a team and train the team, and branch out to other parts of SEA.
The toughest part is the M&A. As a fintech company, they are operating in a regulated industry, so they need to have all kinds of licenses and the paraphernalia. I had executed two M&A for them. The central banks usually want to see a local director in the company. And as a foreign company, you do need a reliable local partner.
TP: Why you are still focusing on the Chinese market despite the economic slowdown?
JL: The reason why we still focus on China is because more and more Chinese companies are expanding globally and it’s a good opportunity for us.
In 2015-2016, I had only come across 10 companies interested in going overseas. Now there are 100 companies eyeing international markets. Once we stabilise in China, we will shift our focus to Vietnam.
The China office will cover the mainland, the Vietnam office will deal with Thailand and Vietnam and the Malaysian office will cover Singapore, Indonesia, and Philippines.
TP: Do you have any plans to enter Indian market?
JL: Indian market has got potential. We are still a young company, and we have too much on our plate with China and SEA. Maybe, we'll consider India after five years.
I am keenly watching the Gulf Cooperation Council (GCC) for past 2-3 years. GCC has a lot of Chinese companies. It's quite natural for tech companies to go to GCC. India's tech is also good. I think things could change, with government policy and all other things, in the future.
TP: Middle East funds have not shown a lot of interest in Chinese companies. What are your thoughts on that?
JL: The way they do things and the way China and SEA do things are quite different. We need to spend some time to build the trust. Their speed of doing things is 3-5 times slower than China.
The Middle East funds had traditionally invested in the US, even after 9/11, as the trust is already in place. If China wants to attract money, they can do it via Malaysia as it connects the east side and the west side. Malaysia also has a lot of Chinese population. Together they can build the trust, and explore the markets.
(Xintong Chen, an intern with The Passage, has contributed to the story)