Th Edge: Investing in cross-border ventures

Source: https://www.theedgemarkets.com/article/cover-story-investing-crossborder-ventures

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 14, 2019 - October 20, 2019.


By: Tan Zhai Yun

For more than a decade, beginning in the early 2000s, Joseph Lee flew in and out of China every month looking for investment opportunities. He was a senior investment manager at Kuwait Finance House and was managing its private equity (PE) investments in China and Southeast Asia.

During that time, he witnessed China’s transformation into an economic powerhouse. “I saw the country’s income per capita and technology become what it is today,” says Lee, who had sharpened his investing skills at a venture capital firm for two years before joining Kuwait Finance House, where he spent six years.

At the time, he noticed that many Chinese start-ups were eager to expand beyond their borders. “Back then, few Chinese companies were keen to expand as their market was already big enough to keep them busy. But later, out of the 10 companies you talked to, about eight would express their intention to expand overseas. They just did not know how to do it,” he says.

This trend offered many opportunities to investors and businesses. So, in 2015, Lee started Kairous Capital Sdn Bhd with two friends, See Toh Kean Yaw and Dr Michael Gan.

Kairous is a venture capital firm with a hybrid model as it has adopted some PE elements due to its active involvement in post-investment value creation, says Lee. The firm invests in technology companies across the region that have proven business models or have the potential to cross borders.

In particular, the firm sees the potential of investing in Chinese companies and helping them expand to Southeast Asia. “There are a few reasons as to why these companies are eager to expand outside of China. The country has reached a new normal, where the growth rate has slowed and you see fewer opportunities in the country. Over the last 15 years, profit margins have been better outside of China because of the fierce competition in the country,” says Lee, the firm’s managing partner.

In Southeast Asia, China-based companies can compete with those from the US or other Western countries due to its relatively lower price point, he observes. “A Chinese company that has mature technology and sees no room to grow in China should come out because there are still many opportunities outside the country. They can export their technologies and business models to other countries,” he says.

Arbitrage is another reason Chinese companies should cross borders. Lee observes a lag in technology and business model innovation in Southeast Asia compared with China. This presents a huge opportunity for China-based companies to go abroad.

“For instance, China has no room for new mobile payment players because it is dominated by Alibaba Group Holding Ltd and Tencent Holdings Ltd. But Southeast Asia still has room for new players,” he says.

This is also a key strategy for Kairous. Underlying Lee’s confidence in cross-border strategies is his observation that competition in today’s world is borderless. This means a company with good technology can easily enter another market and compete across borders. They can also compete across industries at any given time.

“For instance, previously in PE, we looked at the healthcare, retail and manufacturing sectors in their own verticals. But look at the tech world now. Ping An Insurance is in the insurance sector, but it is also big in healthcare and banking,” says Lee.

“Grab is in e-hailing, but it is also a big player in food delivery and it is going into the financial technology (fintech) space. You can find similar cases for tech giants such as Alibaba, Tencent, Meituan Dianping, TouTiao or TikTok. You cannot view things in their own vertical silos anymore.”

This is an emerging trend that investors should capture by adopting a more holistic and regional view. This observation led Lee to name the company Kairous, which means good timing or window of opportunity in Greek.

“For investments, it is important to capture that window of opportunity … I see many opportunities for this in the tech space. Four or five years ago, we saw that the tech space was not that active in Southeast Asia [compared with China]. We wanted to position ourselves early and become the only organisation serving as a bridge between China and Southeast Asia,” he says.


Identifying arbitrage opportunities


Lee’s views on opportunities in the tech sector is reflected in Kairous’ portfolio. Its 10 investee companies are in fintech, medical technology (medtech), insurance technology (insurtech) and e-commerce, among others (see infographic).

Lee is also interested in education technology (edutech). “Edutech is still lagging behind as we have struggled to find good deals. But fintech, digital health and e-commerce offer plenty of opportunities,” he says.

In medtech, the arbitrage opportunities lie in telemedicine, artificial intelligence (AI) and big data. Kairous has invested in China-based CareLinker, which developed an online system linking pharmacies across the country. The company collects and analyses health data and creates risk-prevention models for doctors to help high-risk groups. It also has its own medical devices that are connected to an app.

“We brought the company to some of the pharmacy chains in Malaysia. They [pharmaceutical companies] have collected a lot of data that can show how effective certain medications are on patients with certain chronic diseases. These companies will get statistics such as which age group of patients is getting the most effective results by taking a particular medication, which will help in their research. I think health tech will be the big thing in the next 10 years,” says Lee.

The data is stored anonymously in a data warehouse so that patients’ data privacy is protected. CareLinker is already connected to 35,000 pharmacies across China and 100 million members are using its app, according to Lee.

“CareLinker also assists patients in documenting their health data, reminding them to take their medications and providing explanations on their diseases and medicines via messages from its intelligent cloud database,” he says.

Kairous’ other medtech investee company is China-based SkinRun, which uses facial recognition technology and AI to detect facial skin health. Much like having a specialist view photos of different skin types to identify issues and provide recommendations, the company uses technology to collect and analyse all this data on the back-end.

Using the technology, SkinRun invented portable devices that scan your face and send the data to be analysed digitally. In a few minutes, a report on your skin health will appear on the screen, together with recommendations for skincare products.

“We brought the company to visit malls in Malaysia. Imagine that you could scan your face with a camera on the advertising panels in malls, on top of the directory board. It could then analyse your skin condition and lead you to SaSa or Watsons to buy products,” says Lee.

This product is already being used in Watsons and many other big brand outlets in China, with more than 200 million scans in their AI database. The system will be available in Malaysia soon, he adds.

In the fintech sector, Kairous invested in iPayLinks, a cross-border payment settlement service provider in China. It was the firm’s first investment. The service provider also counts Tencent as one of its investors.

iPayLinks currently supports more than 200 localised modes of payment around the world, such as Paytm in India and Line Pay in Thailand, according to its website. It also connects with international card payment channels such as Visa and MasterCard.

“Following our investment in iPayLinks, it completed two acquisitions in Malaysia. One is a company with a money lending licence and the other is a company with a merchant acquiring licence. [In fact,] we co-invested in a start-up with iPayLinks and it has set up a team here too,” says Lee.

The co-investment is in PrimeKeeper, a digital payment aggregator and open banking platform that will launch in Malaysia soon.

Not all of Kairous’ investments are aimed at bringing technology from China to Southeast Asia. Some, like JomParking and Softinn, have replicated successful models in China. JomParking is a smart parking app solution while Softinn is a smart hotel booking and management system.

“JomParking looks like a China-based unicorn called ETCP while Softinn is very similar to Qunar in its early stages. In China, these areas are already very advanced. So, the easiest way to scale is to see what is already proven and we develop it here. The risk is lower,” says Lee.

ETCP is one of the biggest smart parking players in China. It allows users to find a parking spot, reserve it and pay for it using their smartphones. Qunar is an online travel information provider.

For some of its investee companies in Southeast Asia, Kairous is doing it the other way around by bringing them to China. The firm invested in Vietnam-based Intrepid, an e-commerce business-to-business service provider started by Lazada alumni.

“Many small merchants want to sell on various platforms like Lazada and Shopee. But it is difficult for them to onboard all these platforms simultaneously while trying to boost sales on each platform. Intrepid helps them do this all at once,” says Lee.

“The company has another model, which has already been proven successful by a

Nasdaq-listed Chinese company called Baozun, which helps the big brands manage their online stores.

“Intrepid is connected with all the e-commerce platforms in the region, including Shopee, Lazada, Bukalapak in Indonesia and Tiki in Vietnam. We can bring these to China by onboarding all the Chinese merchants who aspire to sell to Southeast Asian customers.”

Another area that Lee finds interesting in e-commerce technology is the use of video streaming to sell products. This is a trend that will come to Southeast Asia, he says.

“In China, they are already using video streaming to sell things. An influencer may sell clothes through video streaming and you can ask her questions. It is interactive,” he adds.

“Ultimately, Alibaba will use this technology, which is already proven in China, in Southeast Asia on their e-commerce platforms. It is just a matter of time. We are already gearing up for this.”

For instance, a Chinese influencer called Lieer sold 80,000 units of a Malaysia-produced bird’s nest product in just five minutes on a Taobao livestream last month. She was participating in an initiative launched by Alibaba — the eWTP (electronic world trade platform) — which aims to sell Malaysian products to Chinese consumers using Taobao’s live streaming platform.


Taking a PE approach


Lee is a rather cautious investor. He is very particular about risk management and sees this as the first step in an investment strategy before assessing the upside potential.

With Kairous, he does this in three ways. One is by finding partners with diverse backgrounds — one has a background in corporate finance while the other is a doctor — so they can properly vet and guide the investee companies. They also look for cross-selling opportunities among its investee companies.

Another is by investing in companies that already have proven business models. “If I invest in a company whose technology is already proven in China and has been tested by the intense competition there, and the business model and team are proven to be workable and capable, the potential for success is much higher,” says Lee.

He avoids cash-burning tech companies. Instead, he chooses those that can disrupt industries such as finance, healthcare, insurance and e-commerce.

“I am investing in tech companies that can disrupt those industries. There are so many opportunities there. It is not very high risk, but it can be high return. Take Ping An Insurance. Its returns are high because it has been successful in using technology,” says Lee.

In addition to venture capital investments in companies seeking series A funding, Kairous wants to take a more PE approach to managing the companies. This means an emphasis on post-investment monitoring, he says.

“As PE managers usually deal with conventional businesses, they need to put in a lot of effort to help these businesses grow every year. The PE manager needs to do a lot of work for operational improvements and mergers and acquisitions. These are things PE professionals are good at. That is why we are very involved with our investees and in figuring out how to bring them across borders. I am familiar with this area due to my past experience,” says Lee.

Interestingly, another area where he noticed a difference in perspective for a PE and venture capital investor is in valuing the founding team across a company’s stages of growth. In the early stages of a start-up, you need a charismatic founder who can bring the company to series A and B, he says. But beyond that, if the leader does not change his or her style, it may be detrimental to the company.

“Sometimes, the leader is too dominant and micromanages things too much. He does not build a second line management team. So, when the business scales up, it is difficult to manage,” says Lee.

“So, when we look at a founding team, we prefer to have a combination. Perhaps at series A, they should have a complete team, who are good at different verticals. It is better than having a strong leader and weak middle management team.

“An angel or pre-seed investor may focus on the leader and there is nothing wrong with that because the company probably does not have a team at the time.”

 Currently, 60% of Kairous’ portfolio is in China, although it is increasing its exposure to Southeast Asia. Its total assets under management is about US$50 million as at last month.

Some of the companies it has invested in already have a regional footprint. According to Lee, most of its investee companies are close to breaking even and most of its China-based investees are already profitable. His target internal rate of return is 30%.

“For iPayLinks, our returns have increased five times in two years. I think SkinRun will be big too because we entered at a good price as it required our assistance to grow to the next stage. Six months after we invested, it became profitable. Its next round of fundraising will be at six times of our entry valuation,” he says.

Kairous will launch its second fund in the next few months, with a first close by the first quarter of next year. Lee hopes to raise US$100 million from investors.

The firm currently has offices in Malaysia, Hong Kong and Shanghai. It plans to open an office in Vietnam next year.

Most of Kairous’ existing investors are corporates and family offices in Malaysia, the Middle East and China, according to Lee. The majority of them are Malaysian investors who agree with his views on the region or who see the firm as their window to access technology in the region.

“We hope to continue onboarding investors across the region because it will help me expedite regional growth. For example, if I invest in a Vietnamese company and the investor has plenty of resources in Indonesia, it will be easier and faster for me to bring it there,” says Lee.

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