China and the crowded 'growth' strategy

Andrew Rickman, chairman of the Rockley Group, a China-focused technology investor, explains why rapid success can sometimes be a bad thing for Chinese companies.

It might seem strange that a growth-focused investor should class growth itself as a potential “problem to watch out for”, but this is exactly what Andrew Rickman, chairman of early-stage technology investor Rockley Group, warns it can be in China.

“Because there is so much money chasing many Chinese deals… there’s almost an inverse relationship between growth and profit, because the more growth there is, the more excitement there is, the more the margin is distributed,” he says.

“We have seen companies that have been incredibly profitable, but only achieved this for a year or two, because seeing their success a wave of competition has moved into the market. They might be in the right place at the right time, but if they haven’t differentiated other people can move in,” he adds.

As of December, UK-based Rockley Group has two China-focused joint venture funds under an umbrella vehicle, Rockley China Fund, which is headquartered in Beijing. The firm first linked up with the Shandong High-Tech Investment Corporation (SDHTIC) and the Shandong Academy of Sciences to launch a $100 million private equity fund focused on Shandong province in May 2009.

Andrew
Rickman

To this in December was added an agreement with the Shanxi Small and Medium Enterprise Investment Corporation (SSMEIC), the high technology venture fund that is owned by the Shanxi provincial government, to raise a new $100 million fund. Both follow the strategy of backing established technology companies in the energy, environment, information and communications technology and health and safety sectors.

“There are certain industry sectors where, in order to meet demand for sustainability and energy efficiency, China is trying to reach out around the world to acquire, buy, or license whatever it needs to catch up,” says Rickman of Rockley’s remit in China. 

“That’s the bigger picture, and instead of looking at it from a western perspective, it is very interesting to take the perspective from within China and help make that connection work efficiently, which is what we aim to do.”

However, as Rickman points out, growth can be hard to sustain in China’s fragmented markets.

“A lot of businesses thrive in one municipality, but then when those businesses attempt to move out of the [area] they might run into problems because somebody else has already captured that same market in the next municipality,” he adds.

“It’s another differentiation from conventional business practice you’d expect to see anywhere else in the world.”

And, though bullish on China’s long-term investment potential, especially in the technology sector, Rickman sounds a general note of caution about the “model under which private equity has grown up in China”.

“There’s a quick return mentality: here’s a pre-IPO deal, here’s some money to put into the deal, and so on. Many companies will never go public or won’t go public within the timescale that they believed they were going to, so there’s very little margin for error,” he states.