Chinese E-commerce: A big payout

It is not hard to see why China’s internet sector commands such widespread global media attention. The huge growth in its internet user base is perhaps best exemplified by Alibaba Group’s $25 billion IPO in New York last year. 

China’s internet sector services up to 700 to 800 million wireless users today, equating to about 70 percent market penetration.

But the surge happened so quickly that some GPs were burned. Bain Capital’s investment in Gome Electrical Appliances, which it exited in January at 1.3x, was ultimately hurt by the rise of competitors such as JD.com. Bain managing director Jonathan Zhu told PEI last month: “We need to be very vigilant about changes in the marketplace. The Chinese market is very dynamic.”

But now other private equity firms with the stomach for investing in the exciting but fast-changing sector are looking to sweep up internet-related assets to capitalise on the trend. This month, Boston-headquartered TA Associates acquired payment services business YeePay for an undisclosed amount, teaming up with financial services firm Far East Horizon for the deal.

The internet sector in China is huge, with a number of different sub-sectors, including online retailers and e-payment services business, but the YeePay deal demonstrates the scale of the opportunity.

Founded in 2003, YeePay provides payment services enabling businesses and customers to send and receive payments via the internet, mobile devices and phones. The company focuses on a variety of sectors, including travel, asset management, digital entertainment and education.

In 2014, YeePay processed $77 billion in transactions, a rise of more than 100 percent from 2013, according to TA Associates.

Moreover, the third-party payment industry in China has grown significantly in recent years with a compound annual growth rate (CAGR) of 54.1 percent between 2011 and 2013, and a forecast CAGR of 40.1 percent between 2013 and 2017, iResearch data shows. Total transaction volume was $3.2 trillion in 2013 – and is expected to reach $12.4 trillion by 2017.

“Almost every cell phone in China has some internet capability, so everyone has some access,” one source close to the deal says.

And Yeepay in not even the biggest in its sector, coming a distant third to e-payment behemoths Alipay (the digital payment platform of Alibaba) and government-connected China UnionPay, which dominate the marketplace. However, the vast scope for opportunity means there is room for more service providers.

“The market is deep enough for multiple winners,” he believes.
Despite the potential scale for openings, GPs should tread carefully because valuations are being pushed up as more firms focus their efforts on the country’s internet opportunities.

Some business are not yet profitable and one industry source told PEI that valuations are “very aggressive” – some being based on their number of users rather than revenues. As a result, prices have been known to reach hundreds of times their current revenue.
It is a risk, but the hopes are it is worth it. PEI’s source connected to YeePay explains: “Return expectations are probably slightly higher [because] the risk profile is higher – the prices are higher and barrier to entry is lower so a lot of people can launch new services quickly, [and] you don’t have a lot of contract customers – so there are a bunch of business model reasons why the sector has more risks.” ?