Tech titans turn to PE

With deep pockets and a long-term perspective, China’s BAT internet trio are changing the private equity investment story.

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China’s three technology titans, Baidu, Alibaba Group Holdings and Tencent Holdings (BAT), have long been seeking out new markets to move out of their core businesses, becoming the go-to investor for many companies. It’s a buying spree that means the powerhouse trio often come head-to-head with private equity firms in deals.

Tencent, which dominates mobile messaging in China, has operations that spread across communications, media, entertainment, payment systems, online advertising, apartment rental services and bike sharing.

E-commerce giant Alibaba has backed online shopping platforms, cloud computing companies, video hosting services and online payments.

Meanwhile, search engine Baidu has made investments in electric vehicle makers, food delivery, logistics, biotech, medical imaging and artificial intelligence companies.

Apart from Japan’s SoftBank, no other Asian group comes close to having the deep pockets of these three. And unlike private equity fund managers they never have to return money to their backers.


It’s no surprise that Bain & Company highlighted that the BAT trio, along with sovereign wealth funds, pension funds and large corporations, are heightening competition for assets across the region. According to its Asia-Pacific Private Equity Report 2017, the abundance of players makes it increasingly difficult to find attractive proprietary transactions in the Asia-Pacific region. “That has helped drive already steep Asia-Pacific multiples to unprecedented levels, even as GDP growth slows across the region and interest rates begin to rise, blunting two powerful sources of value.”

A year on and results from Bain’s Asia-Pacific Private Equity Report 2018 show the same findings: strategic or corporate buyers remain a big competitive threat for Asia-Pacific GPs.

Large Chinese companies are also driving up competition in South-East Asia, as Kelvin Poa, Asia-Pacific head of private equity at Baker McKenzie, tells Private Equity International.

“One thing we’ve observed very clearly over the last 24 months is that competition for deals in the region is not just among private equity funds, but also from local conglomerates, family offices and Chinese corporate buyers who are very active and willing to pay a higher price for assets especially those with a strategic value to them.”

A Hong Kong-based, China-focused GP, meanwhile, points out that it all depends on the acquisition target. “For example, we are looking to close a deal in K-12 education, a bricks-and-mortar offline tutoring centre. Do I see BAT as a competitor? Yes and no.”

He explains that the nature of the business does not come into direct conflict with the space BAT is focused on. But any one of the three giants could act as a strategic partner to enhance the business online after the firm has grown the company post-acquisition.

“It’s tough because they are strategic players. For an online business they can bring in a lot of traffic that a private equity firm cannot, and they do pose a huge threat,” he says.

China’s tech titans have been shaking up more than the tech sector, expanding their reach into the finance sector in recent years. All three now have representation in peer-to-peer lending, online wallets, online banking, crowdfunding and online insurance.

In 2013, Tencent became a founding shareholder of Zhong An Insurance, along with Alibaba and Ping An Insurance. Tencent also has joint ventures with UK-based insurer Aviva and Taiwan’s Fubon Financial to sell Fubon’s insurance products on its WeChat platform.

Baidu banded together in November 2015 with private equity firm Hillhouse Capital and German insurer Allianz to launch a digital insurance company in China, while Alibaba’s mobile payment platform Ant Financial has struck partnerships with China Taikang, MassMutual Asia and Cathay Century Insurance.


In search of dealflow and more capital, the trio have also ventured into the asset management space in the last three years.

In January this year, Baidu teamed up with Asia Mobility Industries for a $200 million venture fund, Apollo Southeast Asia, to invest in ASEAN mobility solutions. In August 2017, the search engine behemoth banded with China Life Insurance Group to form a 7 billion yuan ($1 billion; €810 million) private equity fund, targeting middle to later stage internet, artificial intelligence and internet finance companies. In 2016, Baidu established a 20 billion yuan investment fund called Baidu Capital, which will back internet-related deals between
$50 million and $100 million.

Investors around the world are taking notice of China’s most powerful investors. At the Asia Private Equity Forum in Hong Kong in January, Suyi Kim, head of Asia-Pacific for Canada Pension Plan Investment Board, said private equity’s “next generation” of managers will include captive platforms from tech companies such as Alibaba, Tencent, and SoftBank

Kim explained that this next breed of GPs will have the added advantage of their deep knowledge in technology as well as vast network of new economy companies in sourcing deals and adding value. A Hong Kong-based placement agent with ties to one of the tech giants adds that the companies have had no problem staffing up, with most of the senior executives “well-versed in both the corporate side and investment community side, and alliances will be struck from time to time”.

Miranda Tang, managing director at CLSA Capital Partners, said she sees BAT more as partners than competitors. “When our deal team reviews a transaction we find comfort in knowing that one of these three companies is an investor or it has participated in follow-on rounds. In fact, GPs like us benefit from BAT’s acquisitive nature in the region. We see them as a sounding board in terms of how confident they are in the investee company. BAT are also potential trade sale buyers for us.”

In today’s environment of high levels of dry powder and heady deal-making, firms that capitalise on rapidly developing technology are the clear winners. And as BAT hunts for the next source of disruption (or next unicorn), private equity firms may have to take a page from BAT’s playbook.

BAT are no longer just influencing Chinese consumers, they are also disrupting the financial services industry. “I think private equity firms globally are accepting this is a reality,” the placement agent says. “Are they competitors or partners of private equity? It’s both – there are no clear leaders and alliances, everything depends on the deals they can strike today.”