Kimberly Jin & Ling Yang
China’s consumer sector is poised for one of its most lucrative vintages with investors able to take advantage of falling valuations, the AVCJ Private Equity & Venture Forum China 2023 heard.
“There will be attractive entry points in the next 12-18 months,” said Karen Lai, a managing director at LionRock Capital, a Hong Kong-based investment firm that targets cross-border buyouts of global consumer brands that offer a China growth angle.
Tian Ai, a managing director at consumer-focused private equity firm L Catterton, identified the next 6-12 months as an optimal entry point. Many companies are conducting a strategic review of their portfolios, carving out non-core assets to ease balance sheet pressure and concentrate on core business areas. This should lead to tremendous opportunities, he noted.
Lai was also bullish on take-privates and PIPEs, citing the downward adjustment in public market valuations. At the same time, the valuation gap between private and public markets has narrowed due to reduced liquidity and shrinking investor appetite. She added that companies previously demanding EBITDA multiples in the high teens are now settling for single digits.
However, investors must be selective. Lai advocated the use of downside protection through contingent value rights (CVR) and earnout structures. Ai stressed the importance of focusing on companies that are either profitable or have a clear path to profitability.
Gunther Hamm, a partner at Hopu Investments who leads the firm’s mid-cap Hopu Magnolia strategy, suggested that the best opportunities can be found in sub-sectors that are still underpenetrated and underdeveloped, such as cosmetics and skincare.
Others highlighted the potential of direct-to-consumer brands that can leverage China’s manufacturing and supply chain capabilities to address overseas demand. Ai referenced L Catterton portfolio companies BloomChic, a D2C fashion brand for plus-size clothes that mainly targets the US, and Tenways, the electric bicycle business that manufactures in China and primarily distributes in Europe.
Ian Lee, a managing partner at Dewu Capital, an early-stage investor that deploys renminbi- denominated funds, added that investors should be mindful of changing consumer behaviour in China. But at the same time, Ai noted that the sector is among the least impacted by geopolitical tensions and regulatory uncertainties, while Lai emphasized the resilience of consumer.
Despite a broader economic downturn, retailers are still prospering, Lai said, referencing the 61% spike in China sales reported by Canadian activewear label Lululemon in the second quarter.
