The interview by FINANCE COMMUNITY | I36 – 24.02.2020
After investing in the Inter Milan, the Chinese fund wants to invest in medium-sized European companies with strong brands in healthcare and wellness. The coronavirus? “It won’t have a significant impact in the long term.”
By Laura Morelli
TSEUNG, LIONROCK: “WE BRING EUROPEAN SPORT TO CHINA”
LionRock will make no short-term decisions dictated by “panic” caused by the coronavirus. For Chinese and international private equity funds, business is progressing as usual; there is not too much change. Given that the holding period of a company for these funds ranges from three to five and up to seven years, the tightening on consumption and production caused by the epidemic is less scary, if seen from a distance. The coronavirus “is certainly a disruptive event in the short term, but we are long-term investors and we believe that the epidemic, which we hope will be contained as soon as possible, will not have a significant impact in the long term,” says Daniel Kar Keung Tseung, founder and managing director of Chinese private equity firm LionRock, and Tom Pitts, head of Europe, in this exclusive interview with MAG.
Established in 2011, LionRock Capital was the subject of much public attention last year when it acquired 31.05% of shares in FC Internazionale Milano from Indonesian businessman Erick Thohir. It is well known that when we talk about football in Italy, everything stops. The 47-year-old Chinese-American entrepreneur Daniel Tseung, who was wearing an Inter T-shirt during the interview, is well aware of this. “Italy has a heritage of brands recognized and appreciated worldwide in the sports sector, including Inter,” he says. His goal is to develop and increase the commercialization and recognition of the Inter brand, as well as others, in the Chinese market.
LionRock’s private equity activity in Italy did not end there. While concluding the Inter operation, LionRock launched a second fund – with a first closing of US$61 million last August and a target of US$1 billion – entirely dedicated to the sports, consumer and wellness sectors, through which it aims to acquire majority stakes in excellent medium-sized Italian and European companies in the sectors to bring to China and grow. It is also for this reason that the company opened an office in Zurich in January, “which is a few hours’ drive from Milan,” recall Tseung and Pitts.
Why is LionRock’s new fund dedicated to the sport sector?
The idea came to us because of two events: the acquisition of FC Internazionale Milano and the entry of Li Ning as a limited partner and cornerstone investor of the fund. As the Non-Executive Chairman of the fund, Li Ning is a former Olympic champion and also the founder of a sportswear company named after himself. Currently, his company has a market capitalization of US$6.9 billion dollar. The Chinese sportswear market is a fast-growing sector, growing at a rate of 30% per year and is worth around US$250 billion. To help you understand the potential of the market, the Fila brand operated by China’s Anta Sports has grown from 50 to almost 2,000 stores since 2009. With the support of Li Ning, we can provide portfolio companies with not only financial capital, but also with experience and industry relationships in order to create leading companies in the sector.
How about Italian companies…
Definitely. Italy has a heritage of sports brands, recognized and appreciated all over the world.
What kind of companies are you looking for in particular?
We are looking for small and medium-sized companies with a turnover of EUR150-200 million or more, interesting but small brands, family businesses with a long business history, which are profitable and underrepresented in China but need help to expand their turnover. It is essential that entrepreneurs have an interest in working with us and be willing to eventually cede their majority stakes. We prefer majority control investments, but we will also selectively consider strategic minority stakes under appropriate circumstances. At the moment we are considering a couple of opportunities, we will see if they go through.
What is your strategy?
We want to bring all these good brands to the big Chinese market and make them grow as Fila did. Fila has grown a lot in China since 2009 and is now a recognized and appreciated brand in the market. There are many other brands like Fila. The Chinese market often intimidates companies, they don’t know where to start in order to establish themselves in the country, so they try to set up joint ventures with Chinese partners or hire consultants and distribution agents who know the financial ecosystem well. We want to be this partner and act in a very simple way: take an existing brand and spread it in the Chinese market through our network and distribution channels.
How are you experiencing the coronavirus epidemic, what effects has it had on the Chinese market?
We hope that the coronavirus epidemic will be contained soon. Although it’s obviously disruptive in the short term, it should not have a long-term impact, particularly on the strong and continuously growing Chinese sports market.
What is the target size of your new fund?
We want to reach US$1 billion, with an emphasis on co-investments. This is a distinctive feature of our fund and is closely linked to the sector in which we want to invest. To explain better, investors today increasingly feel the need to actively participate in the investments and to know the companies directly, especially in familiar and well-known sectors such as consumer and wellness. This is why we have decided to give our investors the opportunity to co-invest in some particular transactions.
Are you only looking at sports brands?
We are generally interested in everything that is health and wellness related. Behind this is the awareness that the Chinese people are beginning to devote the time to everything related to health, from clothing to food, and to a healthy and sporty lifestyle.
Why did you decide to invest in Inter and what are your plans?
Before accepting Mr. Zhang’s proposal, we had a lot of discussions. Joining as a minority partner was risky, but governance works very well. As for our future plans with FC Internazionale, these are topics that we discuss only with the board.
Generally speaking, what is your idea of the Italian private equity market?
In recent years we have witnessed some outstanding operations in Italy, especially in the fashion sector. There are many entrepreneurs here who have built brands of undisputed value but who are experiencing a particular situation, for example generational change, and this presents a great opportunity.
Are you not worried about the Italian economic situation and the political uncertainties?
Honestly, we do not evaluate the national economic situation because we focus on individual companies, which often have a brand that is already known globally or that have the potential to expand rapidly internationally. The question we ask ourselves is: can we sell that product or the expertise in China? If the answer is yes, the rest doesn’t matter.
How difficult is it for a Chinese player like you when it comes to investing in Italy?
There are very good relations between the two countries, there is a lot of cooperation and this makes our work much easier. However, the most complicated part is execution, due to aspects such as regulation, taxation and bureaucracy. These are more difficult to manage than we had expected and have caused a series of inefficiencies that make business difficult. Last year, for example, we were stranded for two hours at immigration control at Milan airport despite all the good intentions. Situations like this do not prevent us from working here, they just make it more complex and time-consuming compared to the UK or Switzerland.