Jing Hong, founding partner of Beijing Gaocheng Capital, said investors have “underestimated” the growth potential of Chinese enterprise software companies.
GJing Hong, a founding partner of AOC Capital, said in an interview during the Forbes Global CEO Conference in Bangkok last month that AOC Capital was “the last one standing” among investors who still support Chinese enterprise software companies. While low share prices of listed companies in the sector have driven away most investors, Hong is staying put because she believes her Beijing-based private equity firm “will become a SaaS (software as a service) index of China's blue-chip companies.” .
Ms. Hong's confidence stems from her role as a major investor in Chinese food delivery giant Meituan Dianping in 2015, when she was a partner and head of private equity at billionaire Zhang Lei's Hillhouse Capital Group, and in 2015 when she was a partner and head of private equity at General Atlantic Investment Group. Atlantic ) has a strong track record of investing in e-commerce pioneer Alibaba. , she saw greater investment opportunities.
“China's enterprise SaaS companies experienced overexpansion in 2021 and then fell into the valley of disappointment, but now they are entering the slope of enlightenment,” Hong explained. “People often underestimate their compound growth potential. Now they are very attractively priced and we believe they will be able to achieve high-quality growth over a long period of time.
Gaocheng Capital focuses on Series B to pre-IPO investments in Chinese enterprise software companies, managing approximately US$1.8 billion in assets. The more than 30 companies it selected include e-commerce management company Youzan Technology backed by Tencent, human resources management platform Beisen Holdings backed by SoftBank, and financial software provider Bairong backed by Hillhouse Capital and Hongshan. Those investments put Hong on Forbes' list of top venture capitalists for three consecutive years until last year.
While China's enterprise software market is still less mature than its U.S. counterparts because Chinese companies still prefer to develop software in-house, Hong said that will change, with outsourcing likely to increase as companies weather the economic downturn. Hong's optimism is reflected in Gaocheng Capital's portfolio companies, where median revenue has quadrupled over the past five years to about 400 million yuan ($55 million). About 80% of them are already profitable or cash flow positive, she added.
“In China, companies have begun to view software as more than just a fixed asset. They buy these assets as capital expenditures and then depreciate them. They have begun to realize that software is an operational tool that can improve efficiency,” Hong said.
As for the AI boom, Hong believes her portfolio companies are “well-positioned” to ride this wave because they have “technical capabilities, proprietary data, very deep industry knowledge and customer insights.” She cited Beijing-based Beisen Holdings as an example. Gaocheng Capital first purchased a 0.3% stake in the company during its pre-IPO round in 2021 and has since increased its stake to 8.9%. The human resources company, which will be listed in Hong Kong in 2023, recently launched an artificial intelligence recruitment service, including smart interviewers. Hong said these services help reduce the cost of the first-round recruitment process by a tenth, to about 20 yuan per candidate.
Meanwhile, Bairong, which helps financial companies with credit risk management, has developed its own large-scale language model to power voice chatbots, which customers can use for their own customer service. The Beijing-based company said artificial intelligence applications helped its revenue grow, which rose 6% annually in the first half of this year. Gaocheng has increased its stake in Bairong to 6% from 4.6% in 2018, when Gaocheng first invested in the company during Bairong’s Series C financing round. Bairong will be listed on the Hong Kong Stock Exchange in 2021.
“The real value of artificial intelligence is in adding capabilities that can help companies increase revenue, improve compliance, reduce costs or improve efficiency,” Hong said. “We're already seeing SaaS companies create tangible revenue through artificial intelligence.”
Although deal activity in China has slowed significantly, Hong remains confident in his investments. Back during the 2021 zero-interest rate policy funding frenzy, the investing veteran began advising her portfolio companies to prioritize healthy growth over rapid expansion and to focus on select product lines and make them profitable.
“In the current capital market environment, we need to remain patient. As long as the company can gain market share and achieve profitability, we do not need to worry about the next round. “Once the capital market returns, investors will find that there are a large number of China's leading SaaS companies It's actually very attractive and can generate very high-quality cash returns. “
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