Investcorp targets mid-sized buys in $500m China investment push

• Bahraini company has launched fund with Hong Kong’s Fung Capital
• Partners aim to buy controlling stakes in family-owned firms
• Fund to focus on Greater Bay Area, including hub Shenzhen

Investcorp is targeting family-owned mid-cap companies in China’s industrial heartland as part of its Asian expansion strategy. 

The Bahraini company, which had $42.7 billion of assets under management as of June 30, is betting on domestic consumer demand in China to outperform its wider economy. 

The International Monetary Fund is forecasting that China’s GDP will grow 3.2 percent in 2022, its second-smallest expansion since at least 1980, as Beijing’s strict Covid lockdown policy constricts activity. A housing market collapse, drought and weak demand at home and abroad are also denting economic growth.

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In late October, Investcorp and Hong Kong’s Fung Capital launched a $500 million fund to invest in China’s Greater Bay Area, which spans Guangdong province, Hong Kong and Macau and includes the manufacturing hub Shenzhen. 

The fund – the fourth tie-up between Investcorp and Fung – aims to buy controlling stakes in mid-cap companies from the bay area that have proven profitability and strong growth potential. 

“Together with Investcorp’s long-standing business partners, Investcorp have developed proprietary relationships with an increasing number of successful mid-cap companies in the GBA with growing EBITDA and solid management,” the company said in a report published this week. 

“Many of these mid-cap companies also face generational succession issues. They range from skincare products to medical equipment to industrial services.”

Investcorp added that it planned to retain the company founders as minority partners while encouraging “a next generation of professional management teams to unleash these businesses’ potential.

“By leveraging our partners’ supply chain and operations expertise, and Investcorp’s global platform with access to highly relevant markets such as the GCC, we believe these companies can be grown into significantly larger players.”

The Middle East received the largest share of China’s $28.4 billion investments through its Belt and Road Initiative during the first half of 2022, with Saudi Arabia the single biggest recipient.

Negotiations for a GCC-China free trade agreement have entered the “final and critical stage”, the UAE’s state news agency revealed in early November.

Investcorp and its partners have committed more than $1 billion to investments in China and southeast Asia, mostly in consumer, healthcare and industrial technology companies. 

The alternative investment manager’s China pre-IPO technology fund has stakes in 11 growth or late-stage tech businesses. Its China pre-IPO healthcare portfolio invests in health tech and services companies, while its Asia food growth platform focuses on food and drink manufacturers. 

Investcorp’s Asia team and its partners typically invest $20 million to $100 million to acquire a minority or controlling stake in companies valued at between $300 million and $2 billion. 

The East Asia portfolio includes premium food retailer City Super Group, Hong Kong-based condiment and sauce maker Heritage Foods, medical tester Kindstar Global, software-as-a-service supply chain management provider Linkedcare, Singapore-headquartered cereal and drinks manufacturer Viz Branz, artificial intelligence specialist Terminus, bone marrow transplant pioneer Lu Daopei Medical and online healthcare operator WeDoctor. 

All eight acquisitions have been made since the start of 2020.

Shenzhen was established as China’s first special economic zone in 1980 and now has a population of 17.7 million. Its GDP was 3 trillion yuan ($418.6 billion) in 2021, giving the zone a slightly larger economy than Egypt. 

The broader Greater Bay Area has a population the size of Germany’s and the same GDP as Canada, according to the Investcorp report. Telecoms manufacturer Huawei and tech firm Tencent are among the many multibillion-dollar Chinese multinational firms based in the region. 

Going shopping with Gen Z

Around 600 million people – or 40 percent of China’s population – were born after 1979, Investcorp’s report points out. It predicts that Generation Z – those born from 1997 to 2010 – will drive growth in domestic consumption and prefer to support domestic brands over foreign rivals.

“Consumption represents a low share of the economy when compared to investments and other developed economies,” the report states. 

“An ageing population, together with improving public and private provisions and financial development, are expected to drive the rise of households’ share of national income. The fall of household savings ratio going forward allows consumer spending growth to outperform economic growth for the foreseeable future.”