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A PE firm backed by the family behind Maxim’s Caterers says it is optimistic about the long-term value of China’s mid-market companies. Photo: AP Photo

Private equity fund backed by the family of Hang Seng Bank’s co-founder bets big on China’s SMEs amid fundraising slump

  • Welkin Capital says low valuations have created opportunities to invest in ‘little giants’, despite challenges posed by China’s strict Covid-19 policies
  • The private equity firm has invested in Juneyao Airlines, Great Leap Brewing and Aidi Education, with eyes on companies in advanced manufacturing

A private equity (PE) fund backed by the family of the cofounder of Hang Seng Bank said it sees huge potential in China’s middle-market companies despite a slump in fundraising activities in the country.

Hong Kong-based Welkin Capital, which has half a billion US dollars of external assets under management, is betting big on small to medium-sized enterprises (SMEs) in China, company executives said in an interview with the Post.

“The mid-market has been overlooked all around the world,” said Johnny Kong, chief executive and co-founder of the institutional PE firm that originally served as a family office for the wealth of the families of Hang Seng Bank’s co-founder Y.C. Liang and Dragon Air’s co-founder K.P. Chao.

“This market is fundamentally driven by favourable policies [for SMEs] and China’s increasing adoption of domestic technologies and products,” Kong said.

Welkin said it has invested in Juneyao Airlines. Photo: Shutterstock
Risk-off sentiment is running high among investors amid policy uncertainties in China and monetary tightening in major world economies, prompting some PE firms to shift their focus to sectors in line with China’s ambitions for hard-tech advancement, common prosperity and national security.

Welkin said its team focuses on investing in Chinese mid-market leaders in the consumer economy, digital transformation and industrial innovation. It serves as a general partner for its investment targets, providing capital and other help.

The firm typically becomes a minority shareholder in various companies, holding roughly 10 to 30 per cent stakes. It has struck 20 deals since its founding in 2009, earning around 30 per cent in return, Welkin said.

Profile photograph of Welkin Capital’s chief executive Johnny Kong. Photo: Handout

In recent years, Beijing has rolled out various policies to support SMEs, ranging from favourable tax rates and an increase in bank loans, to more recently the increase in government procurements from SMEs.

SMEs have found a larger fundraising channel after the establishment of the Beijing Stock Exchange, which was designed specifically for tech-driven SMEs dubbed “little giants” to go public. The government is also encouraging industries and companies to support its drive towards technological self-sufficiency and domestic innovation.

These trends are beneficial to mid-market companies, especially as Beijing has been cracking down on Big Tech companies, private tutoring businesses and property developers, according to Welkin executives.

“The combination of weak sentiment and low valuations is creating opportunities, and we continue to invest in areas and sectors where there is long-term value,” said Chris Fong, chief operating officer and co-founder of Welkin. “The ‘little giants’ represent companies with high growth at low prices, resilient and uncorrelated with many other listed Chinese equities.”

Still, Chinese SMEs have been hit hard by the country’s strict Covid-19 restrictions and lockdowns, as Beijing insists on maintaining its zero-Covid policy. An average of 126,200 companies deregistered each month between February and April, Chinese media outlets reported, citing data from enterprise data provider Qichacha.

Products from Chinese craft beer brand Great Leap Brewing, which counts Welkin as an investor. Photo: Weibo

China’s PE market has also been embroiled in plunging fundraising and a harder exit environment.

In the first quarter, US dollar-denominated PE companies that invested in China raised only US$1.4 billion, the lowest level in the same period since 2018, according to Bloomberg, citing data from investment data firm Preqin.

Exit opportunities for PE investors significantly declined amid Covid-19 containment measures, increased US scrutiny of Chinese firms and delisting risks. The exit value in China dropped by 50 per cent in the second half of 2021 from a year earlier, according to business consultancy Bain & Company.

Despite the headwinds, Welkin plans to double both its headcount and investment in China, betting that global investors will return as they are forced to seek growth somewhere.

Welkin said it has invested in one of China’s largest private carriers Juneyao Airlines, local craft beer brand Great Leap Brewing and operator of private international K-12 schools Aidi Education. It is also increasingly eyeing companies in advanced manufacturing, productivity solutions, automation and home-grown consumer brands in the so-called new economy.