Luca Serino, Investment Portfolio Manager, shares his insights from the IP Group’s Annual Deep Tech Forum in Hong Kong in September and some of the themes that currently dominate the investment narrative in Asia.
In September I attended IP Group’s annual Deep Tech Forum in Hong Kong and took the opportunity to catch up with some other managers in the region. The conversations spanned widely, from DNA sequencing to baby clothing, Chinese celebrity brand endorsements and art education. Of course, conversations were surrounding US politics and the trade war, but only a single mention of Brexit.
IP Group’s event was held at the Hong Kong Stock Exchange (an impressive venue which also hosts an excellent Museum of Finance) and was organised in collaboration with the Hong Kong Science and Technology Park (HKSTP), a scientific campus that fosters development and investment in the local scientific and technological ecosystem. HKSTP will be partnering with IP Group to support investment in its companies and indeed is currently collaborating with and is a customer of Precision Robotics (robotic surgery) and Oxford Nanopore (portable DNA sequencing), both of which are IP Group Portfolio companies. Albert Wong, Chairman of the HSKTP, pointed out that Hong Kong is the only city other than London to be home to four universities ranked in the top one hundred globally.
The event opened with the launch of ‘IP Group Greater China’ (complete with fumbled ribbon cutting..!) as the firm will soon be opening an office in Hong Kong to head its operations in the region. The launch coincided with the appointment of Sir Douglas Flint as IP Group’s Non-Executive Chairman. Sir Douglas was previously the Chairman of HSBC and has extensive experience operating in the region, signalling the continued commitment of IP Group to become a leader in science and technology investment in Asia. Through its global partnerships, IP Group now has access to c. 17% of the top scientific research (defined as the institutions that publish the top 1% most referenced academic papers).
David Baynes, IP Group COO, opened the event by outlining the broad themes that characterise technological progress and investment, and in particular the cycles of hype and disappointment that are commonly experienced by technology investors. Quoting Roy Amara who said that, “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”, David pointed to Bill Clinton’s prediction in the year 2000 that within 15 years our children would only know the word cancer as the name of a constellation. Eighteen years later it is clear the prediction was overly optimistic ; but we are now starting to see revolutionary changes in outcomes for cancer patients thanks to treatments such as immunotherapy and gene therapy (ref. the 2018 Nobel Prize), an area of focus for a number of IP Group’s portfolio companies, including Cell Medica and PsiOxus, among others. Another amusing quote David mentioned was by Nobel Prize winner Paul Krugman, who in the 1990’s predicted that by 2005 it would become apparent that the impact of the internet was akin to that of the fax machine, a nod to how hard it can be to foresee the actual effect of transformational technologies.
David’s final quote was by Klaus Schwab, founder of the World Economic Forum, “in the future political power will increasingly be determined by technological superiority rather than military power.” IP Group’s event indeed took place during the same week as the Davos Summer Forum in Tianjin and the topics of Artificial Intelligence, Life Sciences and Clean Technology – the key areas of focus for IP Group’s portfolio companies – were all over local newspaper headlines (see press clippings at end of article).
Oxford Nanopore CEO, Gordon Sanghera, gave the keynote speech and outlined the history of the company which was established in 2005 and supported by IP Group all the way through its development (the company now represents c. 20% of IP Group’s NAV). With its portable DNA sequencing devices, the company aims to enable the ‘Internet of Living Things’ (‘IoLT’) with the analysis of any living thing by anyone, anywhere. Gordon saw the advent of the IoLT as one of the most impactful technological breakthroughs on the horizon and compared the relationship between Oxford Nanopore’s technology vs. lab-based technologies of competitors, such as Illumina, as similar to mainframe computers vs. the PC. With three products being sold in more than 80 countries, the company is focussed on commercial scale-up, having tripled its revenues year on year. China is one of Oxford Nanopore’s key markets and Gordon reiterated the intention to pursue a dual listing in the next 12-18 months in London and Hong Kong. Highlighting the importance of Asia, and China in particular for the business, Gordon said he now finds himself visiting Asia every two months whilst only visiting the US once a year.
The theme of China’s importance as a target market, technology partner and source of funding ran through the presentations by 20 more of IP Group’s portfolio companies. Ceres Power, one of IP Group’s top 10 portfolio companies by value, which has developed a novel fuel cell technology (fuel cells are one of the key technologies in China’s 13th 5 Year Plan) was a good example. Ceres recently completed a deal with Weichai Power, one of the world’s largest automobile and equipment manufacturing groups, which took a 20% stake in the company and agreed on a JV to manufacture and license its fuel cells for applications that include combustion-free bus engines. Similarly the CEO of Creavo, a company which has developed a cardiac diagnostic technology that could lead to significant savings in both costs and hospital bed occupancy for the NHS, pointed to the 170% increase in emergency department visits over the last decade in China, where cardiovascular disease is the cause of 21% of adult deaths; there are currently 28,000+ hospitals (and 7,000,000 hospital beds) in China vs. less than 200 in the UK.
My update with Lunar Capital provided a different perspective on China. The firm was founded by Derek Sulger, an American national and fluent Mandarin speaker who moved to Shanghai in the late 90’s and surrounded himself with a local team. Lunar targets a classic buyout strategy, taking majority stakes in consumer focussed companies in mainland China and then professionalising with strategies such as management replacement, distribution expansion channels and bolt-on acquisitions. Examples of the companies Lunar has invested in include baby clothing brands and a premium snacks brands; their most recent investment was UCCA (the Ullens Center for Contemporary Art) which provides art tuition for children in association with a well-known museum in Beijing. Lunar typically acquires companies from retiring entrepreneurs who built their businesses in the 90’s onwards and Derek joked that these founders often do not know the difference between revenues and profits because of the magnitude of growth they have been accustomed to. E-commerce is the fastest growing distribution channel for Lunar’s portfolio companies and I was struck by Derek’s observation that Lunar’s companies have significantly superior data on their customers compared to western companies as there are effectively no privacy laws in China. Derek highlighted the increasing demand for local premium brands; this is driven in part by the fact that large multinationals often misunderstand local tastes, (for example marketing chocolate snacks which are less popular than nut snacks) and is supported by the rise of the upper middle class, the fastest growing consumer segment in China which is expected to reach 400m by 2020. Celebrity endorsements have become a key feature of marketing strategies for Chinese brands and China is now the most expensive market for this type of advertising. Derek pointed to a café chain (not a Lunar investment) that spent 80% of a nine figure (in USD) fundraise on celebrity endorsements for its brand.
Finally, the update from Axiom Asia, the Singapore-based fund of funds group, whose founding team spun out of the GIC, provided a fascinating conversation that ranged from micro to macro. Despite being a highly diversified fund of funds, the firm has outperformed many of the single manager funds in the region, in part thanks to an allocation to co-investments within its funds. I was struck by the fact that in the two pages that listed the 20 most successful exits within Axiom’s co-investment portfolio (the lowest at a 4x multiple of cost, the highest at 145x) I scarcely recognised five names of companies that are household names for billions of consumers in Asia (according to the Brookings Institute 88% of the next billion people to enter the middle class will be from Asia).
The conversation then moved onto the ‘big picture’ and Axiom’s investment team, all of whom are Singaporean and ¾ of whom were educated at Stanford according to my calculation, provided a fascinating view from the other side of the globe of the geopolitical tensions that dominate the headlines. One of the most interesting observations was that, in Axiom’s opinion, Western commentators significantly underestimate the willingness and ability of the Chinese to endure the pain of a trade war. This is in part due to the fact that China exports nearly twice as much to the rest of Asia as it does to the US; furthermore the regions in China which have the highest export/GBP ratios (Shanghai, Jiangsu, Guandong Zheijang) are also among the richest, have low debt ratios and are therefore better able to withstand the effects of the US sanctions. Just as important is China’s history of foreign invasions and the importance that its leaders place on being perceived as ‘standing up to bullies’.
Overall I was left with the impression that many of the themes that dominate the investment narrative in Asia – artificial intelligence, clean technology, healthcare, consumer brands, e-commerce, to name a few – are similar to what we are accustomed to in the West but the magnitude of the opportunities that these themes present is often of a different scale simply due to the sheer size of the addressable market. On the other side of the ledger are many risks that are well known and similar to what we are accustomed to in the West – technology risk, financial market risk, etc. -but it was the risks that are harder to model that I found most relevant. Chief amongst these risks was the long term viability of an unelected governmental system, coupled with the rising challenges of a ‘demographic time bomb’ that has led to a sense of urgency and effectiveness in the effort to meet economic, social, ecological and technological challenges which will be hard to ignore, and hard to navigate without expert partners.