ByteDance and McDonald’s are thriving in post Covid-19 China by riding e-commerce boom, says private-equity backer Carlyle

·8-min read

Carlyle Group’s Nina Gong sat through five-hour conference calls in January last year with panicking chief executives (CEOs) as the first coronavirus lockdowns decimated sales figures globally. Fast-forward to the present – and the world’s second-largest private-equity firm is reaping profits as China’s economy rebounds from the impact of the pandemic.

Carlyle’s stake in Chinese short-video and e-commerce giant ByteDance is soaring in value; McDonald’s China franchise plans 500 new store openings this year; and the US$260 billion asset manager is shepherding a clutch of Chinese firms towards listings in New York and Hong Kong.

Carlyle-backed companies eyeing initial public offerings (IPOs) this year include JD Logistics, ANE, Spark Education, Adicon and Abbisko Therapeutics, according to people familiar with the deals. The Washington-based firm is also looking to sell its stake in Hong Kong-based Asia Satellite Telecommunications to strategic investors, the people familiar said.

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“2021 we see as another great year for exits. The valuations are high and the market is open for IPOs,” Gong, Carlyle’s head of retail and consumer deals in China, said during an interview with the Post. Globally, Carlyle sold US$6.4 billion worth of assets in the first quarter.

Gong said her roller-coaster ride over the past 15 months began with advising retailers on their fight for survival amid store closures, and has reached the cutting edge of e-commerce in the world’s largest online market.

Online sales captured about a quarter of China’s consumer market last year, the greatest proportion globally, as the pandemic forced retailers to accelerate their e-commerce push. As a result of this mass digital pivot, China is likely to overtake the US as the world’s largest consumer market in the coming years, senior officials in China have forecast.

Chinese retailers are also benefiting from US-China trade tensions, which are prompting more Chinese consumers to buy local.

“The sense of nationalism and a preference for local designers is at an all-time high,” said Gong. Carlyle has invested more than US$2 billion in China’s consumer sector since 2000.

US and European retailers are keen to get in on the action, but are wary of stiff local competition and political pitfalls. Retail giants Nike and H&M faced a backlash in China this year after expressing concern over alleged Uygur exploitation in cotton fields.

“Everybody wants to access the Chinese consumer, but nobody wants Chinese competition. So, more and more, they are turning to partners like us,” said Patrick Siewert, managing director of Carlyle’s Asia advisory team on investments in consumer and retail businesses.

Carlyle is snapping up retailers, such as the UK’s END, and helping them expand in China. Carlyle sold Italian brands Golden Goose and Moncler after advising them on Asian store openings. It has 20 Chinese companies in its portfolio, seven of which are in the consumer sector.

It did not always look like a slam dunk. Carlyle’s senior executives were stunned as they tracked the coronavirus outbreak back in January last year.

“Logistics volumes in the portfolio fell to zero and stayed there for about three weeks. This was shocking. We’d never seen anything like this,” Jason Thomas, Carlyle’s head of global research, said on a recent call with investors.

Carlyle had to hit pause on some acquisitions. Siewert could not leave Hong Kong to conduct due diligence on Newcastle-headquartered END. The deal did not close until last month.

At the peak of the pandemic in China, about a quarter of McDonald’s restaurants closed. To cope, the Chicago-headquartered fast-food chain, which Carlyle had backed in 2017, ramped up deliveries to about 30 per cent of orders from 20 per cent in 2019.

As China eased lockdowns, McDonald’s largest franchise outside the US was able to reopen about 98 per cent of its restaurants by April and shared the temperature of its kitchen staff flipping burgers with diners. Still, most clients preferred to keep their distance: McDonald’s customers placed around 80 per cent of their orders digitally, on smartphones or self-order kiosks, as of the end of last year, up from 40 per cent pre-pandemic.

“It won’t be too long before that is 90 per cent of orders,” said Siewert, a director on the board of McDonald’s China and Hong Kong.

Carlyle used the early experience of executives in China to prepare peers in North America and Europe as the outbreak turned into a pandemic. For one, McDonald’s China CEO, Phyllis Cheung, spoke to other Carlyle-backed managers about how she oversaw the fast-food franchise’s digital overhaul.

McDonald’s adopted an omnichannel tactic, a mix of online and bricks-and-mortar shops. It had 3,787 restaurants in China at the end of last year and has said it will have 4,500 stores by the end of 2022. Carlyle plans to hold onto its stake for now, as it sees potential for 10,000 stores in the long term, according to a person familiar with the matter.

McDonald’s is expanding its restaurant chain in China. Photo: Bloomberg
McDonald’s is expanding its restaurant chain in China. Photo: Bloomberg

Smaller companies in Carlyle’s portfolio reached out to customers over the networks of China’s giant internet platforms, including those of Tencent Holdings, Alibaba Group Holding and ByteDance. Carlyle’s Gong encouraged home furnishings company Luolai Lifestyle Technology, which has about 3,000 stores, to launch an application on Tencent’s mini applications programme, run by its social-media app WeChat.

“This little tool,” recovered 70 per cent of Luolai’s original offline business sales, as of February 2020 said Gong, who led Carlyle’s April 2019 purchase of a 10 per cent stake in the firm. Carlyle saw Shenzhen-listed Luolai’s share price dive to 7.86 yuan by the end of 2019 and then recover to 14.34 yuan as of this month.

Luolai also stabilised sales by creating a task force to sell inventory on Alibaba’s Taobao Live, China’s largest e-commerce live-streaming platform, and via ByteDance’s short-video unit Douyin. Alibaba owns the Post.

More than 24 million live-streaming events took place last year, according to China’s Ministry of Commerce. Online retail sales jumped 30 per cent in the first quarter from the same period a year earlier, said the National Bureau of Statistics of China.

Douyin, the Chinese version of viral app TikTok, has set a target of shifting 600 billion yuan (US$92 billion) worth of gross merchandise value over its e-commerce platform, up from 170 billion yuan last year, according to an internal memo cited by Bloomberg on April 16.

“They [ByteDance] are developing their own e-commerce platform and they expect to grow very fast – outgrow[ing] the overall e-commerce sector,” said Gong. Carlyle invested US$150 million in ByteDance in a round of fundraising that pegged the private company’s value at US$180 billion as of December last year.

The surge in e-commerce was not entirely smooth. It provoked an antitrust crackdown on powerful internet platforms, which ensnared the world’s largest financial technology platform, Ant Group, as well as smaller Carlyle-backed payments company Du Xiaoman Financial. Carlyle owns 0.35 per cent of Ant Group after investing in 2018.

ByteDance was fined in January for spreading vulgar content. The world’s most valuable unicorn said it was not yet ready to IPO.

Still, the economy has regained enough of its poise for financial sponsors to liquidate a host of investments. Carlyle sold shares in China Literature, Microport and Zhongmei last year, a relatively high number of exits.

Venture capitalists have sold about US$26 billion worth of equity in Chinese companies in the year to date, and are on track to equal last year’s tally, which was at least a 10-year high, according to alternative markets data provider Preqin.

Chinese regulators halted Ant Group’s record-breaking IPO amid a broad crackdown on the digital economy. Photo: AP
Chinese regulators halted Ant Group’s record-breaking IPO amid a broad crackdown on the digital economy. Photo: AP

Carlyle will be showcasing its exits and return on investments to big money managers as it seeks to raise capital for its latest fund, Carlyle Asia Partners Growth II, LP, according to a US filing.

Carlyle is currently harvesting from its fund Carlyle Asia Partners IV, which has a 1.9 gross multiple on invested capital (MOIC) ahead of exiting from investments in companies such as McDonald’s China and the same fund that was prevented by regulators from potentially exiting Ant Group during its IPO last year.

Carlyle Asia Partners IV invested US$100 million in JD Logistics ahead of its upcoming IPO. Its Carlyle Asia Partners V had a MOIC of 1.4 times as of March 31.

Carlyle sold Venice-headquartered sneaker brand Golden Goose Deluxe Brand to another private-equity fund called Permira in February last year after helping it expand in China, but retains about 10 per cent of the firm. The investment had a 3.4 times gross return as of the end of last year. Carlyle’s investment in puffer jackets brand Moncler notched up an MOIC of 5.69 times, according to people familiar.

Carlyle-backed Chinese cosmetics firm Yatsen Holding and China’s largest mobile device charging service provider Energy Monster made their stock market debuts on US markets in November and April, respectively.

“For sure, [we’ll] see more IPOs in China and Hong Kong,” said Gong, who said she was now travelling every week for business on virtually full flights around China.

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