Interviewed by Raime Chu* (朱紀中)
Compiled by Kira Hsu* (許家綸)
How should we choose our investment targets amid global stock market highs? Angie Lin, co-founder of FinEX Asia which specializes in FinTech and has launched Asia’s first FinTech asset management platform, advised deep-pocketed investors to include private equity (PE) into their investment portfolios and plan their equity arrangement earlier at this stage, so as to potentially increase their return by 4 times over 6 years.
How should ordinary investors invest in PE? And what are the opportunities and risks? Raime Chu, Editor-in-Chief of Smart Monthly, invited Angie Lin for an interview (this issue is the final part of the interview series).
Raime Chu, Editor-in-Chief of Smart Monthly (“Chu”): Did you ever worry that Xiaomi would not sell well when FinEX Asia was handling the Xiaomi PE investment case earlier this year?
Angie Lin, President and co-founder of FinEX Asia (“Lin”): Xiaomi is a very simple PE investment case for FinEX Asia. The only problem is that the market was rife with gossip and concerns before the company went public, making investors wary and wondering if they could really earn a 20-25% return after listing as expected. But what differentiates us is that even though investors abounded, they came and went in a flash together. In less than a month they have earned a 25% return. This translates into double-digit earnings even after deducting the costs.
Chu: What is the expected rate of return on PE and how long is the expected investment period?
Lin: Overseas PE investment period usually involves four rounds of fundraising – A, B, C and D. There is around one round every two years, and they are ready to go public after Round D. Most of the funds from Europe and the US are invested in rounds A-C since it takes 7-10 years for a start-up to grow big enough for listing, but a certain internal rate of return (IRR) target is set for each year. At the same time, different exit mechanisms are developed, for example, being acquired and merged by a larger company or transferred to a secondary market for trading through equity transfer.
In contrast, Asian funds is allowed for a period of about 3-6 years, so most of the buying comes after Round B or C. At this point, most of the investment targets already have a marketing model in place even though they have yet to make a profit.
Past investments of FinEX Asia included the US company Credible Labs (CRD.ASX), a platform specialized in providing student loans. Two and a half years after our buy-in, the company was listed in Australia last year. Another case is Xiaomi Corporation (1810.HK), which went public in Hong Kong this July. We bought into the company mostly between Round B and its final listing.
Talking about the success rate of investment in PE, the figure is around 40 out of 100 Asian companies. That is a normal rate. And the 40 companies that survive have to be capable of creating an average 25-30% IRR each year for the entire initial invested amount, in other words, increasing their return by around 4 times over 6 years! PE in the U.S. is similar to initial investment so the success rate is about 15%, which means it is normal that 85 out of 100 companies invested in would fail. But since the amount of investment is usually small, the IRR for the investment is expected to be as high as 40-60% within 7-10 years.
No limit on funding effectively improves investment stability
Chu: What is your observation about the common myth that Asian PE investors have?
Lin: When investing in PE, Asian or Taiwanese investors prefer targets with high liquidity and are very likely to generate steady or high returns. Therefore, they tend to look for large and well-known deals. Still, they may face two situations: First, there are so many investors that they may not be able to get the investment quota; second, the valuation is too high, so the investment risk is also quite high. Taiwanese investors usually would not invest in a “unicorn company” (a startup with a valuation of more than US$1 billion) until the company becomes an overseas unicorn, but in fact we should buy in before it develops into a unicorn. For example, we bought into JD Logistics as early as in Round A.
Chu: Now that the global stock markets are mostly at a high point, is it the right time for PE investment?
Lin: At this point, it is very appropriate to incorporate PE into your investment portfolio, but the prerequisite is that you are prepared for the risk of PE. You cannot expect to buy today and reap the profit tomorrow. If you want to profit more from a company’s high growth at the early stage, you are supposed to buy its equity early on to bring in more returns on your investment benefiting from the company’s growth which is reflected in its value enhancement. After all, equity investment remains essentially unchanged.
FinEX Asia is here to help investors allocate funds to several different targets, so as to reduce the risk exposure to individual investment. We also help in current or future liquidity management and lowering the investment threshold.
Chu: Given the poor liquidity of PE investment, how can we achieve an orderly management?
Lin: FinEX Asia has created a trading platform for PE investment, and we are more of an investment manager than solely an intermediary. First of all, we are very clear about the liquidity of each of our investment projects. We have also planned in advance which stocks we are going to trade and how much we are supposed to earn. In the case of Xiaomi PE investment, we bought in and sold out just like this. Second, when looking for additional investors, we would split the whole investment into various amounts, so that small investors can also take part.
In fact, we hope our investors would rather put in a smaller amount, like US$250,000 or US$500,000. In this way, risk tolerance and stability can be increased for investments over a period of 3 to 5 years, and the risks can be even more diversified for high net worth investors.
Chu: What is the biggest risk of PE investment?
Lin: The biggest risk is that a company ceases its business or closes down. Currently, the top concern about investing in PE is the difficulty in finding a good company. After all, we should focus on the value of the company over the next 3 to 5 years, rather than the current stock volatility. Therefore, the current market situation will not affect FinEX Asia in choosing the companies to invest in as well as its investment decisions; the only effect will be the growth of future rate of return varying from 3 to 5 times.