While Sequoia Capital and General Atlantic were dominating the headlines this summer during talks between ByteDance and US regulators over the fate of TikTok in the country, KKR’s Henry Kravis was making discreet calls. Behind the scenes, the group’s co-chief executive was sounding out Zhang Yiming, the Chinese group’s founder, to see whether his investment firm also had a role to play, according to two people with direct knowledge of the matter.
KKR was one of three lead investors in ByteDance’s $3bn capital raise in 2018, part of a series of tech deals in Asia that it has quietly pursued over the past few years. “Asia is a winner-take-all market,” says one person with close ties to the New York-based group, which declined to comment citing fundraising rules. “KKR goes from country to country to identify national champions and invest behind them at an early stage.”
Now KKR is reaching the final round of capital raising for its $12.5bn Asian buyout fund, its fourth such vehicle and what will probably be the largest ever for the region.
At the same time, the firm whose name is synonymous with buyouts worldwide is readying what is expected to be a $1bn fund to invest in young tech companies in the region, its first such foray in Asia.
That figure is small by KKR standards, but large in the world of venture capital and growth equity. Can KKR successfully diversify in Asia, as it has in the US and Europe, from doing big private equity transactions to early stage investing?
After all, investing in young tech companies requires very different skills to those needed when engineering megadeals. Buyouts involve taking control of mature companies that throw off enough cash flow to pay off the debt that finances the transaction. The big private equity firms identify targets using financial data from years of operations — they have a truckload of information, as well as many years to improve performance before exiting. Moreover, if they have issues with top executives, they can replace them.
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In contrast, there is virtually no data for investors trying to identify the most promising tech firms as their history is so short. A new competitor can suddenly emerge — and one with even better technology. Valuations are more an art than a science. The execution risk is also far greater. Ultimately, intuition about the management team and a sense of timing matter far more.
But the upside, of course, can be massive — and can come in a fairly short timeframe.
Witness the example of Neil Shen, founder of Sequoia Capital China. He backed Xing Wang, founder of China’s biggest food delivery super app Meituan, but only after watching him establish two previous companies. Now, after merging with Dianping and listing, the group is worth close to $200bn and Sequoia’s China outpost has made more money on that bet than its parent in Silicon Valley has with its investment in Google.
Tech, as opposed to old-school buyouts, is where the big money is being made these days.
So far, KKR — and Mr Kravis in particular — have used relationships with tycoons and their own expertise in sectors such as finance and healthcare to identify the best prospects in Asia.
One recent deal was its April investment in Philippines digital payments company Voyager Innovations, helped along by experience in that industry gleaned from its ownership of First Data, which provides the pipes of payments infrastructure in the US.
The following month KKR invested in Reliance Industries’ Jio Platforms in India, hot on the heels of Facebook. Mr Kravis has long had a close relationship both with India and with Reliance founder Mukesh Ambani (and was an honoured guest at the wedding of his daughter last December).
The firm committed $1.5bn to Reliance from a combination of its Asia funds and its second Next Generation Tech fund. The 2.3 per cent equity stake in the digital company makes KKR the joint third-largest shareholder, after Reliance itself and Facebook.
“They are less developed in Asia than in the US,” says one family office investor in Hong Kong, who co-invests alongside KKR in Asian deals. “When they started doing Asia tech, like investing in Gojek [an Indonesian ride sharing firm] in 2016, it caught everyone by surprise. Now, though, their thought process has evolved.”
The timing of the Asian tech fund is fortuitous. A lot of global liquidity, driven by zero rates from central banks in the developed world, is sloshing into Asia. Meanwhile, SoftBank, which was responsible for much of the overvaluation of tech companies in India and south-east Asia, has cut back its activities. KKR’s three big listed rivals — Apollo, Blackstone and Carlyle — are also far behind in providing young tech firms with capital.
Tensions between Washington and Beijing mean many US-based investors are nervous about the mainland, one reason why KKR’s fund will be regional rather than narrowly focused on China.
KKR has been successful in Japan, leading to more competition there. Rivals will soon be closely watching the fate of its tech fund.