Tian Tu banks on bonds in planned pivot from its retail roots

The private equity investor appears to be setting its sights on high-tech companies as it prepares to raise funds by issuing bonds

Key Takeaways:

• Tian Tu Capital is looking to raise up to 300 million yuan by issuing bonds that it’s calling “Sci-Tech Innovation Notes”
• The move comes as the private equity investor’s growth stagnates amid sluggishness for its core focus on consumer-related Chinese companies

By Warren Yang

Private equity and venture capital veteran Tian Tu Capital Co. Ltd. (1973.HK) is preparing to broaden its horizons as its traditional focus on China’s once-vibrant consumer sector rapidly loses economic steam.

Last Thursday, the company said it’s looking to raise up to 300 million yuan ($42 million) by issuing bonds that it’s calling “Sci-Tech Innovation Notes” in one or more private offerings for institutional investors. Tian Tu plans to use at least 70% of the proceeds to finance investment funds or for its own equity investments, and spend the rest on other purposes, including replenishment of its working capital.

The company didn’t specify what sectors it will chase with the new capital, but the “sci-tech” name heavily suggests it has set its sights on high-tech enterprises. Such a pivot wouldn’t be completely out of the blue for this company better known for its consumer focus, with an investment portfolio including the likes of bubble tea chain Nayuki and infant formula maker Feihe. In its latest annual report, the company said it wants to broaden its investment scope to emerging areas like biotechnology and robotics as it tries to “uncover innovative investment themes and strategies.”

Tian Tu, a seasoned private equity and venture capital firm that’s been around more than two decades, previously thrived on rising Chinese consumerism, which fueled its growth for years as a booming economy created an increasingly wealthy middle class.

But that was then, and this is now. China’s economic growth has cooled considerably in the last few years, with no easy fix in sight. The country’s property sector, which accounts for a large part of its GDP, is ailing after speculators pushed prices to meteoric heights and a relentless debt-fueled expansion created massive oversupply. China is also facing a long list of challenges externally, including trade tensions with Donald Trump, a major headache for its export-oriented economy.

Those macroeconomic troubles are trickling down to average Joes in the form of slow income growth and even layoffs. That means greater difficulty in boosting sales for consumer businesses, which in turn makes life harder for Tian Tu in a number of ways.

Among other things, it becomes more difficult for the company to attract investors to its funds as its primary retail-related target companies become less attractive. Perhaps reflecting that, Tian Tu’s assets under management shrank about 16% to 20.5 billion yuan at the end of last year from 12 months earlier. The amount of new capital raised by Tian Tu’s funds last year also dropped by nearly two-thirds to 401 million yuan.

As the company struggled to attract investors, its revenue fell about 5% to 44.6 million yuan last year from 2023. It has two main revenue sources: fund management fees and so-called carried interest, or a cut of realized gains from investment funds it manages. Tian Tu didn’t book any income from the latter category last year, which means its revenue growth came solely on its ability to grow its fund management portfolio.

Tian Tu is also facing the additional challenge of falling valuations in its portfolio companies. To account for that last year, it continued to book substantial investment losses amounting to 705 million yuan on a net basis, dwarfing its revenue for the period.

In the current climate, Tian Tu may also be having difficulty finding promising new retail-related investment targets, and face similar problems exiting its existing investments through IPOs or sales. So, its attempt to broaden its investment scope makes sense, although it might face greater competition in high-tech areas that are typically favorites among private equity and venture capital investors.

Contrary to Tian Tu’s struggles, business is booming for major investment banks like China International Capital Corp. Ltd. (3908.HK; 601995.SH) on the back of a resurgent IPO market in Hong Kong. On Tuesday, CICC said it expects to report year-on-year profit growth of as much as 78% for the first half of this year. This indicates that investors may feel more comfortable with putting their money in relatively established companies that go public than betting on startups that are the focus of private equity firms like Tian Tu, especially in tepid sectors like retail.

Among Tian Tu’s apparent new interest areas, biotechnology isn’t entirely new to the company. In 2022 alone, it invested in two early-stage companies in that sector. And robotics are all the rage in China at the moment, which could yield other promising opportunities.

Debt financing

In terms of financing, bond issuance has some practical benefits as well. For starters, bond financing could be cheaper than soliciting contributions from investors for purpose-specific funds, since borrowing costs are currently pretty low in China as the country’s central bank keeps interest rates down to stimulate economic growth. And at the end of the day, debt is generally cheaper than equity, as investors in the latter demand higher returns for the higher risks they take. So, it’s not uncommon for private equity firms to use borrowing to juice up returns on their investments.

Also, by securing funds by issuing bonds, Tian Tu can deploy capital quickly when it finds a good investment target without waiting for investors to send their committed capital. Moreover, the company can raise funds based purely on its own creditworthiness and use the money freely, unlike equity capital that typically goes to a specific investment.

The issuance of Sci-Tech Innovation Notes will reduce Tian Tu’s “financing costs, diversity its funding channels, expand its business scale, and enhance its profitability and risk resilience,” the company said.

Tian Tu shares are down more than 30% from their IPO price in 2023 and trade at a price-to-book (P/B) ratio of just 0.3, compared to 0.7 for CICC. China Renaissance (1911.HK), a similar boutique fund manager that both invests and offers investment banking services, trades in between the pair with a P/B ratio of 0.5, showing that Tian Tu needs to up its game to return to investor favor.

It thinks the answer might lie in high-tech investments. Now, Tian Tu needs to successfully execute that pivot and return to growth – something that may be easier said than done as it faces a complex challenge of stiff competition for quality investments in a slowing Chinese economy.

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