LVMH, holding a $25 billion big PE, is using money to vote for the consumer track

This shark from the east coast of the Pacific has already smelled the blood of the Chinese consumer market.

Two recent "little things" have brought the old consumer investment institution L Catterton back into people's attention.

The first thing that happened at the end of March. Yuanqi Forest completed a new round of financing with a post-investment valuation of US$6 billion. It is reported that Yuanqi Forest’s share of this round is very sought-after. L Catterton, Sequoia and Hua Ping had the last laugh together; The second thing was that in mid-June, L Catterton opened its Beijing office and announced the launch of its first RMB fund.

In fact, if you study the history of L Catterton, you can find that this private equity institution, which manages nearly $25 billion in assets and is backed by LVMH, the world’s largest luxury goods group, has achieved impressive results overseas, but it is in the mainland and Hong Kong. Nearly 10 years of investment history, regardless of the number of shots and the results achieved are not eye-catching.

Behind the recent series of actions, L Catterton is changing the investment layout of the Chinese market, especially targeting the rapidly emerging Chinese local brands. In a report released in February this year, L Catterton emphasized to investors: In the next 3-5 years, given that Chinese e-commerce giants will continue to support local brands, one of emerging brands and vertical top brands will appear. A large number of attractive investment opportunities.

This shark from the east coast of the Pacific has already smelled the blood of the Chinese consumer market.

L Catterton

The predecessor of L Catterton was the US private equity fund Catterton and the investment institution L Capital under the French luxury goods group LVMH. In 2016, the two parties merged and changed their name to L Catterton. At present, the total assets under the management of L Catterton exceed 25 billion U.S. dollars, more than double that of the initial merger (approximately 12 billion U.S. dollars).

Catterton was first established in 1989 by Frank Vest, Chinese investor J. Michael Chu (朱迈贤), and former US Treasury Secretary William E. Simon. At the beginning of its establishment, Catterton focused on investing in the beverage industry. With the development of the company, the scope of investment has gradually expanded to a wider range of consumers. Its most famous investment case is the acquisition of the American Internet celebrity chain restaurant Outback Steakhouse and the American furniture brand RH (Restoration Hardware).

L Capital is a private equity fund under LVMH. This institution was established in 2001 and was initially positioned to invest in "affordable luxury goods" at a lower price than LVMH. Its investment projects include clothing brand Gant, Italian beauty chain La Gardenia, and several luxury commercial real estate projects in Europe and the United States.

According to the New York Times report at the time, before the merger, L Capital, which mainly focused on the European and Asian markets, was considering expanding to North America, while Catterton, which was based in North America and Latin America, was considering expanding to Europe and Asia. The investors behind these two consumer investment institutions are LVMH founder Bernard Arnott, who has been an investor in the Catterton Fund since 1998. In the end, under Arnott's matchmaking, L Capital and Catterton successfully merged, creating a "big Mac" in the consumer investment industry.

Judging from the results, this merger combined the complementary advantages of the two, resulting in the result of "1+1 is greater than 2".

The first point is reflected in the combination of investment scope. Before the merger, Catterton's main business was private equity investment in North America and Latin America, which complemented L Capital's European and Asian private equity business and real estate business. After the merger, six major investment platforms were formed to invest globally.

These six platforms are "L Catterton Flagship Buyout", which mainly invests in North American and European companies with a scale of US$75-500 million; "L Catterton Growth" with the main investment of US$10-75 million; and a US$50-150 million investment. "L Catterton Asia"; "LCatterton Europe", which mainly invests in Western European companies of 30 million to 100 million euros; "L Catterton Asia", which mainly invests 30 to 75 million US dollars; and the main investment of 25 million to 125 million US dollars in luxury retail "L Catterton Real Estate" of the real estate project.

In addition, the advantages of the two are also complementary. Catterton's advantage is its professionalism as an established consumer investment institution. After the merger, Catterton's team can be retained and become the backbone of the new company. Two managing partners, J. Michael Chu and Scott A. Dahnke, respectively serve as the global co-CEOs of the new company.

The most valuable thing about L Capital is, of course, the golden sign of LVMH, the king of luxury goods, which has also been preserved to the greatest extent in L Catterton. In L Catterton's official website and official promotional materials, this organization repeatedly emphasized its relationship with the LVMH group, and this has also become L Catterton's best helper when gnawing some "hard bones".

A participating investor told China Investment Network that in the latest round of financing of Yuanqi Forest, L Catterton was able to stand out from a crowd of VCs and PEs that had broken their heads, and obtained the lead share of this round, which Tang Binsen liked. It is the brand value of LVMH behind it.

No matter whether it is a consumer or a consumer company, no one can refuse the temptation of LV and Dior, although the relationship between L Catterton and LVMH may be far less than that of Shunwei to Xiaomi or Yunfeng to Ali, which are more familiar to domestic investors.

L is face, Catterton is lining

The premise of studying L Catterton is to understand the true relationship between this investment institution and the LVMH group behind it.

On the surface, the relationship between the two is not complicated, a bit similar to the relationship between Shunwei Capital and Xiaomi, or Yunfeng Capital and Ali. Before the merger, LCapital was a strategic investment fund under LVMH. After the merger, LVMH Group’s controlling shareholder Arnott Group controlled approximately 40% of L Catterton’s shares. At the same time, LVMH and Arnott also participated in L Catterton as investors (LP). Funds managed by Catterton.

On the official website, L Catterton defines its relationship with LVMH as a "strategic partnership." Called "part of the ongoing partnership", the two parties actively cooperate in the areas of consumer insight, brand strategy, retail expansion, and economies of scale in the group's shared investment portfolio.

But in reality, LVMH's empowerment of LCatterton's portfolio is far weaker than Xiaomi's to Shunwei, or Ali's to Yunfeng. Many people in the domestic investment circle would think that getting investment from Shunwei and Yunfeng means getting tickets for Mijia and Ali, but getting the money from L Catterton does not mean that the company has gotten a deal with Dior. , LV or Sephora’s stepping stone to cooperation.

LVMH Group has its own strategic investment department, including LVMH Luxury Ventures, an investment department for cutting-edge luxury brands established in 2017. As shown in the figure above, this department has made a total of 7 investments since its establishment. Most of the investment targets are early brands and channels.

In contrast, L Catterton invests mostly in the role of a financial investor, and the rate of return is the core indicator it pursues. The overall brand and product strategy of the LVMH Group is not related to L Catterton. However, entrepreneurs are not aware of this. What they value is the brand and channel operation capabilities brought by L Catterton's shareholding.

In addition to the tiger skin of LV, L Catterton's real internal strength is the brand operation ability inherited from Catterton and LVMH Group. Its core investment philosophy is to use the operation ability of the post-investment team and the channels of LVMH Group after the brand's growth period. And brand resources to promote the growth of the company, to reap considerable returns within the investment cycle of 3-5 years.

Huang Hanji, head of L Catterton Asia Greater China, said in an interview with the media in 2017 that they can help investee companies in four aspects:

The first is geographic expansion. For example, after investing in Korean beauty brands, CLIO and Charles & Keith, they helped them enter the Chinese market. In 2017, the sales of Little CK in the Chinese market exceeded that of Singapore. ；

The second is category expansion, for example, the product category of small CK has been expanded from shoes to bags;

The third is mergers and acquisitions. For example, after investing in GXG in 2016, L Catterton helped GXG and Australian sports brand 2XU establish a joint venture in China to expand from menswear to sports fashion.

Finally, there are talents and management. L Catterton's official website shows that it currently has more than 250 employees worldwide. In addition to the investment team, there is also a strong post-investment team, which includes both luxury goods executives and analysis of top consulting companies. Teachers, as well as talents from retail companies, product experts, etc.

As a major shareholder, LVMH gives more support in terms of channels and resources. For example, when helping small CK expand its channels, it will use LVMH's existing channel resources to deal with shopping malls; to help Marumi enter Hong Kong DFS and Sephora, it also directly uses LVMH's resource system.

This kind of industrial capital play is not unadvanced. After Hillhouse acquired the shoe king Belle for more than 40 billion in 2017, it has also embarked on a similar path. But just looking at the results of the Greater China region, L Catterton, who has been in China for 10 years, is hard to say successful. Not only did he sell very few projects, but the return was not impressive.

Invest in Chinese local brands to harvest Generation Z

The predecessor of L Catterton Asia was L Capital Asia. In December 2010, L Capital Asia completed the fundraising, of which LVMH invested 10%, and the rest was funded by European and American financial institutions and high-net-worth individuals. The main goal of the fund is to find investment opportunities in China, India and Southeast Asia.

The first person in charge of L Capital Asia in Greater China is Huang Hanji mentioned above. According to the official website and LinkedIn information, Huang Hanji previously worked at Intel Capital and Hong Kong hedge fund DE Shaw. He joined L Catterton Asia as a founding member in 2010 and has been a member of the L Catterton Asia Investment Committee ever since.

Since entering China, L Capital Asia has successively invested in Xinhe Company, which owns several high-end women’s clothing brands, Ochirly’s parent company Hefen International Group, Guangzhou’s cosmeceutical brand Marumi, and Hong Kong’s Emperor Jewelry and Mingfeng. Except for the two jewelry companies in Hong Kong, the other three mainland companies failed to go public and exit within a few years as expected.

L Capital Asia invested in Xinhe in 2011. At that time, L Capital had high hopes for this investment. After the cooperation, it not only established a special team to connect with Xinhe, but also helped them win a long-cherished favorite of The Venetian Macao The store, and invite the former Dior designer to join in congratulations.

But these failed to pave the way for Xinhe to go public. The latter failed to hit A shares several times and did not land on the SME board of the Shenzhen Stock Exchange until 2020. And L Capital, which has long lost patience, repurchased 7% of its shares from Xinhe in January 2018, and withdrew before the latter’s successful IPO.

Hefen International's road to listing is not smooth. In 2017, Hefen International applied for an IPO, but the impact was unsuccessful several times and it was finally withdrawn in a low-key manner.

In addition, Marumi's investment in 2013 has also experienced several twists and turns. In July 2018, the process of Marumi's IPO was suspended. Starting from the first submission of IPO materials in June 2014, this is the fourth time Marumi has turned on its A-share IPO. halberd. But at last LCatterton did not completely lose confidence. In July 2019, Marumi finally succeeded in its fifth IPO application. L Capital also reduced its holdings in the following year, cashing out nearly 1.7 billion yuan, earning 6 times the return in 7 years.

After the merger with Catterton in 2016, the new company did not reverse its decline in China. In 2016, L Catterton and another investment institution, Crescent Point, invested US$300 million in the Mulsanne Group, the parent company of GXG. When Mulsanne was listed in 2019, LCatterton held approximately 38% of the shares and CrescentPoint held 14%. Calculated based on the issue price at the time, The market value of these stocks is about 370 million U.S. dollars, and then return in three years is only 20%.

Before 2019, LCatterton only made less than 10 investments in Greater China. In addition to investment strategy, poor performance may also be one of the reasons. However, starting from 2020, L Catterton has quietly changed its investment strategy in Mainland China and began to increase China The strength of market layout.

At the beginning of 2020, LCatterton hired Chen Yue, a former partner of TPG Asia, as the managing partner. Public information shows that Chen Yue is the founder of TPG's investment in China. During the TPG period, he has participated in the investment and post-investment management of consumer companies such as Li Ning for a long time.

In addition, L Catterton also raised the first RMB fund with a total amount of several billion yuan, and invited Li Jing, the former CIO of Guoli Minsheng Group, as the head of RMB funds and the managing director of L Catterton Asia.

As for the reasons for the change in China’s strategy, L Catterton explained in detail in a report entitled "Fads vs. Facts: Hunting for Unicorns in China’s Booming Consumer Market" published in early 2021.

First of all, from the perspective of the industry, 2020 is a year of the rise of Chinese local consumer brands. Tmall will have 357 local brands made the list, compared with only 11 in the same period in 2019. The popularity of Perfect Diary and Bubble Mart after their listings also made consumer investment institutions dumbfounded. Based on the closing price of the first day, Perfect Diary's P/S reached 15.6 times, and Bubble Mart reached 35.2 times.

L Catterton believes that this kind of consumer market enthusiasm is not a bubble, but behind it is the rise of Generation Z consumer groups in China. This group of new generations born between 1996 and 2010 accounted for about 17% of the Chinese population, but their consumption expenditures accounted for 25% of the total sales of China's new domestic brands. Although half of these people are still in school or new to the workplace, their income is quite limited, but from the perspective of household consumption expenditure, the expenditure of the young generation in China accounts for 13% of household expenditure, which is much higher than that of the United States (3%) and the United Kingdom. (3%), Germany (4%) or the global average (8%).

L Catterton pointed out in the report that China’s Generation Z is clearly more global-conscious, more proficient in digital technology, and more accepting of “Made in China” products. Young Chinese consumers do not regard the source of the product as the only purchase criterion, but are attracted by-products that can be used as "self-expression" and "personal values." Because of the national self-confidence brought by China's increasing activity on the global stage, the growing national pride among young people has translated into a love for local brands.

In addition, Generation Z in China has also cultivated consumption habits that are different from those of other peers around the world, such as the rise of live streaming in the beauty industry, the love of fast food in the food industry, and the rise of Hanfu culture in the clothing field.

L Catterton believes that China's new consumer brands will give birth to a group of unicorns, and investors can measure the development potential of a brand from three dimensions.

First, whether the brand innovation speed is fast enough; whether the second brand can reach consumers more directly and creatively; third, whether the company focuses on building the brand and establishing the brand loyalty of users.

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