The scale of investment opportunities in consumer industry in China is growing, and we believe that Lunar offers an attractive proposition to the owners of businesses that we acquire. We provide a solution that is operationally oriented in the belief that transitioning businesses to professional management unlocks the potential for tremendous value creation, and we share upside with founders by allowing them to retain a significant minority stake in the company. The reception to our proposal has steadily gained acceptance over the past several years, and we believe that the overall opportunity for buyouts of consumer businesses will rise to over USD 35 billion per annum in the coming decade, driven by management and succession challenges.
Drivers of Consumer Investment Opportunities
Our pipeline of investment opportunities in our focus consumer subsectors is growing as business owners seek solutions to succession and management challenges. We have observed that founders are becoming increasingly willing to cede majority control to proven operators with a successful track record, particularly so when they can retain a stake in the business and benefit from professionalized management.
Consumer businesses in China have found it difficult to transition to a culture of professional management and to compete in an increasingly dynamic market, where marketing, branding, and margins matter more than in previous decades. We believe this creates an opportunity to bring expertise, discipline and repeatable processes to portfolio companies, which will in turn yield greater value for our shareholders and limited partners. Further, we believe that most of the businesses we target for acquisition have similar challenges, which creates the opportunity to develop strategies that are applicable across the portfolio. For example, over the past few years we have built Yeehoo’s e-commerce presence to become the leading babywear brand online and we are now using the same team and processes to expand Yonghong’s distribution through similar channels.
Growing Scale
As part of our annual sourcing review process, we worked with AT Kearney to update our projections on the scale of potential consumer investment opportunities. China has 500,000 consumer businesses that report revenues in excess of RMB 20 million (USD 3 million), 98% of which are private enterprises. 15,000 companies fall within Lunar’s target revenue range of RMB 200 million to 1 billion (USD 30-160 million). Within this universe, we believe that about 750 companies with a total enterprise value of roughly USD 35 billion, will likely come up for sale each year, and that approximately 120 of them, worth more than USD 5 billion, will fall within Lunar’s target consumer subsectors.
Our model relies on data that has shown a marked shift in the attitude of founders as their companies mature. According to research by Shanghai Jiaotong University, nearly 80% of private companies are now family owned, 70% of which will change hands in the next 10 years. 82% of these companies lack successors. In addition, concerns about maintaining the legacy of the business are rising and corporate governance worries are also posing significant challenges to these businesses. According to a Deloitte survey, 67% of business owners believe that they are unable to action change internally and require external advisors to help to promote and establish a clear framework of corporate governance policies to reduce operational risks.
Identifying the best possible companies for acquisition remains a challenge. To mitigate risk, we source and diligence potential transactions using an industry-insider approach that narrows our focus on subsectors where we believe we are most likely to find businesses that will make for great Lunar companies. We have found that a clear framework for subsector selection, proactive industry mapping, and using an industry-insider approach to engage with companies and their owners works best and has resulted in a robust and growing pipeline of high-probability opportunities. Key to our approach is looking for businesses that have the potential to grow based on a highly detailed, granular business plan that we can develop and implement using our operational expertise, and an understanding of challenges that we are able to address.
