Class of 2020 | brali@wharton.upenn.edu
Two years ago, Silver Lake, the private equity firm specializing in technology firms, hit the jackpot when Alibaba Group went public. After investing $500 million into an early Alibaba, Silver Lake saw its asset grow to a valuation of $5.1 billion dollars within 3 years. After its first multibillion dollar payday from the Amazon of China’s success, Silver Lake is now seeking another jackpot by investing in Koubei.
Koubei is an Alibaba affiliate that brings local services and businesses in China into Alibaba’s operations. Formed by Alibaba and Alipay, the company has grown quickly into becoming a major player. The company focuses on bringing online customers to physical locations. It also allows Koubei affiliates to access data on consumers and offer targeted discounts and coupons to consumers. As China’s internet commerce sites compete for market share and consumers, the strategy of utilizing local services has been key to growth. In the third quarter of 2016 alone, Koubei reportedly handled 15 million daily orders and transacted $7 billion dollars, which further reinforces the value of attracting daily customers.
However, it is interesting to note that Koubei has many existing competitors, which are both larger and more well-known. For example, Meituan-Dianping, a company formed through a multi-billion dollar merger, already owns the title of being the largest company in the online-to-offline sector. In 2016, the company went through its own round of funding and garnered $3.3 billion with a valuation of $18 billion. In regards to metrics, Meituan-Dianping’s gross merchandise volume was 3.5 multiple of Koubei’s volume. Another example of an already established company is Tencent-backed WeChat. WeChat has expanded its business into online payments, in-store payments, ecommerce, fintech, and other areas that encroach upon Alibaba’s business. With the online to offline market already highly saturated, it is interesting to see Alibaba continue to make a play on expanding its influence.
Figure 1: Online-to-Offline Ecommerce Sales in China, 2011-2018
Perhaps Silver Lake’s reasoning rests with the idea that Koubei is targeting largely untapped groups of consumers. A recent McKinsey survey indicates that a growing number of middle-class social shoppers spending on travel, dining, and transportation will generate huge revenue for Chinese ecommerce companies. Another of Koubei’s strategies involves targeting more women consumers with the idea of engaging them with the restaurant and food delivery segments. Koubei also plans to target higher educated consumers, who are more likely to learn and use the Koubei platform. Lastly, Koubei plans to target low-tier cities. With higher expenditures on online to offline commerce coming from these cities. With these and other growth strategies, Koubei stands to outcompete its competitors through innovation.
So, is the potential for innovation the driving factor behind Silver Lake’s decision to back Koubei? Or is it the past rewards that Silver Lake gained from working with Alibaba? Maybe a little bit of both. As Ken Hao, a managing partner at Silver Lake, put it, “Koubei was the special one that fit Silver Lake’s criteria for size and risk-reward, and provided a great opportunity to work with the exceptional people at Alibaba again.” In the first round of financing from external investors, Silver Lake led the charge in raising a pool of $1.1 billion dollars. With Alibaba having an expected value of $8 billion, Silver Lake is once again hoping that Alibaba and Koubei can drive them all to big money. Furthermore, Koubei stands to benefit from the additional capital that can be used to expand and gain a higher degree of independence. Ultimately, it could even be listed as a public company. So with both Silver Lake and Alibaba/Koubei benefitting, maybe the two companies have truly become multibillion dollar generating BFFs.
Figure 2: Lower-tier cities spend more on e-commerce than high-tier cities