WHARTON PRIVATE EQUITY & VENTURE CAPITAL Volume 1 / Issue 11 SILVERLAKE AND ALIBABA’S BUDDING FRIENDSHIP
IN THIS ISSUE: 1. SilverLake and Alibaba: New BFF’s? 2. Ford and Argo AI Team Up 3. 2017: The Year of the IPO 4. Insurance and Outsourcing Arrive to PE Marketplace
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 Tencentbacked WeChat. WeChat has expanded its business into online payments, instore 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.
Author Brandon Li Class of 2020 brali@wharton.upenn.edu
Perhaps Silver Lake’s reasoning rests with the idea that Koubei is targeting largely untapped groups of consumers. A recent Figure 1: Online-to-Offline Ecommerce Sales in China, 2011-2018
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
FORD & ARGO AI TEAM UP On Friday, February 10, auto manufacturing giant Ford announced that it plans to invest $1 billion in Argo AI, an artificial intelligence startup to develop a system for its self-driving car set to be released in 2021. Ford is a global automotive and mobility company based in Michigan with over 200,000 employees and 62 plants worldwide. To expand its current business model of designing, manufacturing, marketing and servicing a full line of vehicles, Ford is aggressively investing in electrification, autonomy, and mobility.
Author Jose Roberto Delgado Class of 2019 delgj@wharton.upenn.edu
Argo AI is an artificial intelligence company based in Pittsburgh focused on tackling self-driving vehicles using computer science, robotics, and artificial intelligence. The technology company was founded by former Google and Uber leaders: Bryan Salesky, CEO of Argo AI, who was the head of hardware at Alphabet’s car division Waymo for the past three years, and Peter Rander, COO, who was one of the top engineers for Uber’s self-driving division but left the company in September. Ford will roll out $1 billion over a five-year schedule, which is consistent with Ford’s autonomous vehicle capital allocation plan, but will immediately become the majority stakeholder in Argo AI. This makes for one of the largest plays in a series of investments made by traditional auto manufacturers in self-driving technology over the last year. For instance, GM announced in March 2016 that it acquired self-driving startup Cruise Automation for north of $1 billion and invested $500 million to buy a 9percent stake in ride services firm Lyft, a chief competitor to Uber. Similarly, in 2016, Uber bought autonomous trucking company Otto for $680 billion. Ford will combine its autonomous vehicle development expertise with Argo AI’s robotics experience and startup momentum on artificial intelligence software to develop a virtual driver system for Ford’s fully autonomous vehicle for commercial application in 2021. In Ford’s press release, Raj Nair, Ford’s executive VP and CTO stated, “Working together with Argo AI gives Ford a distinct competitive advantage at the intersection of the automotive and technology industries. This open collaboration is unlike any other partnership - allowing us to benefit from combining the speed of a startup with Ford’s strengths in scaling technology, systems integration and vehicle design.” Although the investment makes Ford the majority stakeholder in Argo AI, it is important to note that the deal has been structured such that Argo AI will remain substantial independent from Ford. Ford CEO and president Mark Fields explained that the most important reason Ford did not acquire Argo AI was so that the startup could attract top robotics and engineering talent from competing companies with attractive offers of equity. Sure enough, the startup plans to have more than 200 employees by 2017 and will allow them significant equity participation as well, enabling them to share in their success. Ford will continue to lead on development of its autonomous vehicle hardware platform as well as systems integration, manufacturing, design, and regulatory policy management. Argo AI’s immediate focus is to support Ford’s self-driving vehicle development and production and create the virtual
driver system. However, the startup intends to license is technology in the future to other companies and sectors looking for autonomous capability. This whole move comes as Ford aims to position itself not only as an auto manufacturer, but also as a provider of mobility services. In other words, Ford placed a billion-dollar bet that people will eventually get around without actually owning cars. By allowing Argo
AI to license its technology to competitors, Ford intends to scale the industry as a whole and create value for other companies while not compromising their own competitive advantages. As Mark Fields said, “The next decade will be defined by the automation of the automobile, and autonomous vehicles will have as significant impact on society as Ford’s moving assembly line did 100 years ago.�
Figure 3: Understanding AI
2017: THE YEAR OF THE IPO
Author Richard Li Class of 2020 lirich@wharton.upenn.edu
With more companies reaching “unicorn” status, many investors are patiently waiting for an opportunity to invest in these burgeoning startups. But as more venture capital funds are created, startups are feeling less pressure to go public. After all, when there are abundant sources of capital coming from private firms, why subject yourself to the scrutiny of public markets? In fact, this shift has dramatically changed the way startups search for capital. Traditionally, companies like Uber would have been expected to go public after reaching a certain critical mass. Yet, even after eight years of remaining private, Uber continues to raise billions of dollars without going through a down round. In 2016 alone, they raised another $5 billion round. So, with this new aversion to the public markets, will startups still pursue the risky path of an IPO? Will they be willing to allow the Street to pop their bloated valuations? The answer is yes, and in 2017, there are some major IPOs that will determine the path for future startups to come. Snap Inc. As of now, Snap looks to be the biggest tech IPO of the year, as they hope to raise $3 billion in their initial public offering. However, investors are balking over its rumored $25 billion valuation. But with a limited number of IPOs available, institutional investors may not find a better opportunity than Snap in 2017. As Snap filed for an IPO early in the year, their IPO may occur as soon as March. Inability to produce profits and slowing user growth will definitely bite into their valuation; just last year, the company reported losses of $515 million on a user base of 158 million daily active users. Notably, their user base is up 48% from a year earlier. It’s going to be interesting to see how investors balance the tough competitive environment with the company’s new innovations. For example, Instagram added 50 million users to their platform in the past four months alone, increasing their daily active user base to 150 million. On the other hand, as Snap develops their new Spectacles offering, new opportunities may be in store for the company. Airbnb With over 3 million listings worldwide, Airbnb dwarfs the number of rooms offered by large hotel chains like Marriott and Hilton. Their valuation doesn’t fall too short, either. With a valuation of $30 billion in their most recent round, Airbnb is worth more than Hilton ($23 billion) and Marriott ($26 billion). With regulatory issues and new competitors in the form of Expedia’s Homeaway and TripAdvisor’s Housetrip, Airbnb will have its fair share of obstacles. Hiring Eric Holder, former Attorney General of the United States , as an advisor and expanding into other travel offerings certainly seem like good strategies. Palantir Technologies The legendary company that nobody has heard of. Another one of Peter Thiel’s children, Palantir was founded in 2004; however, although it is famous within the tech community, the company has failed to proliferate into the lives of daily Americans. That’s because it doesn’t have to. As one of the world’s premier “Big Data” providers, Palantir services governments, large corporations, and humanitarian operations. In December 2015, Palantir raised $880 million in a round that set their valuation at $20 billion. It might not get a lot of press, but with growing demands for Big Data, Palantir may be this year’s sleeper IPO. Don’t underestimate Peter Thiel’s close relationship with the new President. It may hurt his popularity in Silicon Valley, but it won’t hurt his large government contracts.
INSURANCE ARRIVES TO PE MARKETPLACE Up to fifteen percent of the working American populace have their work benefits processed by Aon Plc (NYSE: AON), an insurance giant that isn’t even based in the United States. The world’s largest insurance broker based on revenue, Aon is headquartered in London and has existed since 1982.
Author Ty Zhang Class of 2020 taizhang@wharton.upenn.edu
Without doubt, Aon has matured in the insurance marketplace – the crash of ’08 and regulation breaks have caused Aon to divest from the insurance market and buy stakes in major growth markets, like cybersecurity. Aon’s benefits outsourcing business has traditionally been a cash drain that Aon has wanted to offload, and in seeking an exit, Aon has attracted the attention of major private equity firms in the past two years. That’s why Aon’s held an auction for its outsourcing business in Q4 2016. The winning offer was from The Blackstone Group (NYSE: BX), buying for a valuation of nearly $4.8 billion. The deal gives Blackstone access to a scaled business offering cloud-based human resources management and workplace benefits processing services. Private equity firms have been heavy investors in outsourcing businesses that cut costs and generate large cash flows, leading to high profits for the private equity firm. Thus, its easy to see why a bidding war between Blackstone and private equity group Clayton Dubilier & Rice LLC ensued. Although both firms claimed that the deal is intended to create a standalone company that will grow its capital-intensive business, the deal was formulated to give the winning bidder extensive access to Aon outsourcing’s capital structure. Its easy to speculate that the purpose of the buyout is targeted towards purchasing Aon’s large amount of credit, and pricing that credit higher at maturity. The final settling price of $4.8 billion is a mix of $4.3 billion upfront and $500 million contingent on future performance of Aon’s outsourcing business. Insight on the deal reveals that a large portion of the $4.3 billion upfront will be used in Aon’s massive share buyback program, now in its second quarter. This deal could be an important catalyst for Aon investors that currently hold shares, as a share buyback would increase the value of existing outstanding shares. This is an opportunity that could yield value for institutional and commercial investors. Aon’s robust fourth quarter results are further evidence of possible future value stemming from the terms of this buyout. The Blackstone Group’s deal is expected to close in the second quarter of 2017. Should the deal fall through or disagreements arise amongst both parties, there is a termination fee of $215 million obligated to The Blackstone Group.
HAVE MORE TO SAY? Our members at Wharton Private Equity and Venture Capital club hope that you enjoyed our first edition of the newsletter. We are always committed to sharing the latest and hottest news in the buy-side world of finance. Private Equity and Venture Capital Newsletter (PEVCN) is designed to provide information of a general nature and is not intended as a substitute for professional consultation and advice in a particular matter. The opinions and interpretations expressed within are those of the authors only and may not reflect those of other identified parties. PEVC does not warrant the accuracy and completeness of this newsletter, nor endorse or make any representation about its content. In no event will PEVC be liable for any damages whatsoever arising out of the use of or reliance on the contents of our newsletter. For more general question, please contact pevc.board@gmail.com. We will be more than happy to hear your thoughts or concerns. You can read more at www.whartonugpevc.com.
WHARTON PRIVATE EQUITY AND VENTURE CAPITAL 3730 Walnut Street Philadelphia, PA 19104