Tencent pursues a calmer investment strategy amid the Big Tech crackdown in China

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Almost five years ago Pony Ma, chief executive of Tencent, bragged to other Chinese business leaders that his company was so vital that it became “more and more like a supplier of water or energy, such as infrastructure.”

Its control over the ubiquitous WeChat superapp, a tap that controls the flow of 1 billion users, has also made Tencent a valued advocate for many start-ups, helping the tech company amass a listed investment portfolio worth 1. RMB 2 billion ($ 190 billion) as of September 30th. It also has stakes worth tens of billions of dollars more in private companies, according to a person close to the company executives.

But the Chinese Communist Party’s campaign to rein in rival giants like Alibaba and Meituan has prompted a dramatic rethinking of Tencent’s strategy of extending tentacles to the country’s tech scene, according to insiders, top industry executives and a analysis of investment data.

With Beijing re-evaluating the influence of private companies on the economy and society more broadly, Ma appears to be pursuing a calmer approach to investing at home, with a focus on overseas expansion.

“We’re not any kind of core service,” Ma said at Tencent’s recent end-of-year party in December, telling employees they were working at “just a regular company,” which was “a good assistant” but “easily replaceable.” .

China investment pace histogram slowed last year (number of investments) showing Tencent's growing international profile

Over the past year, Chinese antitrust authorities have argued with Ma, fined Tencent for nearly three dozen of its past investments, blocked a merger, and asked the company to open its ecosystem to competition.

Along with new rules putting Tencent’s investments under greater regulatory scrutiny, the company also recently divested $ 16 billion from Chinese e-commerce giant JD.com. It also indicated that it may continue to sell its holdings as the portfolio companies mature.

“Going forward, we expect [Tencent] invest less in platform companies to avoid the impression of forming [alliances] through investment, which is considered problematic under China’s anti-monopoly lens, “said Bo Pei, of US Tiger Securities.

The data shows that Tencent’s investments in 2021 rose to a record 270 from 174 the previous year, but there are signs that its spending is starting to slow. According to data from the ITjuzi research group, the company’s deals in China in the fourth quarter totaled only one-third of the number concluded in the first quarter.

“As the portfolio gets bigger and bigger, it is natural for returns to deteriorate,” said a person knowledgeable about the company’s investment strategy. “So rather than being empire builders and having a bigger and bigger portfolio with worse and worse returns, [Tencent] he would simply prefer to return part of the value to shareholders ”.

Part of the slowdown can be attributed to Tencent’s increased desire to stay out of the spotlight. Several venture capitalists told the Financial Times that Tencent had recently asked to leave its name out of the press releases that start-ups publish to advertise new funding rounds, pointing to recent fundraisers for the Lanhu product design tool and the XSKY enterprise software provider.

Charlie Chai, an analyst at 86Research, said that despite divesting from JD.com, the company remained targeted by authorities. He pointed to Tencent’s holdings in the food delivery app Meituan Dianping, e-commerce giant Pinduoduo and online broker Futu as groups considered “reasonably similar to JD,” adding, “In the eyes of the regulator, they share the traffic and try to dominate by sharing users. It is impossible for a newcomer to enter. ”

There is growing sensitivity to Beijing’s demands after regulators recently canceled Tencent’s plan to merge two video game streaming sites and fined the company and its affiliates RMB 16 million for failing to report nearly three. dozens of past investments, or the maximum penalty of 500,000 Rmb for each case. Late last year, Tencent received four separate fines for deals in which it acquired only a minimum 10% stake in startups.

The fines come after Chinese authorities closed a loophole in November 2020 that allowed internet giants to indulge in a frenzied business for years without needing approval from the anti-monopoly regulator. Tencent now has to go through the cumbersome China merger approval process when investing money in larger startups if it gets a little control in the process.

The new rules mean Tencent has had to reduce the level of leverage it can take when investing in startups to avoid problems, according to two people familiar with its trading strategy.

“The size of the stake doesn’t matter. The principle is that if you can influence the target’s key business decisions, you’re in control, ”said Scott Yu, an attorney who trained China’s tech giants on antitrust compliance.

“In the past, large tech companies could apply for a seat on the board and seek unanimous board approval for key issues such as investment plans, annual budgets or the appointment of new executives, but now that could change.”

Yu noted that target startups must also have Rmb400m in annual sales in China to meet the filing threshold. Data from ITjuzi shows that Tencent increased its early-stage investment share last year over the previous year.

In an official statement, Tencent denied that there had been any change in its investment strategy, simply saying its goal was to invest in companies in their early stages. “Tencent regularly reviews its investment portfolio and considers various options that are beneficial to itself and its subsidiaries,” he added.

$ Billion bar chart showing Tencent's most valuable holdings in Asian technology

While navigating a dark regulatory landscape at home, Tencent is expanding overseas, with 44 deals concluded last year, up from 17 a year earlier, in industries such as gaming, e-commerce, healthcare and fintech.

Tencent is aggressively hiring in Singapore to ride the tech wave of Southeast Asia. Its largest shareholder, Prosus, just raised $ 5.25 billion of new debt last week for purposes “including acquisitions and investments,” according to a company statement and documents seen by the FT. In the past few weeks, Tencent has increased its stake in Finnish mobile gaming company Supercell and invested in Monzo, the UK’s online bank.

“Regulators have made it very clear that they don’t want to see anti-competitive behavior. . .[like]devouring every gaming company, “said Wong Kok Hoi, chief investment officer of APS Asset Management.” Now they have no choice but to go international. “

But being a Chinese company could hinder its international campaign. India has blocked WeChat and Tencent’s other successful apps and games in the country in recent years.

This year, Tencent abruptly announced that it would sell a small amount of shares and give up voting rights in Sea Ltd after its stake in the company started causing controversy in India.

Sea Shopee’s online marketplace was just starting to take hold in the country when a noisy nationalist trade association and Prashant Umrao, a lawyer aligned with India’s Bharatiya Janata party, accused the company of being an agent of the Chinese tech company. The plan will reduce Tencent’s voting power in Sea from around 23% to less than 10% and will nullify a voting deal Tencent had with Sea’s founder.

Whatever the next target of the Beijing crackdown, where Tencent invests is no longer a private affair, with one person close to the company saying it now considers the public aspect of any investment along with its regulatory impact.

“The market regulator knows intimately how many investments each of these tech giants have made,” said a senior Chinese venture capitalist. “An official listed the numbers for each company for me. They are watching closely ”.

Additional reporting by Nian Liu, Emma Zhou and Robert Smith

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