Jing Hong, founding partner of Beijing-based Gaocheng Capital, says investors have “underestimated” the growth potential of Chinese enterprise software companies.
Gaocheng Capital is the “last man standing” among investors still backing Chinese enterprise software companies, said its founding partner Jing Hong in an interview on the sidelines of the Forbes Global CEO Conference last month in Bangkok. While the low stock prices of listed companies in the sector has driven most investors away, Hong is staying put because she believes her Beijing-based private equity firm “will become China’s blue-chip enterprise SaaS (software-as-a-service) index.”
Hong’s confidence stems from her stellar track record of being the lead investor in Chinese food delivery giant Meituan when she was partner and head of private equity at billionaire Lei Zhang’s Hillhouse Capital Group in 2015, and in e-commerce pioneer Alibaba while at General Atlantic in 2009. Since founding Gaocheng Capital in 2018, Hong has switched track to pour money into Chinese enterprise software providers, where she now sees an even bigger investment opportunity amid China’s economic slowdown and the rapid rise of generative AI.
“Enterprise SaaS companies in China have been through overexpansion in 2021 and then down to the valley of disappointment, but now they’re entering the slope of enlightenment,” explained Hong. “People typically underestimate their compounding growth potential. Now that they are at a very attractive price, we believe they will be able to deliver high quality growth over a long period.”
Gaocheng Capital, which focuses on Series B to pre-IPO investments in Chinese enterprise software companies, manages about $1.8 billion in assets. Its 30-plus picks include Tencent-backed e-commerce management company Youzan Technology, SoftBank-backed human resource management platform Beisen Holding, as well as Hillhouse and HongShan-backed financial software provider Bairong. These investments propelled Hong into Forbes’ Midas List for three straight years until last year.
While China’s enterprise software market remains less mature than its U.S. counterpart since Chinese companies continue to prefer developing their software in-house, Hong said that’s set to change and outsourcing is likely to pick up as companies navigate an economic downturn. Hong’s optimism is reflected in Gaocheng Capital’s portfolio companies, which saw their median revenue jump four times to around 400 million yuan ($55 million) over the past five years. She added that roughly 80% of them have already become either profitable or cash flow positive.
“In China, companies have started to think of software as not just a fixed asset they buy as a capex and then depreciate. They started to realize software is an operational tool that can increase efficiency,” said Hong.
As for the AI boom, Hong is confident that her portfolio companies are in a “good position” to ride the wave because they have “technology capabilities, proprietary data, very deep industry knowledge and customer insights.” She cited Beijing-based Beisen Holding, which Gaocheng Capital first bought a 0.3% stake in its pre-IPO round in 2021 and has since then increased its ownership to 8.9%. The human resource company, which went public in Hong Kong in 2023, has recently launched AI-powered recruiting services, including a smart interviewer. The services help cut the cost of the first-round hiring process by one-tenth to about 20 yuan per candidate, said Hong.
Meanwhile, Bairong, which helps financial firms with credit risk management, has developed its own large language model to power a voice chatbot that its clients can use for their own customer services. The Beijing-headquartered company said the AI applications have helped grow its top line, which went up 6% year-on-year in the first half of this year. Gaocheng has increased its stake in Bairong to 6% from 4.6% in 2018, when it first invested in the company’s Series C round. Bairong debuted on the Hong Kong stock exchange in 2021.
“The true value for AI is to add functions that can help companies increase their revenue, be more compliant, cut cost, or improve efficiency,” said Hong. “We’ve seen those SaaS companies creating tangible income through AI.”
Even though dealmaking activity in China has slowed significantly, Hong remains confident about her investments. Back in 2021 during the zero-interest-rate policy fundraising frenzy, the investment veteran began advising her portfolio companies to prioritize healthy growth over rapid expansion, and to focus on a selected product line and make it profitable.
“We need to be patient under this current capital market environment. As long as companies are gaining market share and are profitable, we don’t need to worry about the next round,” Hong said. “Once the capital market comes back, investors will find that there’s a whole group of Chinese leading SaaS companies that are actually very attractive, producing very high quality cash returns.”