Li Yuhui Tells How Panlin Capital’s 4-year DPI Exceeds 120%
On September 19, Panlin Capital announced the completion of the first-phase capital raising for its new flagship PE fund themed on sci-tech innovation. It took 16 months to raise 1 billion yuan. The investors included government-led funds, funds of funds, public companies, strategic investors, and many tech-savvy entrepreneurs. Most of Panlin Capital’s earlier investors have contributed to this fund.
According to Li Yuhui, founding managing partner of Panlin Capital, this flagship fund is the 12th fund in the portfolio of Panlin. This new fund also boasts the highest ratio of institutional LPs and the largest size since Panlin Capital was incorporated in 2010. Li Yuhui said, “I am proud that we are now able to work with so many and diversified investors. The higher ratio of institutional LPs optimizes our capital structure, increases the depth of our pockets, expands our scale, and pools multiple sources of capital.” He also said that the fund would try to continue the success of Panlin's previous VC investments, and focus on Series A and earlier rounds of investments in health and technology projects.
This new flagship PE fund of Panlin will invest in the prevention, diagnosis, treatment of major diseases and the digital and intelligent transformation on the supply side of the consumer market. To this end, Panlin will continue to explore biotechnology or artificial intelligence opportunities to improve supply efficiency or service quality. It will invest in technology startups by tech-savvy and innovative entrepreneurs.
As Li Yuhui told 36Kr, after going through a full investment cycle, Panlin has got keen eyes for both industry trends and VC investment opportunities.
The day when it announced the completion of capital raising for the new flagship fund, Panlin Capital brought together the founders of its portfolio companies and its friends to celebrate its 10th anniversary and hold an investor conference. From “PE for All” in 2010 to “VC 3.0”, Li Yuhui and Panlin Capital have never been left behind in the high tide of innovation and entrepreneurship in China. This young investment company can be considered as a microcosm of China's venture capital industry going from nascence, growth to maturity, and witnessing boom and bust along the way.
In the extraordinary year of 2020, Panlin Capital grew positively against headwind and remained at the forefront of the market.
Boutique Investing
People familiar with Panlin Capital may compare the company to a “sniper” to praise its accuracy of investment.
Since it began VC investments in 2013, Panlin Capital has structured its health industry portfolio around novel drugs development and high-end medical devices. It invests in Kangtai Bio (300601) in preventive vaccines; Hybribio (300639) and Deyi Oriental in early diagnosis and screening of diseases; Ribo Life Science in RNA interference; Youzhiyou (YZY) in bispecific antibody drugs; Affinity in tumor microenvironment-activated drugs; Virogin Biotech in oncolytic virus drugs; and ABMTX in brain anti-tumor drugs. In the field of anti-cancer drugs, Panlin invests in Shenogen, Cothera, Apollomics, and Genfleet; in the field of “AI + medicine”, it invests in Thorough Images and Lang Rui Medical; in the field of therapy devices, it invests in Antitumor and Health Reconstruction Biotechnology (Anti-contion), and heart valve R&D company Kingstron Bio.
Panlin Capital also sets its eyes on digital and intelligent transformation of enterprise services and smart equipment on the supply side of the consumer market. In the field of innovative enterprise service infrastructure, it invests in RF chip maker Chipanalog, IoT company Ensenmax, information flow recommendation engine Xiguangkeji, and machine vision company Percipio.xyz. In the field of industrial data platforms, it invests in Common Rail System’s Family (commercial vehicle aftermarket), YESMRO (industrial MRO), Ziyun Technology (industrial internet), Ruiyun Cold Chain (cold chain logistics), and Ycloset (subscription-based e-commerce). Based on SaaS for catering, automotive stores and ECG digitization, Panlin invests in Passiontec, IRIS, and Lang Rui Medical respectively. In the field of smart equipment, it invests in UAV company AOSSCI and autonomous mobile robot producer AICROBO.
All the investments have paid back generously. Over 72 % of the projects have received multiple rounds of VC investment subsequently. Kangtai Bio and Hybribio have been listed on GEM board; Shenogen, XGIMI Technology, and Ribo Life Science will soon be listed on the SSE STAR Market; Passiontec was 100% acquired by by Meituan Dianping; and Ycloset was partially bought over by Alibaba.
The returns are exciting. The overall IRR of all funds managed by Panlin Capital exceeds 30%, while their time-weighted 4-year DPI (Distributions to Paid-in-Capital) exceeds 120%. These results are comparable with any leading USD or RMB fund operating in China.
Li said, “Considering our excellent returns, most of our initial investors, including entrepreneurs and LPs, have chosen to continue investing in our funds, which is an important reason why we have been able to raise so much capital in such a difficult year. We’ve won the recognition of a wide range of institutions.”
Panlin Capital has become a “sniper” because of its proper resolution of two questions. First, how to select the most promising startup project among so many which would have vastly different outcomes? Second, how to pick the best timing to invest to obtain excess returns?
Panlin Capital’s answer to the first question is “boutique investing”. It is carried out in three steps:
First, develop a clear theme. Based on their deep understanding of market trends, Panlin’s VC team has focused on two major sectors: one is novel drug development and high-end medical devices, and the other is digital and intelligent transformation of enterprise services and smart equipment on the supply side of the consumer market. In early 2018, Panlin Capital announced that “the spring of novel drugs is coming”, which aroused heated discussions in the market. At the end of 2015, it began to invest in innovative enterprise services based on digitization and artificial intelligence. Both areas have become the market’s darlings, which proves Panlin’s foresight.
Second, select the right targets. Panlin is firmly committed to solving actual market or industry needs through technology innovation, and cares most about advanced technologies that can be commercialized soon. “We generally care less about cutting-edge technologies per se than market needs, although the new drugs and AI applications we’ve picked are really innovative.” Also, Panlin has always believed that good projects are scarce, so it invests and continues to invest in well-chosen startup projects.
Third, invest in entrepreneurial scientists, or tech-savvy entrepreneurs. Panlin has developed different portraits of founders of health and technology startups. The former are generally over 45 years old, mostly overseas returnees, with a strong academic background and organizational capabilities to pool together R&D talents. At the same time, they also have strong business acumen and financing resources. The latter, aged 35-40, have spent more than 10 years with large enterprises. Whether they are engaged in research and development, production, or sales, they generally have keen eyes for technology. “We prefer tech-savvy founders and examine their potential to be great entrepreneurs.”
In Li Yuhui’s view, a “sniper” must possess a critical skill in addition to excellent marksmanship and eyesight: move early enough to occupy a good position ahead of the target. About timing, he told 36Kr, “A sniper has limited bullets. It is not any attempt to shoot a bunch of rabbits with a machine gun. Obviously, he must try to hit the cheetah and kill it in the first instance.”
A very good example is that entrepreneurs and investors are rushing into the arena of novel drug development. In its second year, Panlin invested in Kangtai Bio which develops, manufactures, and sells Class-II human vaccines, and which was listed on the A-share market in 2017. Based on its insights it drew from this project, Panlin has given priority to new drug projects.
Li said, “Many people feel that it’s a big risk to invest in new drugs. Our logic is that investment aims first of all to address needs. Considering population aging in China, prevention, diagnosis and treatment of major diseases, including cancer, cardiovascular diseases and diabetes, are urgent and substantial needs. However, unlike the traditional single-drug approach, we explore the combination of discovery of targets and mechanisms of action through life science and exploration of biotechnology in areas such as cell therapy and gene therapy. We believe that the development of new drugs can be driven by science and technology, and tech-savvy entrepreneurs can create more platform-based technologies and product pipelines. This aligns very well with VC’s investment logic, and will create enormous commercial value.”
This is why Panlin was bold enough to announce that “the spring of innovative drugs is coming” while venture capitalists were generally taking a wait-and-see attitude toward new drug research and development in 2018.
A case in point is Panlin’s investment in Ribo Life Science, a leading Chinese developer of RNA interference drugs in 2015. As a new-drug platform technology, RNA interference had not yet materialized into any drug in the world, so it was not yet an obvious target of venture investment. However, after continuous trial and error, the technology has matured bit by bit. Through a scrutiny of data at home and abroad, Panlin accurately spotted Ribo Life Science which had obvious advantages in RNA interference, especially the expertise to deliver RNA interference drugs to the site of lesion, and had the potential to create product pipelines based on its technology platform. So, Panlin became an initial (series A) investor of Ribo Life Science. One year later, Ribo Life Science developed the world's first drug based on RNA interference. Panlin participated in another round (series B) of investment and led series C1 investment in the company at the end of 2019. Three months later, Ribo Life Science received series C2 investments from China Venture Capital, CICC, Hillhouse and other institutions. “We have a deep understanding of life science and biotechnology, especially platform-based technology. Ribo Life Science is a good example of Panlin’s keen interest in novel drugs.”
A sniper’s habit to move ahead of his target explains why Panlin loves to participate in series A investment in startups. “Series A means there is a certain degree of certainty about both the business model and the products and services. At this point, capital and resource inputs can scale up the business and take it to series B and then series C. With both a certain level of certainty and high returns, series A is the best investment opportunity.”
In September 2018, Panlin Capital was the sole investor in the pre-A round of YESMRO, a company that provides maintenance, repair & operations (MRO) items for small and medium-sized manufacturers.
China is a manufacturing giant. Over the years, large manufacturers have had access to MRO sourcing services from foreign brands like Grainger, as well as domestic brands such as ZKH, EHSY and Ruigu. However, for small and medium-sized manufacturers, there was no company like Monotaro (a Japanese company) to provide such services. The Founder of YESMRO used to work for a long time at Grainger, which acquired Monotaro later. Seeing that there was unmet demand in the market, the founder took reference from Monotaro’s model and started YESMRO in 2016. In the early days, the company was not sought after by capital in the pre-A round, as it needed to do a lot of promotion and the market was not yet ready for its model. It was at this point that Panlin got in touch with this company. Panlin benchmarked it against its Japanese peers and concluded that it would have strong growth in China, so Panlin became its sole investor.
“I made my judgement out of two reasons. First, the founder was from a foreign MRO company, so he had a very deep understanding of the industry especially the needs of SMEs, which was critical. Second, he valued technology, and particularly digitization and intelligent recommendation, and built a strong tech team that emphasized user experience. Many people say that YESMRO is an e-commerce sourcing platform, but we view it as a digital platform based on MRO service.” Li recalled, “We decided to invest in the founder and his business model when the business was still small in the pre-A round. Five months after our investment, the company’s operational figures picked up considerably. Then Matrix Partners China and Shunwei Capital came in, followed by Future Capital.” Panlin was also there for further investments in subsequent rounds consecutively. The company is a typical investment made by Panlin under the theme of “digital and intelligent transformation of the supply side of the consumer market” in the area of enterprise services.
The above two cases illustrate Panlin’s strategy well, which features “pioneering foresight, early planning and concentrated investing”. Among its portfolio, Panlin was the lead investor for over 70%, and led the first round for over 50%.
Apart from moving ahead of the target and shooting accurately, Li thinks that a good sniper has to predict changes and make exits. A fund needs to maintain a relatively steady approach in an investment cycle, but a VC instead has to “go out of its comfort zone”. “Where there is a leopard, there is a sniper that follows. But when the leopard is aware of the sniper, it will move to somewhere else. A good sniper is the one who moves even faster to wait for the leopard to arrive. Catching the prey while staying put is for sure the best case, but in reality, market changes so quickly that many people are caught off-guard. So, it’s very critical to have foresight and keep pace with changes,” Li stressed.
From PE to VC – An Organizational Upgrade
Embracing change and going out of the comfort zone are embedded in the DNA of Panlin.
In 2009, the GEM board was launched, creating an exit channel that PE/VCs in China had long been waiting for. A large number of investment institutions were set up subsequently. It was a time called “PE for all”. With over 10 years of experience in top-tier investment banks including Junan Securities and Guotai Junan Securities, Li Yuhui seized the chance and built a team of professionals. In early 2010, Panlin Capital was founded.
In 2007, Li made a personal investment in Toread（300005）, the top domestic brand of outdoor sportswear. It was his first personal equity investment, which also marked his entry into this field. Later, Toread was among the first batch to be listed on the GEM board, bringing Li over 10 times of return. This success proved his forecast of “consumption upgrade” in China. As a result, as early as when Panlin was founded, it focused on the theme of “technology-driven consumption upgrade”.
The initial two PE funds that focused on growth-stage investment delivered great performance, with over 5 times of return when liquidated. As his experience grew, Li quickly found out that consumption and health sectors had drawn over huge capital, and the valuation of mid and late-stage projects was so high that it became harder to achieve returns. More importantly, later China Securities Regulatory Commission suspended issuance review. So, starting from 2011, PE funds that planned to exit through IPO went through a harsh winter.
If Panlin wanted to continue equity investment, it would have to change. Around 2013, Panlin’s partners had many meetings, often until after midnight. The one question that was on their mind was: since Panlin could not compete with big PEs in terms of capital size, what strength did it have as a start-up investment institution?
Back then, innovation, entrepreneurship and VC were emerging in the primary market. Moving up investment to an earlier stage became a solution that Li’s team was contemplating. “Now it proves to be one of the best decisions we’ve made.”
“We didn’t carefully examine our capability to invest as a VC. But from another perspective, it’s not the logic of VC anyway if one needs to be ready in every regard before taking action.” The shift of Panlin from being forced to change to proactively seeking for change reflects a critical part of Li’s character—grit.
One of the key issues Panlin encountered after the transformation was to build a professional team familiar with VC investment. In the case of healthcare, which is its strongest area of expertise, Panlin’s partners all came from PEs and were only familiar with investment in traditional pharma companies. However, VC investment had to be made at the time of Phase I clinical trial or even earlier stages.
“It became very important to understand and evaluate the technologies.” In early 2013, Li realized that Panlin didn’t have talents in medicine or biology. Meanwhile, it would cost a lot to hire talents who were experts in both healthcare and investment. The solution he came up with was to give up hiring investors familiar with healthcare and instead select talents among healthcare professionals.
“We looked for people who majored in biology, genetics or clinical medicine, or worked as doctors or managed pharma companies before. Some of them were willing to shift to the healthcare investment industry, and that was where we came in. We helped them develop expertise in evaluating startup founders, corporate management, business development, team management, and post-investment corporate management.”
As of today, the healthcare professionals recruited back then have been working at Panlin for 6-7 years. They fit quite well with the original team, and delivered satisfactory performance.
A fundamental skill for VC professionals is making accurate forecast and moving in advance. Typically, VCs all know that they need to “go out of their comfort zone and emphasize industry research”, but Panlin differentiates itself from the rest as it follows the strategy of “boutique investing”. In April this year, Panlin completed the new organizational planning for the next ten years. It went through detailed discussions on organizational structure, team makeup, job requirements, and performance evaluation among others, and brought forward the idea that “boutique investing calls for an elite team”. Li told 36Kr that Panlin always trained and expected elites to have a forward-looking and macro perspective, an internal drive for self-improvement, and a habit to go beyond the comfort zone.
Panlin’s ongoing pursuit of change and innovation is itself a perfect example of the mindset favored by VCs.
The Era of “Small and Rich” Investment Institutions
With fewer investment targets in the primary market and decreasing demographic and mobile internet dividends, the technologies that Panlin set eyes on in around 2016 have become a red sea for early-stage investments.
“Although ‘novel drug development and high-end medical devices’ and ‘digital and intelligent transformation of enterprise services on the supply side of the consumer market’ can promise returns for at least ten years,” said Li, “Panlin as a ‘sniper’ needs to be prepared for change.” “We’re already having internal discussions about new ideas, and we may invest in new sectors in the next 3-5 years.”
In Li’s view, compared with the big-name PE funds, Panlin Capital is a typical “small and rich” investment institution. If “VC 1.0” is the era of USD funds, and “VC 2.0” the era of RMB funds, then “VC 3.0” will be the time for “small and rich” investment institutions which take a refined approach.
“I hope we invest earlier and more accurately than our peers, which means we need to have sufficient knowledge of the industries and invest more resources in our portfolio. Going forward, we will continue our approach of early planning and boutique investing. By the time our peers all discover an investment opportunity, I hope Panlin will already be ready to harvest returns.”
