Letter from Mingpo Cai, Founder, Chairman & CEO, Cathay Capital

October 18, 2022

Dear Investors,

I am writing to you today from Singapore, where the 9th annual Cathay Forum is being held. When I founded Cathay Capital in 2006, I was very fortunate to be surrounded by like-minded people with a shared desire to pioneer a new way of investing — one that was grounded around a philosophy of sharing knowledge and building trust to enable the emergence of new leaders.

As invaluable partners, it’s your trust that has enabled us to grow and develop a unique and successful global investment platform over the past 15 years. We thank you for this. Cathay Capital has now reached the next stage in development and as we start this new chapter, I’d like to write this letter not to comment on the latest news but rather, to give you the perspectives and context in which we continue to evolve as an investment firm, as your business and thought partners and as members of our global community.

Here I would like to share our thoughts, convictions and opportunities we believe will be key to the next phase of our journey. These are based on exchanges I’ve had throughout our entire ecosystem, a real source of added value for Cathay Capital — covering 4 continents and allowing us to take a pulse on innovation, entrepreneurs and industry leaders across the world. Even amidst the health crisis, I’m thankful for being able to continue travelling to our various offices in Europe, the United States and Asia, and I will continue to do so to remain close to our teams and the local players shaping economies.

Navigating the New World: Macroeconomics & Geopolitics

Today, the world faces an increasingly volatile environment — from climate change and world conflicts to inflation and epidemics — that are now felt throughout day to day lives. Some may see these ongoing threats as indicators of a seemingly permanent state of crisis, but we see it as an urgent call for massive investment in the years to come.

First, the international geopolitical and macroeconomic context has become, to put it mildly, very uncertain. The war in Europe, as well as tensions between China and the United States, has led to two concepts dominating the global conversation: the decoupling of economies and de-globalization. Today, a return to the pre-pandemic economic integration status quo seems unlikely.

Moreover, central banks have underestimated the risks of inflation and have started to move back to more conventional monetary policies, raising interest rates almost everywhere which is likely to have an impact on growth. The risk of a global recession or even stagflation is here, even though some economic policies may be able to avoid it.

However, regardless of market or geopolitical fluctuations, the world always adapts as real life carries on!

Revisiting Globalization and a Dynamic Asia

As investors, it’s our responsibility to adapt our short and medium-term strategy to these ever-shifting factors. However, taking the macro-economic and geopolitical context into account does not mean being a prisoner to it! Despite a less favorable environment, business goes on and with great change also comes new opportunities. While major companies will certainly adjust their industrial base and the organization of production facilities (albeit marginal), globalization is a fact and will remain so. Value chains cannot be unraveled and simply reinvented in a few months. However, some companies will eventually look to reorganize as they prioritize minimizing exposure to geopolitical risks, reducing energy costs as well as environmental footprint. Stability and sustainability are taking over cost and efficiency.

As for Asia, it’s impossible for investors to ignore the region for strategic allocations, especially China and ASEAN countries, which remain powerful sources of growth and innovation. China, like everywhere else, has its ups and downs and has recently lost some attractiveness to the Western world but economic fundamentals remain strong. China will continue to grow, perhaps at a slower pace, and will continue to do so steadily and in a more inclusive and qualitative way.

At Cathay Capital, we can attest to this thanks to our deep French roots and locally embedded teams from East to West. As such, we work closely with the young generation of entrepreneurs across the country who are highly ambitious and constantly building new champions in numerous sectors. We believe that China will continue down its path in becoming a leading economic power with an unlimited capacity for innovation and creativity. International investors are not mistaken — despite the current environment, the country has welcomed a considerable volume of foreign investment. Similarly, Southeast Asia has emerged as a strong, dynamic and highly promising region for investment due to a sharp increase in internet and mobile penetration, a growing middle class and improving infrastructure. With less legacy from traditional services, a new generation of digital players are now “leapfrogging” with the latest technologies to reinvent industries. From our Singapore office, which was launched in 2019, we are already active venture capital investors in the region and are accelerating our local small and midcap activities.

The Decoupling of Global Economies

As a major impact of the covid crisis and its aftermath, we are increasingly seeing the decoupling of economies in terms of growth, debt and even inflation — but this can favor both global and local players. In this new environment, marked by uncertainty and anxiogenic market circumstances for all, it’s important to us to go back to the fundamentals underlying private equity (as we see it). As investors, our role is to be both an anxiety reducer and a confidence builder — to be a bridge between different cultures, types of companies or organizations, sectors or people who may not speak or even understand each other.

Since its inception, this has been at the heart of Cathay Capital’s strategy: global reach, in-depth local market expertise and a collaborative, multi-sector ecosystem. This approach is proving to be more relevant than ever as partnerships between large companies and startups across various regions and sectors are becoming essential to innovation that will effectively benefit both the economy and society. But true transformation cannot happen in silos. By creating ecosystems, on the local or global level, that facilitate collaborations between various players, we can harness different areas of expertise and skills, enrich our collective thinking, improve decision-making and ultimately move forward faster.

Industry Transformation and Redefining Markets

Globally, Cathay Capital interacts with companies of all sizes on a daily basis — from startups to Fortune500 corporations. We are growth investors that help entrepreneurs, management teams and executives reinvent traditional industries and business models with the latest innovation and technologies emerging from all corners of the world. Today, we’re seeing industry transformation accelerate as digitalization starts to have a real impact on core businesses. We estimate that within the next 5 to 10 years, most industries will see current offerings completely transformed, distributed across various digital platforms jointly developed by existing groups and external players. Those who seize this opportunity will likely see a significant increase in market size and will be able to take advantage of the next digital era.

Anticipating this shift, our multi-sector platform was designed not to solely favor the growth of new entrants at the expense of incumbents — it was to enable close, symbiotic relationships that would create joint opportunities. At Cathay Capital, we target key sectors of the future undergoing transformation (healthcare, finance, energy, automotive, consumer) and have built a collaborative ecosystem that brings together new tech players and innovators with industry stalwarts and reference brands. This positions us uniquely at the center of industrial transformation, armed with not only funding but invaluable networks and relationships that foster trust-based collaborations or partnerships, creating both value and the jobs of tomorrow.

As the world becomes increasingly complex, we are convinced that successful innovation requires the ability to build these kinds of dynamic relationships between different ecosystems and sectors. This is precisely how we believe we can be fundamentally useful to our partners in shaping the future.

Investment Strategy: Innovation to Commercialization

While capital is essential to bringing innovation and technology to life, it is not enough. The investor must be a catalyst, the privileged partner of entrepreneurs and companies, from innovation to commercialization.

We must create convergence between an engineer and a doctor, between an American and a French or Chinese person, between the founder of a startup and the managers of multinational corporations. As an investor, we have to understand these different worlds and bridge the gap between the people living in them. Our job is to unite cultures that may not seem easily compatible, but generate significant value when brought together. It is to provide the tools, networks and market access needed to develop the high-potential, high-impact businesses that will create the economy of tomorrow.

We’re committed to being a catalyst — fostering innovation in young, high-growth companies and helping them scale beyond domestic markets while bringing innovation to large companies that are likely to adopt, industrialize and deploy it on a large scale.

Spotlight on Tech — “Waves Don’t Rise Without Wind”

We are inherently optimistic and remain bullish on the potential of technology. Over the next decade, the digital transformation of the economy will only accelerate — especially as companies look to improve productivity and raise prices in line with inflation, without resorting to excessive investment. Today, only 20% of the digitalization of the economy is currently underway while we are moving full speed ahead in areas such as Web3, enabling internet users to not just read, write and share, but take ownership of the web via blockchain, crypto and the metaverse.

While the digital revolution has only just begun, it will profoundly affect all sectors, including those that have remained relatively untouched until now, with a lasting transformation of industries and society. Our investments have already proved this, such as Pinduoduo — bringing China from e-commerce to social commerce, Chime – transforming banking and financial inclusion in the US, or Glovo – developing on-demand delivery in underserved regions such as South America, Eastern Europe and Africa.

In the next 5 to 10 years, the new wave of digitalization will be broader and more significant than what we’ve experienced over the previous two decades. It will be driven specifically by the convergence of various fields of applied sciences and technologies that are creating a new generation of products and services. For example, by combining artificial intelligence, the internet of things and computer vision, companies can now optimize factory operations like never before, improving productivity and quality while reducing carbon footprint.

Spotlight on Health — In the Early Innings of Transformation

Health is also on the threshold of a profound transformation that will have a considerable economic and human impact. It is no coincidence that the world’s largest companies, such as Amazon, via its acquisition of One Medical, and Google, have entered the field. We are at a key moment in the evolution of the sector. Applications that were considered “pipedreams” 10 years ago, such as robotics or remote surgery, are now being taken seriously with marketed products or partnerships with large institutions. And this is only the beginning.

The healthcare sector is also emblematic of the necessity to break silos and bring different players together — such as global pharma with its strong marketing and distribution power and biotech and medtech startups with agile business models but more limited resources. By bridging the gap between these types of companies, we can find the next market leaders while identifying the most innovative trends that traditional health institutions sense but are not able to prioritize. Beyond supporting companies on the strategic, operational and financial levels, we aim to make the right connections, open the dialogue and facilitate meaningful collaborations that will move the industry forward.

Advanced technologies that have become common place in other fields can and should be applied to healthcare which will massively benefit patients everywhere. Accelerating this movement will not only require funding, but the ability to move from prototype to industrialization — bringing solutions to the market that exist in theory but not yet realized in practice.

Spotlight on ESG & Impact — Being Useful

Private equity and venture capital must have a greater purpose beyond profit. And innovation should not be considered for its own sake, but for the impact it can have on the economy and society as a whole. Impact and economic value don’t work against each other — on the contrary, the financial success of a company is closely correlated to the impact it has on businesses, populations or the planet.

Everything starts with an unmet need. Technology plays a key role in this thinking – in both mature and emerging markets – in building a more habitable, open and inclusive world through better access to goods, financial services, education, healthcare and connectivity. As investors, our goal is not about growing assets in size alone, it’s about giving founders, executives and management teams the capacity to drive real change and create the world of tomorrow. It’s about turning companies into game changers.

Taking ESG (environmental, social, governance) criteria into account is essential and highly intertwined with impact. Good governance is crucial for successful development and long-term impact while social and environmental issues further things like social equity or reducing CO2 emissions. However, ESG criteria is not sufficient on its own — we have to go further on climate and utility. We aim to be useful in this regard: (1) to our ecosystem, by understanding our partners needs and sharing the knowledge, resources and tools to create more sustainable, resilient businesses; (2) to our portfolio companies, by helping them take the right steps to maximize impact; and (3) to society at large, by doing our part in fueling the larger transformation.

Parting Thoughts: Cathay Capital & Purpose

At Cathay Capital, we want to champion a vision of private equity that delivers concrete, high-impact results. We want to be at the forefront of tomorrow’s economy and industry, while being useful to society. The more we operate on a global scale, the more impact we can achieve.

Like companies, investment firms must have a mission: for Cathay Capital it is to accelerate the sustainable transformation of industry and society.

My sincere belief is that Cathay Capital, true to its values and DNA, is well equipped for the new era ahead. The various sectors and geographies in which we invest, along with our intimate relationships with key industry players, make us flexible and highly responsive to emerging trends.

Success is no longer measured only by the creation of the largest, fastest or most disruptive companies. In the face of pressing challenges – from climate change to global health crises and social equity – the world over is calling for more responsible and resilient businesses of all sizes. To achieve this, the next generation of entrepreneurs — and the investors who support them -— will be key. Cathay Capital, with you by our side, will be there to support them in making their visions of tomorrow a reality.