The financial services unit of Chinese online search giant Baidu will be spun off with the assistance of investors who include TPG in a deal estimated to be worth $1.9 billion. According to one investor the unit will be valued at $4 billion. The financial services unit will henceforth be known as Du Xiao Man.
Baidu’s stake in Du Xiao Man will be 38% while that of TPG will be 26%. TPG is expected to invest close to $1 billion. The private equity firm recently raised approximately $4.5 billion for its Asia fund. The other investors who will chip in the remaining amount include Taikang Insurance and Carlyle Group. This will make the deal one of the largest PE deals in the world’s most populous country.
In recent years China’s investment landscape has been transformed by venture capital and private equity groups that include TPG have been pushed to the sidelines. According to one investor the deal will reboot TPG’s standing in Asia.
The financial services unit of Baidu was founded three years ago and is only a fraction of rival operations. Currently it boasts of assets worth $7.5 billion and liabilities amounting to $6.6 billion. The value of its loan book will reach $8 billion before this year ends. Revenues this year are expected to amount to $600 million. While the unit is profitable to a small extent the operation has hurt the balance sheet of Baidu.
The deal coincides with increased scrutiny on financial technology companies in China as the government reins in shadow banks. Beijing is also involved in efforts aimed at encouraging financial firms to reduce risks and lower debt in the system. Baidu has made the argument that its financial unit meets policy objectives as it provides small businesses and individuals with financing that mainstream financial institutions cannot offer due to the risks.
“As savings and lending activities move online, technology companies are able to use their big data analytics to offer flexible micro-financing to the younger generation of consumers,” TPG’s Chang Sun, said.
Baidu’s business model views mainstream banks as partners rather rivals and the financial unit of the Chinese online search engine has even collaborated with some of them to develop artificial intelligence tools that assist in making lending decisions. And by turning into an AI-first business that is data-driven Baidu has managed to reduce the over-reliance on digital advertising.
Du Xiao Man is not the first financial firm TPG is investing in in Asia – others include Indonesia’s BTPN and Shenzhen Development Bank.