• Advent has accessed China’s petfood story via trade show and manufacturing deals
• Seek Pet Food’s potential is rooted in its work in innovative product development
• Demand for specialised products to increase as domestic pet market mature

Petfood is one of the few bright spots for global investors in China’s economy, relatively resistant to discretionary spending fluctuations, almost devoid of political and regulatory risk, and propelled by consumer lifestyle trends well charted in other countries.

It is claimed the domestic pet market has posted year-on-year growth of 9%-17% for the past several years, boosted by a pandemic-driven shift toward cats. Advent International estimates the market was worth CNY 69bn (USD 9.7bn) in 2023 and positioned for growth as pets, especially cats, are increasingly seen as part of the family.

It’s an established thesis for global PE, implying mounting competition in a category with limited targets. As recently as last March, Advent sought a backdoor entry with the acquisition of VNU Exhibitions Asia, a trade show organiser whose Pet Fair Asia series is the centre of the industry’s calendar in the region. In 2023 alone, the event attracted 24,000 brands and 350,000 visitors.

“We’re really trying to find creative ways to invest in the pet economy in China, not just the typical path of investing in a petfood brand,” said David Chen, a managing director at Advent who leads the China consumer strategy.

“We want to put together various pieces of the puzzle in this theme to find synergies in our investments and networks. I think that by finding unique angles that benefit the growth of the overall petfood space, it shows that Advent really understands the sector.”

The right recipe?

Advent’s latest play on this theme is the acquisition last month of Seek Pet Food, which claims to be the largest white label manufacturer in its space locally. The firm invested via its latest global private equity fund, GPE X, which closed on USD 25bn in 2022 with plans to ramp up exposure to Greater China. Asia historically represents less than 20% of Advent’s flagship funds.

Advent is taking control as the leader of a consortium that includes existing investor Boyu Capital, although Advent’s portion is under 50% and the largest shareholder remains the founder.

The deal facilitated exits for several small VC funds. Boyu, which increased its position, invested as recently as 2022, putting in USD 75m alongside GP Capital, Riverhead Capital, and Zhonghai Capital, as well as various other local financial sponsors and one strategic.

Advent identified Seek about five years ago when it canvassed the entire China pet products space, but at the time, the company was too small. The early relationship building is credited with the ease of proprietary access despite the popular appeal of the China pet segment. There was no broker and no intermediaries in the transaction.

As with VNU, the thesis is about accessing a phenomenon of consumerism from an indirect angle. Seek is not a customer-facing brand, but it positions itself as effectively the next closest thing – an R&D partner on the bleeding edge of buyer behaviour intelligence that has grown in step with a nascent industry of direct-to-consumer start-ups.

“In terms of consumer insights, understanding what the customer wants, and understanding market trends, they’re no different than the brands themselves,” Chen said. “It’s not just brands providing ideas to Seek – they’re co-developing and co-launching new products together. They’re not just a factory in the back.”

To some extent, Advent is attempting to replicate its experience with PPF, a similar European operator it acquired in 2011 for about USD 266m and sold four years later to Pamplona Capital Management for USD 340.8m.

Feeding cats

The China market is unique, however, in the sense that it has become dominated by cats – they represent about 90% of Seek’s business – and 80% of sales are online. At the same time, consumers have gradually shifted toward local brands, complicating most PE playbooks around bringing foreign names into the country.

The plan is mostly focused on building operations related to local brands. Seek’s ecosystem is 90% China-based with a smattering of exports going to Southeast Asia. There is significant scope building out international brands targeting the market, however, where they are conscious of local nuances.

“You serve the Chinese market not by bringing in a European or US SKU [stockkeeping unit] but by developing a China-specific SKU based on your IP [intellectual property] and your formulation, manufactured locally,” Chen said.

Advent expects to be of most help in terms of building out the IP development side of the business. The firm believes it is well networked in the pet space globally and able to see how past trends in more developed markets are beginning to take hold in China.

The central theme here is the so-called functional side of petfood, where highly specialised, often gimmicky products penetrate sub-categories such as freeze-dried kibbles, pigeon meat, hair shine, hairball control, and weight control.

Perhaps the most basic and lucrative of these product lines are those catering to the age of pets, formulating food for kittens as nutritionally distinct from food for elderly cats. Chen observes this is a common offering in markets such as the US and Europe and set for significant uptake in China.

“Innovation in the pet space is still quite basic in China today. It’s around how petfood is consumed but not yet focused on health benefits at different stages of a pet’s lifecycle,” he said.

“Most Chinese consumer are first-time cat owners, so they haven’t gone through that whole cycle yet.  As the market matures, naturally it will trend toward functional products.”