Over the past quarter, we have spent considerable time thinking through the current macroeconomic situation. Thankfully, our operations suggest that China’s consumer remains on track, and we remain cautiously optimistic that consumer spending will rise, companies with room for operational improvements remain good investments, providers of niche discretionary products will outperform, and the key drivers of our thesis will remain wage growth and urbanization.
Given our cautiously optimistic view, we remain convinced that investing in businesses that provide consumers with the products and services they want and need remains very attractive. Chinese consumers are becoming smarter, demanding better products and spending more. Imports can selectively succeed in the ultra-premium segment for niche and specialized products, but Chinese brands will dominate the mass market, leveraging local tastes and presence.
We also believe the consumer investment climate is at a crossroads, which will result in far broader and deeper opportunities. The last decade saw tremendous investment in department stores, shopping malls, e-commerce marketplaces, and consumer logistics. Just as China has built tremendous roads, rail and ports, it has also now built substantial consumer infrastructure, much of which is underutilized with excess capacity. The most compelling opportunity for the coming decade will be to own businesses with the brands customers want, and that can operate more efficiently by taking advantage of these deep channels.
Finding the right companies, however, is always challenging. Our pipeline is growing mostly as a result of our dedicated focus and our ability to address the operational and succession challenges many attractive businesses are facing. Our value proposition is compelling for potential partners, as the need to professionalize management, drive growth and improve profitability grows.
Our investment strategy is built around this thesis and skill set, and our performance increasingly validates these efforts. A recent Cambridge Associates study showed that managers who invested more than 70% of their capital in a given sector outperformed generalists. Specifically, from 2001 to 2010, consumer sector specialists generated average 2.2x MOIC versus 1.9x for generalists, for a gross IRR of 20.5% versus 18.6%. Across vintages sector specialists outperformed in nine out of ten years. Our returns have demonstrated similar characteristics, especially in maximizing distributions and minimizing loss ratios in challenging environments.
We remain confident in our ability to find great businesses, execute on strategy and generate good returns across varied market conditions. We look forward to capitalizing on these opportunities with the support of our growing team and investors.
Lunar | July 31, 2015