Billions in the pipeline for China PE funds
A mainland vehicle was the biggest PE fund-of-funds to close on a global basis in the first half of the year at Rmb15 billion ($2.45 billion), and there are indications that more large domestic, renminbi-denominated vehicles are in the market to raise capital.
A final close was held in February for Guochuang Kaiyuan Fund of Funds, which was raised by CDB Capital – the fund management unit of China Development Bank. The lender is one of three state-owned lenders which support government initiatives.
Guochuang Kaiyuan is more than double the size of the second largest FoF to close in the first half, which was Portfolio Advisors’ $1 billion Private Equity Fund VII, followed by Partners Group’s $680 million Global Value 2011 vehicle, according to data provider Preqin.
Guochuang Kaiyuan’s FoF is part of a joint venture between China Development Bank and VC fund manager Suzhou Ventures Group. They have a long-term target to raise a total of Rmb60 billion through a series of funds of funds.
In the mainland, Guochuang Kaiyuan has been dubbed as ’China’s national fund of fund’. According to mainland media, investors include the National Social Security Fund, China Life Insurance Company, China Re-Insurance Corporation, and telecoms equipment maker Huawei.
As of last year, mainland insurance companies have been permitted to invest up to 10% of their AUM into PE funds, double the 5% limit set in 2010. While it is a relatively small proportion, mainland national insurance firms are estimated to have about $1.2 trillion in total assets.
In terms of helping to grow the domestic PE industry, insurers could “become a big swing factor”, according to one industry executive. “An RMB-denominated PE fund of fund would be a pretty tough sell, unless there are life insurance companies that may be ready to deploy capital to private equity.”
A government-linked FoF would give domestic insurers confidence to invest to the alternative asset class, with the reassurance that the vehicle would have access to leading domestic PE managers.
In the case of Guochuang Kaiyua, an additional sense of security is provided through the involvement of US-based Siguler Guff, a fund of PE funds manager overseeing $10 billion, which AsianInvestor understands is providing investment advice to the vehicle.
Guochuang Kaiyua reportedly aims to allocate capital to domestic private equity firms that are focused on M&A activity, business restructurings and industry consolidation. The FoF will also have a focus on domestic PE funds that are having difficulty raising capital.
There is no shortage of potential investment targets on the mainland. Industry estimates put the number of active PE funds in the mainland at 8,000, a 40-fold growth from 200 in 2000, and some executives argue that the current estimated figure is conservative.
There is also no dearth of struggling domestic PE funds. There are said to be many managers stuck with minority positions in companies that they cannot exit, due to a bottleneck in IPOs on the A-share market, according to the industry executive.
Subsequently, more capital is being raised for large mainland FoFs. Suzhou Ventures Group is seeking to raise Rmb5 billion for GC Oriza Fund of Funds, which aims to invest in between 20 to 30 VC vehicles registered in the mainland, according to Preqin.
Meanwhile, domestic fund manager Power Capital is also targeting Rmb5 billion for its West Strait Fund of Funds, which plans to invest in China-focused growth equity funds.