Allianz: LPs may rethink China allocation amid macro headwinds

Investors could become more lukewarm on China private equity amid the combination of geopolitical and growth fears, director Willa Hong told PEI.

Private equity firms raising capital for China-focused funds could face headwinds from geopolitics and the slowing of the country’s economy this year, according to Allianz Capital Partners.

Willa Hong, a director at the German insurance giant’s in-house alternatives investment manager, said the firm expects 2019 to be a slower fundraising year than previous years as LPs “look to rationalise” their China allocations across all PE strategies due to Sino-US trade tensions and slowing growth.

“It will be difficult for China funds to be doubling or tripling in fund size in this environment,” Hong told Private Equity International.

China-focused funds raised $22.8 billion last year, the highest amount raised since 2015’s $13.3 billion, according to PEI data.

Average fund size targets have almost doubled in the last four years to $490 million in 2018. Healthcare-focused C-Bridge Capital, which had just raised a $400 million fund in 2017 upped its target by about 63 percent for its latest vehicle. CITICPE, meanwhile, had a $2 billion target for its 2018-vintage third fund, 67 percent larger than its $1.2 billion target for its predecessor vehicle.

Hong added that in her conversations with peers, especially those who don’t have staff in the region, “some seem to [have] become more lukewarm on the China market”.

Allianz has not made changes to its China-focused funds deployment this year, Hong said.

The firm manages over €26 billion of assets in alternatives strategies, according to its website. About one third of its capital allocation in private equity every year goes to Asia, mainly to fund commitments, followed by co-investments and secondaries.

Chinese GPs on the fundraising trail include healthcare-focused firms BVCF and C-Bridge, which are seeking $400 million and $650 million respectively for their latest vehicles, as well as first-time manager Nexus Point, which is seeking $750 million.

At the larger end of the market, CDH Investments has a $2 billion target for its sixth flagship vehicle; CITIC Capital, $2 billion; and Primavera Capital, $2.8 billion, according to PEI data.

Kiki Yang, a partner with Bain & Company’s private equity practice and regional APAC practice co-leader, said in the firm’s 2018 China private equity report that although China continues to be one of the most attractive markets for investors, firms need to invest and focus on cost transformation and management as macro conditions become less sanguine.