Cathay Capital woos wider investor base

The Paris-based firm that specialises in cross border investments in China is raising its third small-cap vehicle, seeking more European, US and Middle Eastern LPs.

Paris-based Cathay Capital Private Equity is hoping to expand its international investor base for its third small-cap vehicle.

Cathay Capital Small Cap III, which is currently in market with a hard-cap of €250 million, held a first close on €100 million in December, without commitments from the firm’s three biggest existing LPs. Their absence will “leave us some space in order to welcome newcomers and enlarge our LP base,” Cathay Capital co-founder and managing partner Edouard Moinet told Private Equity International.

The firm is hoping to attract more investors from Europe, including the UK and Germany, and the US and the Middle East, to support the internationalisation of its portfolio companies, Moinet said.

Paris-based Reach Capital is the placement agent for the fundraising.

Around 40 percent of the investors in Cathay Capital’s funds – which specialise in cross-border investments between Europe, the US and China – are from France, with 30 percent from China and 30 percent from Europe, the US and Middle East. “Probably, we are too focused between France and China,” Moinet said.

Over the past 16 months the firm’s largest investors, the China Development Bank, French investment bank BPifrance and a prominent French family office, have committed €100 million each to the firm’s first mid-cap fund, a €500 million vehicle which closed in 2014 and has drawn down 40 percent in the past 12 months, and €50 million each to the Cathay Innovation Fund, which closed on €250 million last year.

“Their current exposure is very high,” Moinet said of its cornerstone investors, noting those LPs are expected to come in to the small-cap fund at the final close after the summer.

Cathay’s other investors include pension funds, insurance companies, banks and funds of funds, as well as a collection of family offices. “We want to keep these people [family offices] around as they don’t only bring money but they bring an eco-system with strong industry expertise,” Moinet said.

The new fund will invest €5-20 million in 12-15 companies with an enterprise value of less than €100 million. It already has a pipeline of deals, with exclusivity on three transactions, two in e-commerce retail chains in China and one in Germany.

Its predecessors Cathay Capital I, a €67 million vehicle that closed in 2008, and Cathay Capital II, which closed on $187 million in 2012, are completely invested. Fund II was raised alongside Cathay’s €150 million Sino French Fund, with which it invests. Fund I has completely reimbursed its commitments, while Fund II has partially returned its capital.

Cathay Mid Cap Fund targets investments of €25-60 million. It is invested in six assets, three of which are in France and three in China.

“The deployment pace is quite quick,” said Moinet. “When we launched the mid-cap fund, it was because we saw a lot of opportunities at the €50-60 million ticket size, but we didn’t have the money at the time. The move to mid-cap was natural to stick with the deal flow.”

Last year, the firm opened an office in San Francisco and launched its Sino North American strategy and the Cathay Innovation Fund. The innovation fund will target investments in big data, the internet of things and other digital businesses split a third in the US, a third in China and a third in Europe.

In addition to Paris and San Francisco, the firm, which was co-founded by Chinese businessman Ming-Po Cai, has offices in Beijing, Shanghai, Munich and New York.

“Our leverage is our international offices and platform,” Moinet said. “Of course, we are going to prioritise those companies that already operate in the international playground or want to operate or want to share the risk of entering China to build up [their businesses].”

Slowing Chinese economic growth means a push to consolidation and “it is a kind of paradox, but it is easier to deploy and identify the right targets now rather than 10 years ago when we faced 13-14 percent GDP growth,” Moinet said.

“For PE investors, entering in a cycle when industries are going to consolidate, the emergence of real national leaders and international players [provides] an important opportunity for us to invest, and, for our future exits. That is a new move in China. The next step is for Chinese companies to go abroad through international acquisitions.”

The firm has exited three investments through initial public offerings in China and has another three exit deals pending.

In China, the firm targets fast growing companies in sectors including environment, healthcare, education, children-focused businesses, agri-businesses, logistics, and household equipment that capitalises on rapid urbanisation, with less focus on majority stakes.

Moinet maintains that the firm enjoys 100 percent proprietary deal flow in China where investment bankers are thin on the ground. “The banking system is not equipped to finance companies, which has led to a boom in private equity and the stock market,” Moinet noted.

It is different in Europe and the US, where two thirds of the firm’s deal flow, which encompasses majority and minority stakes, emanates from co-investments and advisors, Moinet said.

The firm has assets under management of €1.3 billion.