China PE fundraising dips in H1 2018

China-focused private equity firms raised $3.6bn in the first half of the year, almost a 50% decrease from the same period in 2017, according to PEI data.

China private equity fundraising slowed in the first half of the year, according to preliminary figures from PEI.

An aggregate of $3.6 billion was raised by 11 China-focused and headquartered private equity firms in the first six months of 2018, compared with $6.9 billion collected by 17 GPs in H1 2017.

China watchers cited the “cyclicality of the market”, with more funds with larger targets are expected to hold final closes by year-end, as one of the reasons behind the dip in fundraising figures.

CITICPE earlier this month held a final close on its third flagship vehicle above its $2.2 billion hard-cap, while Orchid Asia Group raised $1.3 billion in January this year for its seventh vehicle, beating its $900 million original target.

Meanwhile, GPs on the fundraising trail include Primavera Capital Group, which is reportedly targeting $2.8 billion for its third fund, and CDH Investments, which has a $2.5 billion target for its sixth flagship fund. Centurium Capital Partners has set the hard-cap for its debut fund at $1.5 billion and TrustBridge Partners, a TMT and consumer-focused manager, is said to have raised more than $1 billion for its sixth offering.

Javad Movsoumov, managing director at UBS Private Funds Group, noted a “bifurcation in terms of who is raising capital and who isn’t in the China private equity market”.

“First, there is a lot of capital raised by large funds (targeting more than $1.5 billion). Second, venture capital funds still continue to attract a lot of interest. And third, we are seeing the mid-market funds (between $300 million and $1 billion) do very well, with teams that have great track record and history, as well as funds with a sector focus.”

“From that cohort, we see strong representation from sector-focused funds such as consumer, tech, healthcare, environmental services, food, and entertainment, among others. What this means is that the years of raising lots of sector-agnostic, generalist, mid-market USD funds ­­­­– the bulk of fundraising five to six years ago – are over, and the market is beginning to shape up into different segments,” he explained further.

Edwin Chan, managing director of placement firm Probitas Partners, noted 2018 has so far been a strong year for China for both venture capital and growth buyouts, driven by demand from investors to diversify more into emerging markets, as well as select funds that have performed well.

He added: “The overall sentiment is positive. It will be interesting to see if the trade war may reverse this trend, but good investors always look at fundamentals and the Chinese environment continues to be seen favourably.”

Meanwhile, James Donnan, managing director of Intertrust Hong Kong, highlighted that “buyouts will be the next big thing and will overtake venture capital in China in the next few years”.

He explained most of the Chinese economy is based on private enterprise in traditional industries, and while often underreported, it’s these well-established private companies that are supporting the macroeconomic themes around the emerging consumer, growing middle class and urbanisation.

“The interesting thing for buyout funds is that there is a generational shift about to take place in the ownership of these private companies. The founders of these companies are getting old, the next generation of their families may not be interested in taking up the reins, and there is no succession planning in place.”

He added Intertrust’s buyout clients are now mobilising and getting ready to take this market on. “It’s less competitive and there are a lot of gems in the market that can be accessed with smart deal sourcing, buying at good value, enhancing the business and taking them online.”