China's growing PE industry

Judy Qing Ye, a Shanghai-based director of emerging markets-focused EM Alternatives, says the time is right for a domestic FoF industry in China.

As director of one of China’s few RMB private equity funds of funds managers, Judy Qing Ye is understandably quick to counter the claim that there are not yet enough domestic GPs to justify a domestic fund of funds industry.

“There were only a handful of GPs in China 10 years ago, but now there are hundreds of active GPs. It’s good because it means GPs grow very fast and there will be another group of talented GPs coming,” Ye said in an interview with sister news site PEI Asia.

“There are more than 6,000 GPs in the US, so eventually there will be more GPs in China. It just needs time,” she added.

Ye, also head of EMAlternatives’ only Asian office in Shanghai, is a firm believer that private equity will play an increasingly important role in the Chinese economy and increase its percentage share of GDP.

“Private equity is a local business, and it will increasingly become a vital part of the Chinese capital market,” she stated. “So RMB fund of funds will have their place.”

The LP base in China has a great potential because there is so much money sitting in the market.

Judy Qing Ye

Guided by this belief in the potential of the market, EMAlternatives launched an RMB-denominated fund of funds last month to invest in Chinese venture capital and growth capital funds. Though no target has been announced, the fund was awarded an initial RMB500 million (€54.72 million; $75.28 million) mandate by the MinHang district of Shanghai Municipal Government. It will be managed under YiMei Capital Management.

Up until now, most funds of funds investing in China have been pan-Asian and raised in foreign currency by a mix of global and regional players. On the RMB front, most FoF vehicles are run by local governments with more policy-driven agendas. One exception is Suzhou Ventures Group, which launched two funds of funds in September with a total target of RMB15 billion.

Of course, EMAlternatives’ step into the space wasn’t simply guided by the growing number of GPs – the steady growth of the local LP base also gives Ye confidence that her firm is acting at the right time.

“The LP base in China has a great potential because there is so much money sitting in the market. Currently the LP base is totally underrepresented in the overall capital market structure,” Ye said.

However, while bullish, Ye does acknowledge that it’s early days for domestic fund of funds and as such there is a certain amount of maturation needed before the strategy can really bed in.

“If you want to be in this market you need patience. You need to grow together with the market,” she said.

Looking forward, Ye predicts that growth in the China’s FoF industry will come from within the domestic market, with the emergence of local managers, as well as from international firms like EMAlternatives establishing a base to raise RMB vehicles there.

Founded in March 2007, Washington- and Heemstede-based EMAlternatives opened its Shanghai office in November 2008. The firm specialises in building customised investment portfolios for large institutional investors that want exposure to emerging private equity markets.