China's HNWIs souring on PE

As China's GDP growth slows and public markets slump, high net worth individuals are less interested in investing in RMB funds.

Wealthy individuals are becoming more cautious about investing in China as returns from the pre-IPO strategy, which most are partial to, are increasingly weak, according to Zheng Zhang, managing director at Jade Invest. 

High net worth individuals are far less confident in China investments today than they have been in the past, and that could mean a lot less capital for private equity funds – particularly RMB funds – that have previously relied on individual investors.

“Some RMB funds this year have had to lower their fundraising expectations by half, and others have not been able to raise any money at all,” Zhang added.

Having HNWIs as investors brings both advantages and drawbacks, Zhang says. With large amounts of cash readily available, they make decisions very quickly, but also have no allocation plan and may not re-invest. 

They also expect very fast and high returns because many wealthy individuals in China also own their own businesses, which can give up to 30 percent returns.

“As a GP, your competitors may be the LPs themselves,” Zhang said.

Daniel Tseung, founder of Hong Kong-based growth-stage investment firm LionRock Capital, says he has found advantages. He brought in HNWI individuals to his maiden USD fund, but he says the wealthy entrepreneurs who invested capital are comfortable with long-term investments.

In addition, some entrepreneurs have deep industry knowhow and connections to help source deals, providing the firm with an edge, Tseung believes. 

Since launching LionRock Capital in January 2011, Tseung says his LP base of wealthy entrepreneurs have helped LionRock close two small-cap investments, the most recent one a $10 million minority stake in Shanghai-based quick-service restaurant chain YPX earlier this month. The firm has no institutional investors at this point.

Tseung said his firm expects to hold its investments for 10 to 12 years, and the LPs are actually supportive of that.

“Those who are interested in short-term profit would never invest with us,” he added.