Exclusive: Mandarin shifts strategy ahead of first close

The Sino-Europe fund has moved away from China outbound investing, dramatically changing its LP base.

Mandarin Capital Partners is expecting a €200 million second closing on its latest private equity fund before the end of August, a source close to the matter has told Private Equity International. The fund expects a final close on €500 million in the first quarter of next year.

Alberto Forchielli’s firm made a first close on €111 million in July last year, but has since experienced a slowdown in its fundraising due to a major shift in strategy.

Mandarin declined to comment on the progress of the fundraising, but founder Forchielli told PEI the fund will not make any direct investments in China, with a view to take those businesses into Europe – something that was integral to the firm’s original strategy.

Instead, Mandarin will focus on investing in European companies with the potential to expand into the China market – a less risky, more profitable strategy, Forchielli says.

“You make a lot more money doing Europe to China than China to Europe, in general. It is a much more profitable investment because [when] investing with Chinese companies in Europe, people are not willing to sell to Chinese. So the [Chinese firms] end up buying companies nobody wants or overpaying for the good companies.”

The move, which was primarily driven by the difficulty of trusting many Chinese companies to adhere to international best practices when investing in Western markets, as well as their lesser ability to invest in good companies at attractive prices, has had a significant impact on Mandarin’s LP base, Forchielli adds.

“The minute we decided we weren’t going to do China outbound, our China[-based] fundraising became very weak [and so we] focused mainly on the US and Europe. But we [had to] start the whole fundraising process in the US [from scratch], as we weren’t [planning] to fundraise there.”

The shift has been a blessing in disguise for the firm, with international investors now more interested than ever in the China proposition, Forchielli, who has relocated from Beijing to Boston in the US, believes.

Moreover, while large Chinese LPs are “impossible to get” without an outbound element, large domestic LPs in China are not always desirable investors, he says, sometimes getting heavily involved with the day-to-day activities of their GPs.

“[Western investors] loved it – because international LPs are not keen at all on China outbound. They like our strategy of investing in mid-cap European companies with China exposure. It is like getting China growth without the negatives; putting money in China, but not being tied to [the challenges of] China exits or vague Chinese laws,” he explained.  

“So they liked our model and the China outbound portion of our strategy wasn’t appealing to them anyway – it wasn’t a key feature for them. Dropping the China outbound feature diminished our attractiveness for Chinese LPs but not for international LPs – to international LPs it made us more attractive.”

Mandarin expects a 2.5x return on its first private equity fund, a 2007 vintage, which has four European-based companies left in its portfolio. The firm has enlisted placement agent Wedge Alternatives to help with its fundraising in the US. 

The second fund also made its first investment this week, with Mandarin investing €18 million in Industrie Chimichie Forestali, a footwear adhesives and specialist textiles business in Milan, Italy. The investment is expected to accelerate the company's international expansion, particularly in China.