Exclusive: Principle Capital to launch USD fund

The Chinese firm is plotting its first US dollar vehicle as buyouts in the country increase

Chinese private equity fund Principle Capital will launch a US dollar-denominated vehicle before year-end, Lin-Lin Zhou, founder and chief executive of the firm, revealed to Private Equity International.

The new fund will target around $200 million, raising capital from both China-based and select international investors, Zhou explained. The fund will make investments of between $50 and $100 million, only in majority stakes, focusing on the consumer, service and industrial sectors.

Principle’s three previous funds, the latest a RMB 500 million ($81 million; €60 million) 2013 vintage, were all RMB-denominated vehicles focused on growth capital, minority investments in China.

Zhou said the US dollar vehicle intends to target the increasing volume of buyout opportunities in China.

“I don’t want the US dollar [fund] to conflict with the RMB fund – they should be separate in the field. [With] buyout opportunities, if I use US dollars, I have a much broader scope for the future. I could IPO in China, I could link up with multi-national companies abroad or could also go IPO in overseas markets,” Zhou said.

“A lot of European, US, Japanese and Korean companies want to come into China by acquiring Chinese companies, which is an opportunity for us to exit our buyout investments.”

Principle will also invest offshore in companies that wish to expand into China, Zhou added.

“Another reason we want to use US dollars is that there are a lot of mergers and acquisitions [available in] overseas markets like Korea, Japan, Israel, the US and Europe. A lot of small- and medium-sized companies there have good products, good technology and good brand names, but they don’t have the capability to expand their product in China.”

While typically Principle’s RMB funds have focused on financial or strategic investing, with some value creation work, the new US dollar fund anticipates a higher level of involvement by the management team at the portfolio company level.

Principle has invested RMB 2 billion in China since its inception in 2002, according to the firm. Through its 24 investments, 11 IPOs and four trade sales, the firm has produced an average IRR from 2003 to 2012 of 49 percent, according to its auditor Deloitte. 

Principle intends to continue raising RMB vehicles in the future, the latest move not a signal that it is dropping out of the domestic RMB market. It expects to have deployed all the capital from its third fund by the end of 2015, Zhou said.