For some western investors, creating new relationships with Chinese GPs may seem incongruous in the present geopolitical environment. But for those with an appetite, there exists a wealth of firms that are either relatively unknown to overseas LPs or only recently open to US dollars.
Domestic firms anticipate an uncertain fundraising future amid concerns that US institutions could face government and beneficiary pressure to reduce their exposure – a dynamic that has already played out in public markets. Recent regulatory intervention from China in popular sectors for private equity, such as tech and education, has further threatened to dent investor confidence.
Picking the right firm could be more challenging than ever. With many to choose from – some estimates have the number of Chinese GPs in the tens of thousands – which deserve investor attention? That’s a question Private Equity International sought to answer with our latest list of Chinese managers worth watching.
Besides an interesting sector focus, background, performance or team composition, qualifying criteria included at least $500 million (or the yuan equivalent) of assets under management and two or more funds, including joint ventures.
Here’s who made the cut, listed in alphabetical order:
Asia Green Fund
Impact investing is still relatively nascent in China, and Asia Green Fund is one of the market’s earliest movers. The Beijing firm was formed in 2016 by Bo Bai, who previously led energy, industrials and business services investments across Asia for Warburg Pincus.
AGF launched its second yuan-denominated growth and venture capital fund in March, PEI reported earlier this year. AGF Carbon Neutrality New Materials Fund is seeking 1 billion yuan ($155 million; €130 million) and is expected to hold a first close on about two-thirds of that figure in the third quarter.
AGF’s 3.2 billion-yuan 2016-vintage predecessor is fully deployed and has generated a 0.38x distributed-to-paid-in multiple, 1.7x multiple of invested capital and 22 percent internal rate of return. The portfolio includes battery switching service Immotor, liquid cooling designer CoolTera and energy savings business East Low Carbon.
AGF co-manages two impact joint ventures, including the $700 million Three Gorges Green Fund – co-founded with China Three Gorges Capital and Tsinghua Asset Management – and has formed special purpose vehicles with capital from the likes of Public Investment Fund and Aramco.
Last year, the firm achieved 2.6 million tonnes of carbon dioxide emissions reduction and 1.6 million tons in water pollution reduction, according to its inaugural Carbon Neutrality and Green Impact Report. This equates to 173,000 tonnes of CO2 reduced for every 100 million yuan invested.
Though its first two funds are yuan-denominated, AGF plans to launch its debut dollar-denominated impact fund next year.
DCP Capital Partners
The firm was founded in 2017 by KKR alums David Liu, former co-head of private equity Asia and CEO of Greater China, and Julian Wolhardt, a former partner and regional leader for China. The duo joined KKR in 2006, having previously spent more than a decade building and leading MSPEA.
With this track record, it’s little surprise the firm collected a hefty $2.5 billion in 2019 for DCP Capital Partners I and roughly the same again for a concurrent yuan-denominated vehicle. Fund I targets buyouts and minority investments across a variety of sectors, including consumer, industrial technology, healthcare and financial services.
DCP’s LPs included New York State Teachers’ Retirement System and University of California Retirement Plan, according to PEI data. Recent acquisitions include diabetes pharmaceutical company Tonghua Dongbao, data centre business Hotwon Group and dairy product company Adopt A Cow, per DCP’s website.
The firm is now back in market with its second fund, according to an October filing with the US Securities and Exchange Commission. The target amount is undisclosed.
Eastern Bell Capital
Like DCP, Eastern Bell Capital is founded by two veteran investors. The growth equity firm was founded in 2009 by Zhiming Mei, who also serves as co-founder and chief executive of Singaporean logistics company GLP, and Li Yan, founder of Chinese family office Black Spade and one of Fortune magazine’s “30 Most Influential Investors” in China last year.
Eastern Bell targets the logistics, supply chain, retail and distribution sectors in China. It has completed 180 investments to date, including 26 companies whose valuations have grown to $1 billion or more, and generated a 30 percent gross IRR in the process.
The Shanghai firm has raised the equivalent of nearly $1.3 billion across five yuan-denominated funds, the largest of which is its 2018-vintage RMB Fund V at approximately $722 million.
Though slightly more established than the other firms on this list, Eastern Bell is still relatively new to the world of USD-denominated fund management. The firm collected $365 million for its 2018-vintage USD Fund I, which had generated a 1.7x net MOIC and 49.2 percent net IRR as of 31 July, according to a source with knowledge of the firm.
Eastern Bell is understood to have already raised $663 million against a $600 million target for USD Fund II. With a 95 percent re-up rate among its LPs, the fund may close even further north of that figure by year-end, the source said.
Loyal Valley Capital
The Shanghai firm was launched in 2015 by Andy Lin, founder of Chinese equities giant China Universal Asset Management. It manages more than $1.6 billion, including two dollar-denominated late-stage venture capital and growth equity funds, and an evergreen yuan fund. It is seeking $700 million for a third US dollar vehicle, according to PEI data.
Loyal Valley mostly focuses on consumer, healthcare and advanced manufacturing. Its portfolio includes online video platform BiliBili, designer toy company Pop Mart and lithium battery manufacturer Eve.
The firm has already notched up some impressive returns. Its $390 million 2018-vintage Loyal Valley Capital Advantage Fund is understood to have generated a 2.4x distributed-to-paid-in multiple as of 31 July and 5.1x net MOIC as of 30 June. The $465 million 2019-vintage Loyal Valley Capital Advantage Fund II generated a 100 percent net IRR as of 31 March.
Loyal Valley’s first dollar fund is understood to have been seeded with assets from its evergreen yuan vehicle. In 2018, LPs in that fund were given the option to roll into a USD fund or sell their holdings to GIC and Asia secondaries specialist NewQuest. The fund contained stakes from a number of Chinese unicorns, including highly prized Bytedance, which owns TikTok.
Such processes are increasingly common in China, as domestic firms seek to provide liquidity for existing investors and entice western LPs with a pre-built portfolio of attractive assets.
The growth equity and venture capital firm is also notable for the composition of its leadership team, being one of the few private equity firms in China to be majority owned and led by women. MSA was founded in 2014 by Jenny Zeng, a founder and former chair at Chinese financial advisory Maple Valley Investment, and now has more than $1.7 billion of assets under management.
MSA is expected to launch two fresh funds before year-end, PEI reported in August. It plans to seek $600 million for its Growth Fund II and $250 million for China Venture Fund III, with fundraising likely to begin in the fourth quarter. The firm is also in market with its debut Emerging Technology Markets fund, which will target early-stage investments in the Middle East, North Africa and Southeast Asia.
Since inception, MSA is understood to have been part of more than 10 IPOs and exits. It has also backed more than 20 unicorns, including Chinese shopping platform Meituan, automobile manufacturer Nio and healthcare data provider Yidu Cloud.
In a period when diversity, equity and inclusion is becoming integral to many LPs’ due diligence processes, MSA represents an intriguing prospect for those hoping to provide greater support for women-led businesses.
– This article was updated to better reflect Zhiming Mei’s role as founder of Eastern Bell.