Friday Letter: Go big or go home

How a still-emerging private equity firm in China is building an institutionalised investment platform right from the start.  

Two weeks ago, at our annual PE Asia Forum in Hong Kong, a fledgling fund manager from a frontier market rose from the audience to ask a group of expert panellists what it was that LPs wanted. Which markets and strategies were they truly interested in? What core elements, in terms of a GP’s internal structure and fund terms, were necessary to win commitments? And did the criteria for Asian investors differ from those of more established institutional investors in North America and Europe?

The people in the ballroom grimaced at the three-part question, knowing there simply wasn’t a quick, one-size-fits-all response to those core issues. The manager selection process differs from investor to investor, each of whom have their own private equity allocation strategies.

There are, however, some obligatory features that are cited always when investors go through the key attributes of those GPs most likely to receive support: modesty, integrity, transparency, track record.

Professionalism is also expected. And another thing that helps a great deal? Scale. “Many Asian fund managers need to develop their firms to be more institutional,” the head of one Asian LP group said on the sidelines of the Forum.

Some Asia-focused GPs are determined to adopt global best practices from the start. Consider CITIC Private Equity Funds Management, a firm currently working towards a final close of its first US dollar-denominated fund on just under $1 billion (the firm already has a sizable RMB fund).

“We do have an institutional approach which is why we have 100 people instead of 10,” CITIC PE president Yibing Wu told us in a recent interview. His firm is part of state-backed financial conglomerate CITIC Group, which surely is helpful when it comes to funding the ambitious ramp-up. 

Despite its new-kid-on-the-block status, three-year-old CITIC has worked hard to create a framework for investing that mirrors the approach taken by veteran private equity firms, complete with an operationally focused portfolio monitoring team. “That's part of the reason the institutional LPs like us…even if part of the team [don’t] speak English, our processes and principles and value systems resonate with the classic institutional LPs.”

The ‘go-big-or-go-home’ approach at this early stage of the firm’s evolution is a statement of intent. If Wu’s plan works out, then CITIC will soon rank among the dominant private equity investors in China. It’s an unusual way of building a business in an industry where the banding together of small groups of entrepreneurially inclined individuals is still the way most franchises are born. Then again, China has an ancient tradition of doing things differently – and often succeeding. And as far as this particular private equity story is concerned: international LPs are bound to keep watching.