Ham Lane targets RMB secondaries with Shanghai office launch

The asset manager will pursue yuan-denominated LP-led and GP-led transactions from a discretionary pool of client capital, Asia co-head Mingchen Xia tells PEI.

Hamilton Lane is targeting China’s domestic secondaries market from its newly launched Shanghai office.

The global asset manager has tapped Mingchen Xia, managing director and co-head of Asia investments, to lead the outpost’s seven-strong team, he told Private Equity International. Xia was previously based in Hamilton Lane’s Hong Kong office.

Mingchen Xia
Xia: Chinese PE has an imbalance of supply and demand

The firm’s entry into mainland China follows its receipt of Qualified Foreign Limited Partner status in May last year, according to a statement accompanying the office launch. The programme grants approved international managers a quota for converting US dollars into yuan (also known as renminbi, or RMB).

Hamilton Lane will participate in RMB secondaries through a discretionary pool of its client capital, Xia said. He declined to disclose the firm’s QFLP quota, noting that it will start small and increase the size “once the thesis is proven out”.

“RMB secondaries are new to us and to the whole market,” Xia said. “It is the expansion of our experience and activities on the US dollar side.”

LP-led and GP-led secondaries transactions are both on the cards. “There are different types of LPs, including real estate-related investors, considering stake sales, but also insurance companies or banks,” Xia said.

“For example, some commercial banks are also selling LP stakes because there were new regulations a few years ago restricting their participation in PE. And also there are a lot of high-net-worth individuals and corporate investors in PE that sometimes have volatility in other parts of the business.”

Hamilton Lane isn’t the first to toy with the idea of a yuan secondaries strategy. London-based secondaries pioneer Coller Capital opened an office in Beijing in 2021 and was exploring appetite for a dedicated strategy using the mainland Chinese currency, affiliate title Secondaries Investor reported at the time.

Secondaries transaction volume in China rose by 71 percent to 1,084 in 2020 and another 70 percent to 1,840 in 2021, according to the China Private Equity Report 2023 from investment banking advisory firm BDA Partners. Activity was driven in part by the declining of value of primary market assets, which prompted many LPs and GPs to realise returns by selling their fund shares in the market, the report said.

China’s domestic private equity market is magnitudes larger than its domestic US dollar equivalent. As of the end of December, there were 23,667 private equity GPs managing 145,048 funds, according to the Asset Management Association of China. Yuan-denominated fundraising typically dwarfs the amount raised by USD-denominated funds each year.

Chinese private equity funds can vary from their western counterparts. Many feature terms such as deal-by-deal waterfalls, large GP commitments and shorter fund lives, which can leave yuan funds with significant unrealised capital at the ends of their terms.

The number of expired Chinese private equity funds grew from 18,550 in 2020 to 32,048 in H1 2022, with the latter exceeding the total number of active funds that year, according to BDA’s report. This implies that demand for fund exits will exceed that of investments, something that could be exacerbated by the growth in extended funds, the report said.

“A lack of competitors is one of the reasons we like RMB secondaries, and the size of the market is another,” Xia noted. “There is an imbalance between the supply and demand – in the last 10 to 15 years, the RMB market has accumulated a lot of unrealised funds with LPs that have a very strong need for liquidity. There are not so many secondary buyers of those assets, so I think the competitive dynamics are really attractive.”

Hamilton Lane’s entry comes at a notable juncture for Chinese private equity. Some international investors have slowed their deployment to the market in recent years due to a combination of geopolitical tensions, pandemic disruption and regulatory uncertainty.

“In the last one or two years, some overseas LPs did have concerns on this market and some slowed down their investment in China, but we are managing a highly diversified LP base and not just from US or any specific regions,” Xia said.

“I think from a long-term perspective, China will continue to be a very sizable economy, so we’re focused on this market. Although we’ve got some short-term volatility or challenges, including covid, including this market correction [and others], we believe this market will continue to grow and present attractive investment opportunities.”