How China’s Eastern Bell defied regulatory headwinds to raise $2bn

PEI caught up with Eastern Bell partner Daniel Sun to discuss how the growth equity firm was able to exceed its fundraising target against such an unfavourable backdrop.

At a time when regulatory uncertainty has prompted many LPs to pause or rethink their exposure to Chinese private equity, raising any amount of capital is a noteworthy achievement. That Eastern Bell nearly doubled its assets under management during this period is particularly impressive.

Daniel Sun Eastern Bell
Sun: Overseas IPOs might be an issue

The Shanghai-based firm – named one of Private Equity International’s five Chinese GPs you should know last year – collected the equivalent of $2 billion in late December across its Eastern Bell Capital RMB Fund VI and Eastern Bell Capital USD Fund II, according to a statement.

The growth equity firm, which targets the domestic logistics, supply chain, retail and distribution sectors, was founded in 2010 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. It has completed more than 200 investments and now oversees about $4.2 billion of AUM.

Eastern Bell’s fundraise comes amid a regulatory crackdown on data security and popular investment sectors like online tutoring. Legislation introduced as a draft in July stipulated that companies holding data on more than one million Chinese citizens will be required to obtain approval before they can list outside of China. The events have compounded existing fundraising challenges for many domestic GPs.

PEI caught up with partner Daniel Sun to discuss how the firm was able to exceed its fundraising target against such an unfavourable backdrop.

China’s regulatory crackdown began in earnest midway through Eastern Bell’s fundraise. How did potential LPs respond?

We officially launched the fundraise in August 2020 and actually went to our first close very quickly at the end of the year. Most of our existing LPs re-upped and we got some new LPs.

The middle of 2021 was kind of a shock to our fundraising because some overseas LPs were very reluctant to sign the contracts, although they were still very interested. After one quarter, some LPs realised that they needed to make a decision, so they proceeded with the due diligence and committed to our fund. We also see that some LPs reduced their exposure in China at least for a while: originally, they would like to invest $100 million with five to six GPs, but last year they decided to only invest $50 million with two or three GPs.

So, we took a longer time to close the fundraising than we expected. When we started, our [USD Fund II] target was $600 million and in our first closing we raised our cap to $700 million. Luckily, finally, we closed it at $800 million because we were a bit oversubscribed.

What do you think might be the long-term impact of regulatory uncertainty on LP appetites?

They started to pause the investments… but after two or three months they felt that the uncertainty was still there, so they had to restart. The regulatory policy, even now, is still unclear, but I think the LPs are still quite confident with the economic growth of China. Although the growth is slowing down a little bit, it’s still the strongest growth engine globally. Maybe [they’ll] lower now a little bit their return [expectations] but they’re still positive that the return is relatively higher than other places.

Some GPs are changing their sector focus to avoid sensitive areas. Has this translated into greater competition?

Industrial digitalisation is quite a broad concept. We started from logistics and then to the supply chain platforms and then to the retail. We have also extended a little bit our investments to software as a service, which is within our theme of industrial digitalisation.

We do see some other investors coming in but there are still some hotter places like biotechnology or pharma. I have been in venture capital investment for 17 years and I’ve never seen one year where people have not said the valuation is high. It depends on the quality of the company. Among strong, high-growth companies, valuations will never be low.

You’ve listed portfolio companies like Full Truck Alliance in the US before. How are you thinking about exits considering the restrictions on US listings?

Overseas IPOs might be an issue we have to face, because some of our portfolio [companies] are planning to list in the overseas markets. Now the policy is not so clear, but we’re still quite positive. We believe that the US market will eventually open to Chinese companies and the Hong Kong market will become bigger and bigger. The [latter]… still needs time to build up, so it’s really having some impact on our overall return.