Investment bank seeks to crack China’s exit problem with debut PE fund

Lighthouse Capital serves as financial advisor to private placements across 13 sectors and reserves investment rights to participate in up to 10 percent of each deal.

Lighthouse Capital, a Chinese boutique investment bank, has held an oversubscribed final close on its debut blind-pool fund, Private Equity International has learned.

The Shanghai-headquartered firm collected $100 million for the Lighthouse Growth Fund I in May after roughly 20 months in market, managing partner Phil Ji told PEI.

Lighthouse committed 12 percent of the fund, Ji said. Other limited partners include fellow investment banks, financial institutions, corporates, family offices and high-net-worth individuals in China, South-East Asia, Hong Kong, Singapore, Europe and the US.

Ji added that the firm serves as financial advisor to private placements across 13 sectors and reserves investment rights to participate in up to 10 percent of each deal. Fund I, which will target 25 deals, is 30 percent invested and stands at a 1.7x gross total-value-to-paid-in multiple.

“We only invest in around 20-25 percent of our FA deals, which means we can select companies that best fit our investment strategy without sourcing pressure,” Ji said. “We won’t be the lead investor; we’ll follow their terms and only invest up to 10 percent. It’s basically a co-investment fund.”

Ji said Lighthouse is also seeking 500 million yuan ($71.4 million; €62.5 million) for a separate fund to participate in yuan-denominated transactions and expects a first close by the end of 2020.

The firm previously served as GP to a number of special-purpose vehicles, according to its website.

Lighthouse joins the likes of fellow investment bank China Renaissance in raising its own funds. The latter, which is headquartered in Beijing, has $3.6 billion of assets under management across several dedicated healthcare and growth funds, according to PEI data.

China’s New Economy funds have traditionally delivered underwhelming distributions relative to their western peers. Vintages from 2007-11 have generated a 0.8x distributed-to-paid-in multiple, compared with 1.35x for their US contemporaries, according to CEPRES. The trend continues with 2011-14 vintages, for which China funds have 0.21x DPIs and their US counterparts 0.69x.

The distribution problem is partly due to Asia’s predilection for minority growth investments, which are harder to exit than in situations where a manager is the sole or controlling owner.

“DPI is the most important part of a fund’s life; people talk about IRR but they don’t talk about DPI,” Ji added.

“Especially in China, it’s very difficult to exit, and the nervous relationship between China and the US creates more uncertainty about exit strategies. In addition to IPO and M&A, we can accelerate DPI in direct secondary or private placements in FA deal transactions.”

Lighthouse served as joint bookrunner for the US initial public offering of Chinese loan provider 360 Finance in 2018. Since 2014, the firm has facilitated more than 120 private placements with a cumulative transaction value of more than $11 billion.

China-based AlphaLoop served as exclusive placement agent for Lighthouse Growth Fund I.