Despite slowing growth and closed IPO windows, institutional investors continue to back China-focused funds, with North American LPs in particular using the country as an entry point into Asia, according to industry sources.
“China remains hot,” Philip Yau, UBS Private Funds Group co-head of North American distribution, told Private Equity International. “The overall Asian economy and global economy is so much driven by China. It is very rare to find LPs that have invested in Asia but not in China. It is more developed, there are many more managers and actually a track record of managers with success.”
Nonetheless, in 2012 the amount of capital raised for China was down significantly.
Only $5.8 billion was raised in US dollars for China last year, a 58 percent decrease on the $13.8 billion raised during 2011, according to PEI's Research & Analytics division. Similarly, RMB fundraising declined 50 percent during 2012 to RMB 39.4 billion (€4.8 billion; $6.3 billion) from the RMB 79 billion raised in 2011.
However, a few high quality firms have been able to raise capital. In February CDH Investments was able to make a first close on its latest $2 billion China vehicle at just under $1 billion after only a few months fundraising. An industry source commented, “There are not a lot of high-quality China managers [like CDH] out right now and investors constantly come up with allocations for Asia. Last year was not a big year for China managers coming to market so they should be able to [raise] quite a bit of money.”
Similarly, Hong Kong-based RRJ Capital recently secured a $300 million commitment from New York State Common Retirement Fund and has reportedly raised the targeted $3.5 billion for its second vehicle while last year, FountainVest Partners hit the $1.35 billion hard cap on its second China-focused fund.
A Hong Kong-based LP explained to PEI, “Other than China, no other country in Asia offers the size and sustained attractiveness for private equity investing throughout cycles to justify 'core' allocation.”
However, UBS’ Yau admits LPs must have a hard stomach to invest in China due to volatility and factor in a risk premium on investment in the country.
Vincent Ng, partner at Atlantic Pacific Capital agrees. “The overall interest level [in China] is still there, but it is a marked contrast to a few years back in the sense that [LPs are aware] that the market still offers a great growth prospect relative to the US, Europe and some parts of Asia – so the macro element is still encouraging.”
“But [this is] with a note of caution because the underlying growth prospects are not as strong and a lot of headline risks are arising from companies with regards to accounting scandals and companies listed in the US having concerns over their books and finances. It has come to the fold quite prominently, particularly from a global investor’s perspective on China.”