LPs rely on managers to navigate China’s regulatory headwinds

Chinese private equity firms are tweaking their sector focus to help legislate against regulatory uncertainty.

Eric Mason HKVCA
Mason: Investors must be “careful” about rushing into new sectors

Private equity investors are relying on their managers to help navigate China’s unique regulatory environment, a conference has heard.

Appearing virtually at the Hong Kong Venture Capital & Private Equity Association’s Asia Private Equity Forum on 12 January, Eric Mason, managing director at the $17.3 billion Church Pension Fund, said it trusted GPs to execute within the confines of government policies.

“We leave it more to our managers to navigate and to assess what policies are going to be catalysts for investments, [and which ones] are going to be restrictions or headwinds for investments,” Mason said.

“Obviously, we’ve seen a big switch from ecommerce, data-oriented businesses in China that come under pressure for social responsibility and data security and national security. It’s a natural trend. I think you’re seeing this in some form or fashion in the US and Europe as well – people are trying to understand the size and scope and power of large, data-focused companies.”

Sectors popular among Chinese private equity investors, such as education and consumer tech, have been subject to a spate of regulatory actions over the past six months as Beijing clamps down on national data security. This uncertainty has dented investor appetites for the market and prompted some managers to rethink their sector focus.

On a separate panel at the conference, Hongwei Chen, partner at Hong Kong-based Forebright Capital, said: “For some of the segments, we have seen some of the larger funds who used to bet relatively aggressively on consumer internet companies [have] now started backing aggressively enterprise and semiconductor companies as well.”

According to ThomsonReuters and PwC, consumer appetites had soared prior to the regulatory crackdown, attracting $65.5 billion of private equity investment in the year to 30 June 2021, compared with $39.7 billion in the preceding 12-month period.

Hongwei Chen Leon Meng HKVCA
Challenge posed by China: Hongwei Chen, partner at Forebright Capital (bottom left) and Leon Meng, founding managing partner at Ascendent Capital Partners (bottom centre) were among the speakers

“A lot of our managers… see that there are other policies that are tailwinds for investing,” Mason said. “It may involve renewable energy, electric vehicles, autonomous vehicles, elements of AI, hard-tech, semiconductors. [For] these policies which are encouraging more investments, I think we have to be careful about rushing too much into any one of these because they sound like they could be the next generation of very sensitive industries, as far as I’m concerned.”

Other firms – such as Hong Kong-based Ascendent Capital – are seeking greater control over their investments to help navigate potential shocks. Leon Meng, founding managing partner of the mid-market firm, said at the conference that it expects buyouts to account for 50 percent of its portfolio in future, up from 30 percent at present.

“In the last 15 years we’ve seen many policy resets, but every time it’s one to two years,” he said. “This time shocked everyone because of the suddenness and also the magnitude of scale.

“The fact that we’re sector-agnostic allows us to not put all the eggs in one sector, one industry. And… I think what’s important is due focus on downside protection, due focus on cashflows, due focus on risk-adjusted returns, and having a structured mechanism… [providing] flexibility in exit.”