LPs want to see these four things from Chinese GPs

BlackRock PEP, HarbourVest, Hamilton Lane and a Hong Kong family office shared tips for Chinese managers on the fundraising trail at HKVCA's China Private Equity Summit on Wednesday 24 August.

It’s no secret that fundraising has become more of a slog this year; perhaps nowhere more so than in China.

GPs targeting the market have had to contend with both the macroeconomic and geopolitical uncertainty impacting their global peers, as well as ongoing pandemic disruption and a regulatory crackdown on much-loved sectors.

China-focused private equity and venture capital funds raised just $4.96 billion in the first half of this year, according to PEI data. Even counting Sequoia China’s reported $9 billion fundraise across four vehicles in July, 2022 could well fall short of the $29.2 billion raised last year.

It is against this backdrop that a panel of LPs and family offices convened at the Hong Kong Venture Capital and Private Equity Association’s 21st annual China Private Equity Summit on Wednesday.

Here are four tips they shared for Chinese GPs hoping to raise fresh capital.

Engage regularly and articulately

At a time when building new LP relationships can prove challenging, GPs should ensure their existing investors are satisfied.

“If you are a manager with existing AUM, focusing particularly all of your team’s time and uniting your team and making sure that your team continues to be focused on the portfolio is extremely important because you want to keep your existing LPs happy and engaged,” Lydia Hao, managing director at HarbourVest Partners told delegates.

“We’re spending a lot of time just on portfolio… monitoring, having more regular update calls with all of our existing GPs just to figure out what is the state of the portfolio in itself. And I think some of the more successful GPs and managers through the turmoil in the last two years in China have built capabilities and internal processes to better facilitate this.”

Stay in your lane

Managers should resist the temptation to shift away from their core competencies in response to regulatory or macroeconomic pressures.

“I’ve seen a lot of large GPs in the past who’ve been very successful and have lots of AUM, and they’ve got to a stage where they… move on to do these recent amounts of investments in hard tech or semiconductors,” Michael Lam, managing principal at Chow Tai Fook Enterprises, the family office arm of Hong Kong’s Chow Tai Fook Jewellery Group.

“And then I’ve got to ask myself, well, what is the expertise… consumer, hard tech? That certainly doesn’t take for us – I’d rather see managers who… [have] a somewhat more narrowly defined strategy of their investments.”

HarbourVest’s Hao said managers should avoid “knee-jerk reactions” like pivoting to outbound and cross-border investments, or new markets such as Vietnam. Instead, they should focus on what differentiates them from the myriad other venture capital, growth or buyout managers in China.

“If somebody is able to really articulate that and marry that with either the past experience or team capability, that usually sends a very positive signal in a meeting,” she added.

Look further afield

GPs may also need to consider new sources of LP capital beyond the path well-trodden. “Obviously in this situation we need the GP to be a little bit more willing to travel,” Yan Yang, managing director of BlackRock Private Equity Partners, noted.

“[If] it’s hard to bring them over to China and see what’s going on, then you probably need more face time with your potential investors. And you obviously go to the common area for fundraising where the large LPs are sitting, but just keep an open mind and try different channels, different places.”

Focus on DPI

Chinese private equity, which has traditionally outperformed other markets in terms of total value to paid in, has underperformed when it comes to realising that value. GPs hoping to convince LPs of the market’s appeal should consider how to bolster their DPI, whether that be through secondaries processes, organic exits or other liquidity options.

“There’s a much stronger emphasis on DPI, and just the manager’s ability to access liquidity,” Collwyn Tan, managing director and co-head of Asia investments at Hamilton Lane noted.