NIO Capital eyes up to $500m for second fund

NIO Capital, the Chinese specialist fund manager focused on smart vehicles, is planning to raise its first USD-denominated fund, targeting between $400 million and $500 million, Private Equity International has learned.

It is understood the firm is in early discussions with LPs about launching the fund within the year, sources with knowledge of the matter told PEI.

The Shanghai-based firm is currently in market with a RMB fund, NIO New Energy Development Fund, targeting approximately 10 billion yuan ($1.5 billion; €1.3 billion), of which 3 billion yuan has been deployed across 15 investments.

NIO Capital declined to comment on fundraising activities but confirmed the plan for a new USD fund.

Speaking to PEI about the rationale for raising a USD fund, Ian Zhu, managing partner of NIO Capital, said the strong growth of its portfolio companies and broader exit options are key reasons for the fundraise.

“Some of our current portfolio companies are already going public in a short period of time. About five companies have already doubled in value since NIO’s investments, which shows that the thesis on smart electric vehicle investment is real,” said Zhu. “With the opportunity set in China, we are seeing a lot of companies with the VIE structure, targeting a US or Hong Kong listing. And they would need to raise capital in USD, that’s why we need to have a USD fund.”

VIE, or variable interest entity, refers to a business structure that is widely used by Chinese companies in certain sensitive or strategic business sectors such as telecommunications and e-commerce that have restrictions on foreign investment.

About 70 percent of the RMB fund’s investments are in Chinese companies such as self-driving start-up Momenta and car hailing operator Shouqi Limousine & Chauffeur, and the rest in overseas companies with a China nexus.

Tech-focused fund managers Sequoia Capital China, Hillhouse Capital Group and Yangtze River Industry Fund are core backers of the firm’s debut fund, as well as the firm’s parent company Chinese electric vehicle maker NIO, the firm wrote on its website. Other LPs in the fund are mainly Chinese financial investors, high net worth individuals, local governments, insurers and public companies.

NIO Capital invests across the whole spectrum of electric vehicle production – from components and batteries, to related technologies and applications, intelligent automotive systems and clean energy.

According to Zhu, new energy vehicle penetration in China now stands at less than 3 percent, with 770,000 vehicles sold last year. “China covers 60 percent of the market globally, that small penetration already accounted for 150 billion yuan in new sales. We expect this to grow to 10 percent by 2020 and smart electric vehicles will be the dominant product format in a decade.”

Zhu also pointed out that customers buy electric vehicles not just because of their environmental awareness but also given the fact that electric vehicles are a better product in terms of economics, acceleration and interior space.