FUNDRAISING SPECIAL(3)

CHINA: WILL THE DRAGON AWAKE?
Chinese state investment fund China Investment Corporation (CIC) raised a few eyebrows with its $3 billion investment for a 10 percent stake in The Blackstone Group's management company last year. But was this investment a tentative toe in the water, or a sign that the Chinese dragon is spreading its wings to embrace the asset class?

Early signs are mixed. The value of the Blackstone investment had, at the time of going to press, nearly halved due to the battering the US alternative asset group's share price has taken following the onset of the credit crunch. Despite these teething troubles, however, the fund appears undeterred. It has reportedly entered negotiations with US buyout firm JC Flowers regarding a possible $4 billion investment in a new fund for investment in financial institutions, according to London's Financial Times.

But beyond CIC's foray into the asset class, what further evidence is there to suggest that Chinese institutions might end up being a valuable source of capital for global private equity? It's true that high-net-worth individuals in China have invested in the asset class, while Hong Kong has seen a marked growth in fund of funds managers such as Asia Alternatives and Axiom Asia. But market sources say it is still very early days in the development of an institutional investor base in the region.

It is expected that, should a legal change occur to allow limited partners to invest in the asset class, it will restrict them to Renminbi-denominated funds

Perhaps the key obstacle to the development of an institutional LP base is the barriers imposed by the Chinese Government to investment in the asset class. Thus far, CIC is the only mainland Chinese institution to invest in a foreign private equity firm and companies need special dispensation before being allowed to commit to the asset class. At the time of going to press, China's biggest insurance company, China Life, was pressuring the Government to allow it to make private equity commitments.

Until restrictions are lifted, most interest will continue to focus on the Chinese state fund. Says a placement agent source: “[Getting CIC to invest in their funds] is what people are working on. So far its interest has been more strategic.”

It will take some time to develop a local institutional investor base, the source adds. “It is very early days there. They've got to develop and alter things like pension laws and go into a broad, lengthy process. They will need to alter the laws to allow alternative investment, and encourage gatekeepers and fund of funds. It will take ten to 15 years.”

INTERNAL FOCUS
One thing the Chinese Government is currently turning its attention to is the development of a strong domestic private equity industry. It is expected that, should a legal change occur to allow limited partners to invest in the asset class, it will restrict them to Renminbi-denominated funds.

Not everyone thinks that restricting LPs' investment parameters in this way would necessarily be the optimal approach. Kevin Albery, from Deloitte's placement agent business, says: “The two interests aren't aligned. The Government is trying to ensure its economy develops, while limited partners seek returns.”

James Coleman, also from Deloitte's placement business, says: “There are some local LPs that are worried about Renminbi funds. They could lead to a significant increase in capital coming to market, which fuels competition and pricing.”

The likelihood of sudden economic liberalisation allowing a much broader spectrum of Chinese companies to invest in private equity is minimal. Nonetheless, you can't blame industry participants for becoming a little preoccupied by the gargantuan mass of capital resting in the coffers of Chinese state vehicles and various other financial institutions investing on behalf of a more than billion-strong populace.

The Government has demonstrated that it has the will to invest in private equity with the acquisition of the Blackstone stake. Time will tell whether that ultimately leads to a flood of fresh capital heading private equity's way.

AUSTRALIA: SUPERS MOVE OUT OF HOME
The Australian Government's progressive attitude to pension saving is warmly regarded by private equity fundraisers in search of capital. By law, nine percent of their income to pensions and, as a consequence, the country's superannuation funds have an estimated A$1 trillion ($925 billion; €603 billion) of assets under management. Trade association the Australian Private Equity and Venture Capital Association estimates that just two percent of these funds are allocated to private equity, but this already equates to a serious amount of capital, amid signs that more may be set aside in future.

Today many are investing internationally, either directly or through intermediaries

James Coleman

Only recently has the investment remit of the “Supers” extended overseas. James Coleman says: “Until a couple of years ago, the superannuation funds couldn't really invest outside Australia so the industry grew up backing local managers. Today many are investing internationally, either directly or through intermediaries.” Therefore, while the country has developed a vibrant group of domestic GPs such as Pacific Equity Partners and Archer Capital, Australian investors are now setting their sights on international funds.

Limited partners that have shot to prominence include Queensland Investment Corporation, with A$50 billion under management, and Victorian Funds Management, with A$40 billion. One recent entrant is the Future Fund, which was set up two years ago by the Government to protect superannuation fund liabilities and which has A$60 billion under management. The fund is expected to become a serious private equity investor although it has yet to make its first commitment and has only recently recruited its investment team.

Western funds of funds have been among the active seekers of Australian money. One market source says: “You'll find some Swiss fund of funds with incredibly large Australian accounts.” One such example is Zug-based Partners Group, which is planning to open an office in Australia later this year. Partners declined to comment on the amount of money from Australian sources that it manages.

It is still early days in the relationship between superannuation funds and the global private equity industry, but it promises to be the beginning of a beautiful friendship.

SINGAPORE: SMALL, BUT A HARD HITTER
Singapore has a strong reputation among those raising private equity funds. They are impressed by the professionalism and experience of the country's limited partners, even though the economy is dwarfed in scale by some others in the region. Most notably, the city state's two sovereign wealth funds, GIC Special Investments and Temasek, have gained a reputation as two of the most astute limited partner groups in Asia and arguably the World.

Albery says: “Singaporean funds are more open to investing outside the Asia region. Temasek and GIC are quite happy to have a global mandate and are open to diversifying outside. But even the smaller LPs [invest further afield]. I know of one which has only $400 million of assets under management and still invests in funds of funds with a global mandate.”

Despite this international perspective, however, Singaporean LPs have also established themselves as regional patrons of the private equity industry. Pawan Chaturvedi, a partner at London-based private equity advisory firm Altius Associates, says: “The level of investment in China and India by Singaporean investors is quite remarkable.”

An early entrant to the asset class, Singaporean involvement in private equity may seem less significant should huge pools of capital be committed in future by investors from countries like Japan and China. For now, though, the city state punches above its weight and the likes of Temasek and GIC are seen as examples for those relatively new to the asset class to follow.

JAPAN: DOMESTIC WOES
The Japanese limited partner can be an elusive character for those on the international fundraising trail. While certain leading investors including Alternative Investment Capital and Mizuho Corporate Bank allocate substantial funds overseas, the level of investment is not what would be expected from an economy of its size and placement agents typically say they focus on only around 10 to 15 limited partners in the country.

In today's globalised economy the number of Japanese LPs investing outside Japan is disproportionally small to the size of the market, but fundraisers see potential for far larger commitments from Japanese institutions

One sceptical placement agent says: “In Japan they are still small programmes because they invest 50 percent in the local market which has been performing badly.”

However, Pawan Chaturvedi of Altius Associates is optimistic. He says: “I would expect that more Japanese investors will widen their allocations outside Japan and Asia.”

He echoes the general consensus among fundraisers that Japanese investors will seek more overseas exposure because of the consistent woes the Japanese economy has experienced. By way of illustration, Japan's Nikkei 225 index has fallen 20 percent since September last year, worse than the FTSE 100's 9 percent fall and the 14.5 percent drop on the Nasdaq 100.

In today's globalised economy the number of Japanese LPs investing outside Japan is disproportionally small to the size of the market, but fundraisers see potential for far larger commitments from Japanese institutions. Hopes are high, but evidence of a substantial Japanese commitment to global private equity is so far thin on the ground.