In late 2012, when China’s GDP growth was clearly easing, when regulators had frozen the IPO market, when mainland fundraising was about to show a 50 percent annual drop, FountainVest Partners closed its second fund – oversubscribed on $1.35 billion. Total time in market: nine months.
External conditions weren’t the only challenges. FountainVest had “very few realisations to point to in its debut fund”, one LP source says. And as a growth capital investor, the firm is strategically not particularly differentiated from peers like Hony Capital, CITIC Private Equity and CDH Investments.
Yet three big-name LPs that anchored the first fund re-upped and did the same for Fund II: Ontario Teachers’ Pension Plan, Canada Pension Plan Investment Board and Temasek Holdings. Their commitments helped create some real momentum for the fundraising, which resulted in the vast majority of Fund I LPs re-investing in Fund II.
“It was helpful for us to have three anchor investors on day one,” says Frank Tang, chief executive officer and managing partner of the Hong Kong-based firm. “That lends a lot of credibility to like-minded institutional LPs.”
A PEDIGREE TEAM
Why did the North American LPs in particular choose to re-invest? It used to be that quick commitments to a large China fund were predicated on excitement around China’s growth story. But these days, when there’s a lot more caution and skepticism in evidence about that story, expressions of confidence by big institutional investors tend to rest on more solid ground.
FountainVest’s main pull, according to several LP sources interviewed, is the people at the heart of the firm. FountainVest was founded in 2007, when a team of four Chinese nationals spun out of Singaporean sovereign wealth fund Temasek, where they’d worked on China investments. Tang, Terry Hu, George Chuang and Chenning Zhao today make up the core of FountainVest. Prior to Temasek, three of them were together at Goldman Sachs (Hu was at Credit Suisse).
The result is differentiation through pedigree. China has (by some estimates) 3,000 fund managers, but only a handful of these firms operate with an institutional-type structure. Among them, FountainVest is the newest – and, according to some LP sources, the most crisply-defined Western model. The firm uses the sort of familiar methods and practices institutional investors would expect from GPs in North America: a clear investment strategy, meticulous due diligence, transparent investor communication and – notably – no political angle.
Tang says that while his firm has a wide network for deal sourcing and partnerships, it doesn’t have any “special political affiliation”, as he puts it. “We’re not focusing on state-owned companies, so we don’t need it and doesn’t affect our strategy.”
“We want to build an institutional firm that can last,” he continues. “We focus on maintaining a disciplined process and we have proper checks and balances in the decision-making process. This approach helped us to attract many large institutional investors.”
On the other hand, other LPs prefer to rely on performance data. “The FountainVest story so far is mainly about reputation,” says an LP from a family office, which chose not to invest in the fund.
FountainVest, therefore, offers a trade-off to investors. According to one US pension fund source who has looked at FountainVest: “It’s quality of execution [in exchange] for a few percentage points on IRR. Better protection, longer duration of due diligence – but an avoidance of deals a little risky. That’s what LPs would be assessing when forming a judgement.”