SOE-backed China funds dominate amid industry consolidation

More than just spending power, SOE-backed private equity funds provide strategic positioning of companies in the China market, says CRE Alliance’s head.

Being backed by a state-owned enterprise (SOE) makes China-focused domestic private equity firms a formidable acquirer of assets especially as industries ramp up consolidation. More than just capital, firms are also able to leverage on the SOE’s resources and network to pull off larger and attractive deals which it could not otherwise do alone,  William Shen, chief executive of CRE Alliance Management Company, a Hong Kong-based private equity fund backed by Chinese consumer and retail conglomerate China Resources Enterprise (CRE), tells Private Equity International.

Shen adds it is easier to approach entrepreneurs for a potential acquisition once they learn about the firm’s parent company. In China, where deal sourcing is often driven by personal relationships, having a well-known backer could be key to sealing a deal.

Strategic support is another edge that state-backed private equity funds have over their global counterparts. SOEs have traditionally enjoyed some preferential treatment aimed at developing bigger “national champions”, including in licensing and in winning government procurement contracts in the local market. In this regard, he says entrepreneurs are more willing to relinquish control of their companies to state-linked funds because of the advantage of developing and expanding sales within China.

Hong Kong-headquartered CRE, which has over $130 billion in total assets, owns the country’s largest brewery China Resources Beer and largest grocery chain CR Vanguard. CRE Alliance was set up in 2016 and held a $500 million first close in June last year on its debut vehicle, CRE Alliance Fund I. CRE and property investment company Great Wall Pan Asia International Investment anchored the fund, each with a $250 million commitment. This July, the firm is understood to have made a decision to close Fund I at $500 million itself, 50 percent short of its original fundraising target of $1 billion.

The firm targets investments in the consumer and retail sector by private companies and SOEs undertaking the mixed ownership reform scheme, which allows state companies to sell stakes to private investors. It is also eyeing foreign brands looking to enter the Chinese market.  It expects to complete two deals focused on the consumer upgrading theme by the first quarter of 2018.

CRE is one example among a growing number of Chinese private equity groups that are backed by state-linked entities. Another example is Jinpu Industrial Investment Fund Management, which is backed by Shanghai International Group, an arm of the city government.