US-China trade war threatens emerging manager fundraising

LPs are opting to back larger, brand-name firms with more established track records in China, an industry conference in Hong Kong has heard.

China’s emerging fund managers are struggling to raise capital due to US trade tensions, a conference has heard.

Speaking at the HKVCA China Private Equity Summit 2019 in Hong Kong on Thursday, James Donnan, managing director of fund administrator Intertrust, said the firm had seen a decline in the number of funds coming to market since December as managers await a potential deal between the sparring nations.

Funds are also taking longer to reach final close as limited partners opt to commit to larger, brand-name managers with more established track records in the region, he added.

“The GPs that are perhaps suffering is the smaller emerging managers; these ones [that] don’t have a track record,” Donnan told delegates.

“Coupled with that, the typical investor base they would target – some of the smaller investors, the high-net-worth investors and some smaller family offices – are sitting on the sidelines these last few months. So they’re struggling to close their funds.”

Capital is flowing towards blue-chip managers. CVC Capital Partners is understood to have raised $3.2 billion in the initial closing of its fifth Asia fund and Warburg Pincus has more than doubled the target for its latest Asia-focused private equity vehicle, which has a large China mandate.

The country’s fundraising slowdown could mark an end to “unsustainable activity” in recent years, Donnan noted. China-focused funds collected $22.8 billion last year, the highest amount raised since 2015’s $13.3 billion, according to PEI data. Average fund size targets have almost doubled in the last four years to $490 million last year.

Total private equity investment value in China rose to $94 billion in 2018, up 64 percent over the previous five-year average, according to Bain & Co’s Asia-Pacific Private Equity Report 2019.

Allianz Capital Partners, the German insurance giant’s in-house investment manager, expects 2019 to be a slower fundraising year for China-focused strategies as LPs “look to rationalise” their China allocations across all PE strategies due to Sino-US trade tensions and slowing growth, director Willa Hong told Private Equity International in January.