Asia Alternatives said on Wednesday it has raised over $1.8 billion to back private equity fund managers at a time when reform in China is creating deal opportunities and prompting more cautious structuring.
The fund of private equity funds expects to deploy roughly half of the fund in Greater China, the region’s biggest PE market by volume.
The fund raising comes as the private equity industry hopes Chinese president Xi Jinping’s efforts to prop up economic growth will translate into more deals as he presses for restructuring of state-owned enterprises and increased domestic consumer spending.
“Private equity is often considered a form of transition capital so reform in China could potentially provide opportunities,” said Melissa Ma, co-founder and managing director of Asia Alternatives in an interview with FinanceAsia.
At the same time, dealmakers in China are becoming more experienced in protecting their investors against surprises. When China suspended IPOs in mainland stock markets for 18 months until January last year many PE managers found their main route to exiting investments suddenly blocked.
"When China turned the IPO spigot off – that length of shutdown was unprecedented and delayed a lot of exits," said Ma who was on the phone from San Francisco.
China has since reopened the floodgates and A-share equity capital market deal volume is at all time highs. According to data provider Dealogic, 125 Chinese A-share transactions were completed in the first three months of the year, the highest quarterly activity on record.
But bloodied PE managers have learnt their lessons and are building in safeguards and sounding out other ways of liquidating investments in case of another shut down.
“This event forced managers to think more creatively and broadly about how to get cash out,” said Ma adding that in the past year there have been more exits via M&A, roll ups, recapitalisations, puts, dividend provisions and ratchets.
“There are a whole range of ways to build in more downside protection so managers can get at least some cash out of deals even if at a lower returns,” said Ma.
Ma said that managers in China are a lot more experienced than a decade ago when she started Asia Alternatives.
“Investors backing fund managers with less of a track record in Asia than in the US need to make sure that the expected return will be enough to compensate them for the additional risk,” said Ma adding that her firm has backed 40 managers in Asia over the past decade and still only a minority have a 10-year track record.
Asia Alternatives has picked well so far. It is the only fund of funds manager headquartered outside of North America and Europe in data provider Preqin's list of consistently high performing managers.
Rising fund size
The private equity fund-of-funds said it had reached final close for its fund called Asia Alternatives Capital Partners IV, LP (AACP IV) and related fund vehicles, its biggest capital-raising to date. The firm has the same fee structure across all the funds but the separately managed accounts can have differing investment parameters.
Asia Alternatives secured the commitments from its investors in just less than a year since its first close; demand to participate in AACP IV was such that it broke through its self-imposed ceiling or hard cap limit on the fund size of $950 million.
It started putting the capital to work mid-last year and has already deployed about a quarter of the fund.
Since inception Asia Alternatives has invested into funds run by China's CDH Investments, Boyu, N5, Boxin, and Hony Capital. The fund of funds house also backed India's Tano Capital, ChyrsCapital and CX Partners, Indonesia’s Northstar Capital and Saratoga Capital, and Japan's Unison Capital and MBK Partners.
Asia Alternatives constantly reassesses investments for relative risk-adjusted returns and at the moment it expects to deploy the remaining half of its fund outside Greater China: up to a third in Japan and Korea; 10% to 20% in India and then the rest spread out opportunistically across South East Asia, and potentially Australasia.
About 80% of investors in AACP IV had invested in previous funds and comprise private capital sources, such as state and corporate pension funds, foundations, university endowments, insurance companies and family offices in the United States, Canada, Europe and Asia.
Institutional investors across all AACP IV vehicles include Cathay Life Insurance Co., Comprehensive Financial Management, Florida State Board of Administration, Jasper Ridge Partners, Massachusetts Mutual Life Insurance Company, New York State Common Retirement Fund, San Francisco City and County Employees’ Retirement System, Teachers’ Retirement System of the State of Illinois, University of Missouri, University of Vermont and Virginia Retirement System.
The firm currently has 36 professionals across offices in Hong Kong, Beijing, Shanghai and San Francisco.
