Astute investors often make their best deals during times of economic strife, when corporate bosses prefer to sell and cut their losses.
CITIC Capital said on Thursday that it had hit the final close of its fourth China buyout fund, CITIC Capital China Partners IV, amassing $2.8 billion to cut deals even as trade tensions between the world's two largest economies continue to escalate.
CITIC Capital’s has developed a reputation for carving out the Chinese units of multinational companies and helping them to adapt to a tougher macroeconomic and competitive backdrop.
“Carve-outs have become a major source of deals for us since 2016,” said Eric Xin, one of the firm’s founding members, during a recent interview with FinanceAsia.
In a high-profile example, CITIC Capital bought the Chinese unit of McDonald’s in 2017. After the purchase, Yichen Zhang, chairman and chief executive officer of CITIC Capital, became chairman of McDonald’s in China.
“McDonald’s deal was a fund maker for CITIC Capital,” one private equity investor told FinanceAsia, based on the size of the transaction and the fact it has performed better than initially projected.
“Yichen’s position as chairman at McDonald’s is a terrific endorsement of his capabilities,” he added.
Many international companies with businesses in China are reviewing their mainland operations in light of the US-China trade war. The slowdown in the world’s second-largest economy and stiff competition from local, nimble and digitally-savvy competitors is compounding the need to think again, even if it's mostly confined for now to diversifying supply chains into countries outside of mainland China.
“Despite the current global and domestic headwinds, we continue to believe in China’s long-term growth potential and are confident that CCCP IV will deliver outstanding returns to investors,” Zhang said in a statement after the fundraising hit its hard cap, the maximum amount the fund is prepared to manage.
The US dollar-denominated fund will focus on consumer, healthcare, business services, consumer services, TMT, and industrial sectors. CITIC Capital has already deployed a chunk of CCCP IV across three transactions, a potentially risky move in such volatile times and with growth slowing.
It said it had bought into beauty e-commerce services provider Hangzhou UCO Cosmetics and supply-chain pooling solution provider China Merchants Loscam. CITIC Capital has also invested in China Biologic, the Beijing-based biotech company said.
DEMAND FOR YIELD
CITIC Capital launched the fundraising last July. The firm tapped into the hunger of pension funds and insurance companies for alternative products, which generally offer a higher yield when interest rates globally are low.
A strong track record certainly helped. CITIC Capital’s third China buyout fund raised $1.575 billion in 2017. While still a relatively young fund, its percentage internal rate of return is running in the teens. Its Fund II is more mature and has almost entirely exited all of its investments, notching up an IRR of between 20% and 25%, people familiar with the matter said.
Fund IV attracted strong support from a mix of existing and new investors, including pension and sovereign wealth funds, insurance companies, financial institutions, family offices and fund-of-funds.
A large number of its investors, also known as limited partners (LPs), backed previous funds and were so pleased with the returns that they have committed capital to its latest fund as well, two of the people familiar with the matter said. Investors that have returned for more include the Canada Pension Plan Investment Board, better known as CPPIB, which has committed $260 million to Fund IV.
Insurance companies Allianz and Manulife as well as the Commonwealth Superannuation Corporation committed capital to Fund IV, according to one of the people familiar with the matter.
Fund IV is the largest private equity fund to-date for CITIC Capital and brings the firm’s assets under management to over $26 billion.
The private equity investor noted that there were still some lingering concerns among investors that CITIC Capital is a captive fund of state-controlled conglomerate CITIC Group, in that there may be some conflict of interests. But he also told FinanceAsia that on balance the performance of Fund II had helped allay many people’s worries.
Founded in 2002, CITIC Capital has over 200 portfolio companies that span 11 sectors and employ over 850,000 people around the world. It’s buyout arm, CITIC Capital Partners, has completed over 70 investments around the world and manages $7.4 billion of committed capital.