Exclusive: China's top ten performing RMB PE and VC funds of the last decade

As last year drew to a close, FinanceAsia investigated which Chinese private equity and venture capital investors ran the most successful RMB funds during the ten years from 2009 to 2019. We reveal the results today and interview the managers who achieved such stellar performances.

Working in partnership with CVSource, a Chinese data service, FinanceAsia established which renminbi funds delivered the best performances over the past decade and interviewed the founders of the most successful ones to learn how the industry has evolved and what the future holds for it. 

Below is a list of the top ten renminbi funds based on return on investment (ROI). According to the data gathered by CVSource, if you had placed your bets on manufacturing, or manufacturing-related business, you would have come out top trumps. IT-related investment was second in terms of total investment volume and number of actual investments made.

In total, fundraising peaked in 2017, with 3,574 funds managing to raise Rmb1.79 trillion ($257 billion), almost 13 times higher than in 2009. Total fundraising amount dropped to Rmb1.33 trillion in 2018 and sank further a year later.

Picking an early-stage investment is also not as easy as it used to be. More investors are struggling to find innovative projects complaining “nothing new is out there”.

In conclusion, the renminbi fund boom promoted China’s development of the Internet, sharing economy and increased consumption. According to research website Qianzhan, renminbi private equity funding accounted for 45.2% in 2010. By 2017, this jumped to 93.6% – in no small part down to the hard graft of the record-making investors in this feature.

On March 15, FinanceAsia published an interview Ben Zhao, founder and managing partner of Cowin Venture to get some insight into why the fund was so successful and his opinions on the future of private equity in China. We are now proud to proud to reveal the insights from more of the top investors in ours list:  Chen Hao, managing partner of Legend Capital; Feng Weidong, CIO of Tiantu Capital; Chen Wei, co-founder of Oriental Capital; and Zhu Yifan, CFO of NewMargin Ventures.

Chen Hao | Legend Capital

Legend Capital established its first renminbi fund in 2009 after running a US dollar fund for eight years. Chen Hao, president of Legend Capital, remembered that the Rmb1 billion fund they raised was quite a remarkable amount among Chinese private equity at that time (the largest among the top ten funds on our list).

“Many funds that are still running today in China were set up around 2009,” Chen said.

China’s economic growth and the development of its capital markets supported Legend’s own development. For a big investment firm such as Legend Capital, it is important to build a platformed operation and a big team with experience across all industries. It completed its fifth renminbi fund in 2019, raising a total of Rmb7 billion.

Its portfolio companies include: CATL, the electric vehicle battery maker that now supplies Tesla; Tongcheng-ELong, the online travel agency that listed in Hong Kong in 2019; pharmaceutical company WuXi AppTec; online streaming site Bilibili; and deliverer SF Express.

The opening of the Chinese capital market fuelled its growth. The Hong Kong-listed WuXi AppTec was firstly supported by Legend Capital’s renminbi fund and later by its US dollar fund.

“There used to be a discernible difference between the investment appetite of US dollar funds and renminbi funds. Now, we are seeing a convergence,” Chen said.

This shift is in line with the gradual internationalisation of Chinese companies. In the past decade, Chinese startups were not satisfied with just winning in their domestic markets – they wanted to go beyond one country and develop overseas. This may require fundraising in different capital markets. That is the strategy Legend Capital has been focusing on, and a crucial reason for them to build renminbi and US dollar funds together.

The Rmb1 billion fund that set up in 2009 generated a 456% return to investors, with one-third of its portfolio companies going public.

“I think the opportunity for the next decade is among M&A,” said Chen. “We saw a rising number of enterprises integrating. When big companies are getting bigger, it’s a natural process for them to consolidate the industry. And industry development is accelerating.”

Chen said Legend Capital achieved an impressive score because it is a China-based company riding on the wave of China’s fast development.  Looking ahead, Chen is confident about “Chinese speed” in the next ten years.

Feng Weidong | Tiantu Capital

Feng Weidong, the chief investment officer of Tiantu, had a clear vision from the outset. “The internet revolution was the Chinese story of the decade, but our focus was always the consumer economy.”

For Tiantu, it’s a numbers game. China has the largest population on earth and any business opportunity that taps into the billion-plus consumer mindset should be onto a winner.

In 2009, Tiantu started its third renminbi fund, raised Rmb300 million, and finished capital deployment within a year. Tiantu invested in household names such as Zhouheiya, selling pickled products made of duck; Pagoda, a fruit-store chain; Xiaohongshu, a social media e-commerce platform; and Nayuki Tea, a trendy milk tea brand.

Investors need to value a lot of outside factors when it comes to the consumer industry. There will always be a need for consumption, although the way products are acquired is evolving every day, especially since the outbreak of the coronavirus.

“There is no turning back after people experience an easier lifestyle,” Feng said. “During this coronavirus outbreak, people are ordering groceries online and they enjoy it – we can’t roll it back now.”

In 2015, Tiantu Capital listed its stock on the National Equities Exchange and Quotations for public trading. Feng said the company is more cautious in its decision making nowadays and believes many more private equity investors are doing the same before diving in with the money.

Feng also takes the view that China lacks the generational experience of his US counterparts. After ten years of rapid development, Chinese investors have come to the realisation that the market can’t sustain an aggressive cash-burning hit and miss model. In the next ten to twenty years, China will more closely follow in the footsteps of the US private equity firms.

The CIO is also hoping to see the secondary trading market for Chinese private equity develop meaningfully. “LPs probably prefer the secondary trading of some private companies as they can see a track record of performance.”

Indeed, Tiantu is preparing its own such product, bundling shares together from several of its portfolio companies. Feng believes this is an important step for the Chinese PE market to catch up with international standards.

Chen Wei | Oriental Fortune Capital

Chen Wei, chairman of Oriental Fortune Capital saw a promising future ahead for China in 2009. Investors were gearing up for the next big opportunities, many exciting companies emerged, and more big institutions and local government funds were willing to commit their money into PE and VC companies.

Nothing stays the same, however. “It was inevitable we would experience structural reform,” Chen said, referring to the decline of the market in 2018.

What happened? Private equity investors got greedy and soon China outnumbered the US in terms of the overall number of PE and VC funds in existence. Although overall the total fundraising volume was smaller than their overseas friends, the numbers were enough to start pushing up valuations, so much so it caused notable ripples in the public markets.

China saw a sharp increase in companies listing in 2017. The Shanghai Stock Exchange jumped 18% from 1,200 - to 1,400 listed companies, partly a result of private market investors pushing company owners to go public as a way for them to exit. The fever died down in 2018 when the Chinese stock markets took a turn for the worse. Many investors started to wonder if another way to exit was possible.

As a private market investor, Chen decided the US PE market was a good enough reference point for renminbi fund managers.

“Renminbi funds used to invest in companies primed for the Chinese stock market, such as traditional manufacturing companies. US dollar funds focused on innovative companies,” Chen explained.

“But Chinese startups are now following standard international practices, and entrepreneurs expect to hold more conversations with investors outside of their home markets. Together with the opening of the Chinese capital market, I think we will see more investing in both US dollar and renminbi funds.”

Oriental Fortune Capital has already registered a dual-currency fund in Shenzhen and has started raising capital. By cooperating with a Hong Kong institution, Oriental Fortune Capital hopes to do more renminbi investments in mainland China, and US dollars in Hong Kong and overseas.

The dual-currency fund is expected to complete its fundraising this year, targeting Rmb2 billion ($288 million). In the future, the portfolio companies in this fund, no matter if invested in renminbi or US dollars, will get the chance to IPO either in China or abroad.

The above partially hinges on the success of the renminbi as an international currency, of which the jury is yet to be convinced.

Looking ahead, Chen feels the opportunity is in advanced technology. “China now values technology more than it ever did,” he said. “I believe Chinese GDP will yield lower but predictable growth. For a private market investor, this is the opportunity in the challenge.”

Zhu Yifan | NewMargin Ventures

NewMargin Ventures’ 2009 renminbi fund ranked seventh in terms of ROI among all the funds who set up in the same year. It invested a total of Rmb397 million and generated Rmb840 million, successfully exiting five projects.

But NewMargin has a different background compared to its peer group. Founded early in 1999, where private investment was in its infancy, it was one of the first local funds to engage in venture capital.

And it was set up with the direct support of the government. The Shanghai Municipal People’s Government and the Chinese Academy of Sciences jointly sponsored NewMargin. The major goal of the fund was to commercialise the scientific and technological achievements in China and capture the momentum of the mobile Internet.

With the support of the Chinese Academy of Sciences, NewMargin was able to get access to low-profile companies with great market potential. One of its portfolio companies is HIT Robot Group – one of the few companies in China that can supply military technology to the Chinese army.

NewMargin also used to invest in Hanvon Technology, a company providing optical character recognition and satellite chip designer Orbita Aerospace. NewMargin was backing the scientists in both projects and successfully brought them both to the Chinese stock market and made 20 times return in both cases.

Partially because of its state-backed identity, which helps it get access to some good projects, and because the exit channels are still opens, Zhu is confident for the future.

“I felt 2013 was the most difficult time in the past decade. It was quite stressful when the government halted IPOs from November 2012 to December 2013, a lot of projects began piling up.”

Looking into the future, Zhu thinks services for enterprises, fintech and industrial internet are the future for investors. China will be the perfect place for such investment as it has the real economy with an integrated and domestic supply chain.

“We will see a diversified future, on exit channels and on investment methods,” said Zhu. “Ten years ago, it was easy to know every investor in the market. As more participants join, there is more communication in the private equity industry, and it is benefiting everyone.” 

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