China Enterprise Capital (CEC) Management, the mainland-focused private equity firm, tentatively plans to raise a new fund this year that would be its third vehicle targeting deals in China’s consumer sector.
Hong Kong-based CEC hopes to raise $200-300 million for the new fund, according to director Peter Lo. The firm runs the $120 million fund CEC Ltd, which closed in 2006 and is fully invested, with portfolio companies that include Hong Kong-listed firms CEC Outfitters, a China clothing distributor, and mining firm Asia Coal.
CEC, through its flagship vehicle China Enterprise Development Fund (CEDF) – which closed at $40 million in 1998 – was an early pioneer in mainland private equity. It made its mark in the sector after taking control of beer producer and wholesaler Harbin Brewery through the accumulation of shares from Hong Kong New Zhonggang Group in 1998-99.
CEDF exited Harbin Brewery in 2003 through a trade sale to South African brewery SABMiller. While Lo would not disclose figures on the amount of profit realised upon exit, he says CEDF realised an overall internal rate of return of about 25%.
Lo believes 2012 will provide ample opportunities for China private equity deals, as growing mainland companies find bank loans and IPOs increasingly difficult to come by.
There are “very interesting, small up-and-coming companies in different sectors”, he says. “You will see smaller enterprises in the early stages of growth that need money.” As a result, they will seek out investors to play the role of a strategic partner, bringing in expertise that will fuel business growth.
A common misconception is that mainland companies are mostly seeking an injection of cash from private equity firms, says Lo. “Most of the entrepreneurs or the companies in China are looking for a partner. They are not looking for money.”
Lo adds: “Private equity is not all-mighty. They can only add on something that a company needs for its future development.” CEC leverages the network of its limited partners (LPs) and other business connections to help grow its portfolio companies, he says.
About half of CEC’s LP base is located in the US and includes endowments, family offices and institutional investors. The remainder largely comprises European investors – including high-net-worth individuals – with only about 3-5% coming from Asia.
While fundraising for alternative vehicles will be a challenge this year, given forecasted economic slowdowns in the US and recession in Europe, Lo believes CEC’s track record will hold it in good stead, adding that most of the investors in the flagship fund had re-upped for its second vehicle. “Our style is to remain relatively smaller [than other PE firms], and more focused.”
Yet negative sentiments about investments in Chinese companies still linger after allegations last year that forestry group Sino-Forest had exaggerated the size of its land tracts under ownership. Foreign investors in Sino-Forest included US hedge fund Paulson &Co and Boston-based institutional fund manager Wellington Management.
Lo says the pitfall lies when there is a lack of transparency between investors and their portfolio companies and suggests this is something that has to be avoided from a private equity standpoint.
Investors should target companies with good corporate governance, he advises. “Don’t accept any excuses," he adds. "I never listen to any stories [by businesses] because they can tell you thousands of stories. You can’t change a corporate culture in a short period of time.”