Citic Capital outlines strategy for venture fund

The head of Citic Capital’s new venture fund says it will seek to invest mostly into unlisted firms in China, but will also target Chinese plays in the US with some caution in light of recent investor black-listings.

Citic Capital Venture Partners (CCVP) is a US dollar fund with a target size of $150 million. It completed its first close at $60 million last week and is hopeful of closing its second round of fundraising for the remaining $90 million within three months.

Anchor investors to date include Vertex Asia Growth, a wholly owned subsidiary of Singapore sovereign wealth fund Temasek, and Singapore-based investment company Enspire Capital.

Jeffrey Zeng, CCVP’s managing partner, confirms that up to 70% of its portfolio will be centred around investment into unlisted firms in China, often with the aim of exiting those that go on to list in China’s A-share market, primarily on the SME Board and ChiNext Board.

Its core focus will be on small- to medium-sized enterprises (SMEs) operating in emerging industries including clean technology, consumer and IT, where they can compete and grow fast.

That makes CCVP different from Citic Capital’s private equity buy-out funds, which focus on large state-owned enterprises. “We chose to keep CCVP small and try to identify the category leader in sub-sectors,” Zeng explains.

He defines category leaders as innovative firms that combine break-through technology with sound business models, and those that are positioned to grow into a sector leader of size.

CCVP will also invest up to 20% of its portfolio into Chinese firms that plan to list in the US and Hong Kong, while the remaining amount will be used for an M&A-style exit strategy.

Of course, it is not lost on Zeng that Chinese companies listed in North America have suffered some hefty sell-offs over the past year, with overseas investors taking flight over broad fears about their standards of corporate governance and transparency.

Clearly market fears were exacerbated by some very public allegations against companies such as Chinese timber firm Sino-Forest, which is listed in Toronto.

Nasdaq-listed online video company Tudou Holdings, for example, saw its share price sink 62% from its August IPO last year to early 2012, although it has since recovered amid a broader market rally to close above $16 on February 29.

Similarly E-Commerce China Dangdang, which joined the New York Stock Exchange in December 2010, suffered an 85% decline over the course of a year.

Such negative sentiment hit some Chinese private equity firms as well. RenRen Net, a social network, saw the price of its American depositary shares plunge from $18.01 at IPO on May 4 last year to a low of $3.30 on December 29. The shares closed at $5.46 on February 29.

Zeng suggests that Chinese firms will be very selective in future in terms of whether to IPO in the US. “Only high-quality companies – a category leader in a sizeable industry with new business model, like Baidu and Sina – will try this route,” he says.

CCVP is not ruling out privatising US-listed Chinese firms and then relisting them in China at higher valuations. “US investors don’t like traditional sectors such as food and manufacturing as they see them as low-growth industries. But in China these are still emerging,” notes Zeng.

The team at CCVP also manages Kaixin Investment, a joint-venture established in 2008 between Citic Capital Holdings and China Development Bank, which has registered capital of Rmb900 million ($143 million) and was fully invested by the end of last year.

The success of Kaixin – among nine projects in its portfolio, seven are ready for IPO – over the past three years has laid a strategy foundation for CCVP to follow.

“Our [CCVP’s] strategy will be mixed, with 70% invested in mature-stage enterprises and 30% in venture round series B deals where a company’s technology, team or business model is proven, although the target does not have to be profitable,” he adds.

Zeng concedes that the arena for venture capital investment into growth companies in China is highly competitive and challenging in terms of deal-sourcing. “The whole market is very expensive and there is no single PE fund that can bargain down entry-price multiples,” he notes.

“What you can do is try to identify targets that offer good value for money. Usually we don’t invest in a target with price-to-earnings over 15 times.”

The overall time-horizon for CCVP is eight years, with three for investment, three for divestment and two for extension.

Citic Capital is an alternative investment and advisory firm managing more than $4.6 billion for Chinese and international investors. It has offices in Hong Kong, Shanghai, Beijing, Tokyo and New York and is owned by China Investment Corporation, Citic International and Citic Pacific.