Citic Capital has reached the final close of its fourth China buyout fund, which has amassed $2.8 billion from new and repeat investors – and China’s current economic woes may provide it with ample deal opportunities.

A large number of investors, or limited partners (LPs), in Fund IV backed previous funds and were so pleased with the returns that they have committed capital to this latest fund as well, two people familiar with the matter said.

Canada Pension Plan Investment Board, for instance, put $260 million into the strategy, which is Citic Capital’s largest private equity fund to date. That helped the Chinese alternative investment house boost its assets under management to some $26 billion.

Having started the fundraising in July last year, Citic Capital has attracted support from investors including pension and sovereign wealth funds, insurance companies, financial institutions, family offices and funds of funds.

One private equity investor said there were still lingering concerns among LPs that Citic Capital is a captive fund of state-controlled conglomerate Citic Group, in that there may be some conflict of interests.

Zhang Yichen

But he added that, on balance, the performance of Fund II had helped allay many people’s worries. That strategy has almost entirely exited all of its investments, notching up an internal rate of return (IRR) of 20% to 25%, people familiar with the matter said. 

Moreover, Citic Capital’s third China buyout fund – which raised $1.575 billion in 2017 – already has a percentage IRR in the teens, even though it’s still a relatively young fund.

The dollar-denominated Fund IV will focus on consumer, healthcare, business services, consumer services, TMT and industrial sectors. Citic Capital has already deployed a chunk of the new capital across three transactions, a potentially risky move in such volatile times and with growth slowing.

The firm has 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.

TRADE WAR OPPORTUNITIES

And when it comes to deploying more of Fund IV, Citic Capital can take comfort from the fact that the best deals are often struck during times of economic strife, when corporate bosses prefer to sell and cut their losses. 

Indeed, 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 mainland China. 

Citic Capital looks well placed to profit in this environment. It has developed a reputation for carving out the Chinese units of multinational companies and helping them 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, a sister publication to AsianInvestor.

In a high-profile example, Citic Capital bought the Chinese unit of McDonald’s in 2017. After the purchase, Zhang Yichen, chairman and chief executive of Citic Capital, became chairman of McDonald’s in China.