Value Partners targets mutual fund JV in China

The firm is hopeful it will submit an application for a mutual fund JV this year. It has just launched a private equity JV as it seeks to build a track record in the country.
Value Partners targets mutual fund JV in China

Value Partners is hopeful it can submit an application to establish a joint venture fund management company in China this year amid ongoing talks with potential partners.

“We want to submit our application this year,” says Jimmy Chan, the Hong Kong asset manager’s CEO. “It just depends on whether we can find the right partner.”

He confirms the company is in discussion with several financial institutions, although he acknowledges the application process will be protracted, with a queue of applications already lodged with the China Securities Regulatory Commission (CSRC).

A foreign firm is allowed to hold up to a 49% stake in a Chinese mutual fund management firm. At present Value Partners has a representative office in China.

Only last week, the company announced it had agreed to set up a joint venture private equity firm with Chinese state-owned enterprise (SOE) Yunnan Industrial Investment, in what will be its first RMB-denominated investment vehicle in the country.

It will have initial registered capital of Rmb15 million ($2.3 million), with Value Partners taking a majority 60% interest in the JV, and Yunnan II holding 40%.

The two firms will jointly invest Rmb150 million as seed capital in proportion to their respective stakes, and will seek to raise up to $100 million before the end of this year for an RMB-denominated private equity fund.

“We see RMB private equity as a new market, and potentially a very big one,” he says.

According to research from Zero2IPO, a total of 50 new private equity funds were launched in China in the first three quarters of 2010 with a total of $21.3 billion raised.

In terms of new fund numbers, RMB funds dominate (43 out of the 50 versus just seven US dollar funds). But in terms of fundraising amount, RMB funds remain relatively low, accounting for just $6.4 billion versus $14.9 billion for the US dollar funds (see graph, left).

Chan confirms his priority is to build a team and a track record in China. However, he concedes that private equity has not been a major investment area for the firm, and as such he is in the process of recruiting a team of six or seven to fit the purpose.

This includes an investment director who has been doing private equity investments for a multinational firm in China. Chan says she is due to come on board within a few months to be general manager of the JV.

He states that initial fundraising will not be aggressive. “We don’t want to have a big fund at first,” he notes. “The market is too new and secondly for us it is more important to build a track record than it is AUM at this moment.”

The fund will predominantly look to allocate resources in less-well-covered western parts of the country, away from the eastern seaboard.

“We believe it is getting more difficult to find value along the coastal areas,” says Chan. “That does not mean we are giving up on them, but the focus for us is more on inland China and the western areas which will experience higher growth and are less well covered by investors.”

Yunnan II was chosen not only because it is a large SOE based in the right area, adds Chan, but also because its management team shared a common vision.

“Definitely it can help us to look for potential projects in the province and surrounding areas, as well as help us through government red tape and provide local expertise,” he states.

As a value investor, the private equity JV will target growth companies including pre-IPO players. Chan says it will be aggressive in seeking sectors that might not be flavour of the month.

Zero2IPO research shows that there were 71 private equity deals completed in the third quarter of last year, of which the highest number – 13 – came in bio/healthcare, followed by clean tech. By sector, the internet saw the highest amount raised, at $490 million.

Chan outlines potential opportunities in Yunnan to invest in bio-tech and alternative energy projects as well as the tourism industry amid a need for greater infrastructure development.

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