BEIJING, June 23 /PRNewswire-Asia/ -- 2009 will witness a booming LP market. According to "ChinaVenture's Survey Report on Limited Partners in China - 2009", 41% of LPs surveyed claimed they will enhance their investments in China. While overseas LPs continue to boost their presence in this promising market, domestic LPs are also exerting their utmost to catch up on the strength of the improving investment environment and robust governmental support. At ChinaVenture's 2009 LP Summit held yesterday, LPs, long in the shadow of GPs, came into the spotlight at last, prowling for new investment opportunities in China's transitional market.
Faster LP Market Expansion Entails a Full-fledged GP Management Mechanism
Over the past few years, the domestic VC industry has made great progress, and National Social Security Fund's initial foray into investment market has also helped to carve out more opportunities for the emergence of local VC sector. However, there are still many hard nuts to crack in the domestic VC market, for example, a smaller camp of seasoned LPs. At the Summit, Mr. Wenlian Cao, Deputy Director of the Department of Finance under China's National Development and Reform Commission (NDRC), aired his unique opinions.
He said that experiences both at home and abroad demonstrated that fast expansion of investment markets depends on, and thrives on, the sound emergence of LPs. But in China, LPs grow a little slowly and too timid to put their money under management of overseas investment teams despite having been here so long, waiting eagerly at their doorway. Of course, governmental watchdogs' concerns are also part of the story.
In order to get out of this dilemma, NDRC has consulted with relevant agencies for consensus in a bid to grant pension funds, insurers and commercial banks the access to PE/VC markets. So far, with its initial foray into the VC/PE investment market, National Social Security Fund has already become the first, literally international Limited Partner.
Meanwhile, he also pointed out that, to facilitate domestic LPs' maturation and improvement, three preconditions must be provided:
Firstly, a GP self-discipline regime must be put in place: the GP market should be assessed impartially and objectively. So, we should have a set of performance assessment systems for defining elite GPs and identifying generally recognized GP teams. Despite a large army of GPs in China, most GPs are still in their infancy, outstanding GPs for the present are very few. Even these best institutions, such as the ones being initially granted the access to capital markets, still need to go through their running-in period.
Secondly, administrative measures and unified rules suitable to China's unique circumstances should be adopted to regulate and coordinate relations among varied players, to prevent arbitrary fundraisings, and to avoid potential risks. Therefore, related norms and regulations should be developed by regulators to guide investment activities of state-owned enterprises, insurance companies and commercial banks.
Lastly, the LP community, including state-owned enterprises, banks, and financial institutions, should also strengthen their capability building, for example, professional trainings and skill upgrade. He added that, China's investment industry remained on the rise in the second half of 2008 despite the financial crisis. According to the statistical data released early last year, there were roughly 200 registered VC/PE institutions, and by the end of 2008, the figure has skyrocketed to 426. Especially in Tianjin's Binhai New Area, besides the over 50 VC ones ready for registration, there were already 156 VC/PE institutions by the end of 2008.
Overseas LPs' China-Focused Investment Strategies Unchanged Despite the Economic Low
During the ChinaVenture's 2009 LP Summit, many overseas LPs expressed that they won't change their China-focused investment strategies despite the financial crisis. According to statistics from "ChinaVenture's Survey Report on Limited Partners in China - 2009", 60% of overseas LPs will increase their investments in China, while another 20% will maintain their current investment momentums.
Ching Tan, Managing Director and Chief Representative of the Greater China Region of Siguler Guff, said that at this time, to buy into distressed assets in the U.S.A. is really a promising business. His company is launching an NPA disposal fund, ready for a USD 2.4 billion global fundraising, but the China-focused allocation in its investment portfolio remains unchanged. In its investment mandate of BRIC Opportunities Fund II, the allocation to China has been as high as 50%.
"We focus more on emerging Asia-Pacific markets," said Judy Ye, Asian General Manager of EM/Alternatives. "We are yet to see mature M&A opportunities in China, so for the present, we opt for venture fund." "According to ChinaVenture's Survey Report on Limited Partners in China - 2009", some LPs surveyed, such as Tufts Endowment Fund, have already expressed that they will increase their proportion of investments in the Asian region in the future in a bid to reduce the risk concentration from investing in single regions.
Lucian Wu, Managing Director of Paul Capital, also said: "Pail Capital just slowed down its investment rather than changed its investment strategies. We see more opportunities in China, and may invest more here than in India."
Mindset of Chasing "Easy Money" Must be Spurned
As for ROIs, Vincent Huang, Partner of Pantheon, gave his own opinions. So far, there aren't outstanding investment institutions like CDH Investments and Hony Capital in China. Lots of investments failed, lots of seed capital was squandered away. Therefore, if you invest in China, your focus must be on screening your right GPs and your investees.
"When it comes to opportunities, of course, there is a sea of opportunities with distressed assets in Europe. But in China, nothing is as optimistic as you expect, thus, to be prudent remains a sure-fire tactic," Jason Zhang, Managing Director of Morgan Creek, concluded. In his opinions, there are few good programs. On the other hand, RMB funds grow too fast, but their management teams fail to do the same. In the short run, such a fundraising frenzy is not good: the market is flooded with money, while investment pressure is mounting.
In the light of the findings of "ChinaVenture's Survey Report on Limited Partners in China - 2009", we found that, compared with last year, there were some extensions in the investment cycle of investment funds that LPs preferred. The interest in funds with a less than 2-year-long, or a 3-4 year-long investment cycle slightly eased, while a 5-year-long investment cycle drastically intensified. These changes mirrored the shift in LPs' attitude and sentiment in the wake of the market cooling-down as well as the sober self-reflection on the mindset of frantically chasing "easy money". As the rational investment market comes back, exit channels via IPO and M&A are also contracting, no longer sustaining the old operational mode of "easy come, easy go", thus, forcing LPs to shift their pursuit from short-term benefits to long-term rewards.
Kang Pan, Managing Director of Adveq Management AG, argued that not all players agree with PE investment, especially domestic "newcomers". Overseas funds usually have their durations of more than 10 years, while domestic funds, generally speaking, 3-5 years, or at longest, no more than 7 years. Everyone is impatient for getting listed as soon as possible. After all, pursuit for instant success and quick profits is not the true essence of long-term investment
Rebecca Xu, Managing Director of Asia Alternatives, pointed out that during the last five years, Asia's IPOs have been satisfactory: in no more than three years, backed entities may grow at a pace of 30-50%, and then, bring back 5-10-fold returns for you. However, this scenario will change in the next few years, and returns won't be so high any more. In this ever-changing context, investors should change their expectations on their backed enterprises' futures, outlook and valuation.
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As a leading research & consulting firm focusing on China's investment market. ChinaVenture provides a variety of professional services to its clients both at home and abroad: VC/PE firms, investment banks, and enterprises active in China. Apart from third-party transactions, comprehensive statistical analysis and customized consultancies, ChinaVenture also runs a media platform - http://www.chinaventure.com.cn , and hosts regular investment conferences. Established in 2005, ChinaVenture has experienced a rapid development over the past few years, and has steadily enhanced its presence around the world through its representative offices in Beijing and Shanghai.( http://english.chinaventuregroup.com.cn/ )
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