Another month, another princeling fund. Okay, so they're not that prolific but there is a familiarity to PE platforms built upon the shoulders of Chinese leaders' offspring in terms of the nature of their emergence.
It starts with a whisper. In the case of Nepoch Capital - the private equity firm co-founded by the son of He Guoqiang, who stepped down from the Communist Party's highest echelon in October 2012 - the rumors began last year, months before the story made headlines last week. "There's a new princeling fund in the market, run by the son of a very senior government official," people were saying.
And once there is momentum, there is no turning back. Regardless of the GP's desire to remain below the radar, meetings must be held with potential investors. Due diligence is conducted, which includes researching the personal and professional backgrounds of key executives. The fund must also create a pipeline of investments - and maybe complete a couple of deals to impress prospective LPs - and the princeling's clout would be brought to bear when dealing with company owners and managers.
Past history also suggests that, once these funds are raised, the princeling retreats from the limelight. Winston Wen, son of former Premier Wen Jiabao, departed for a job at a state-owned enterprise within five years of - and four funds - of co-founding New Horizon Capital. Last year, Lefei Liu, who set up CITIC Private Equity in 2008, relinquished the title of chairman - although he remains CEO - ahead of his father's elevation to the Politburo Standing Committee.
It is hard to believe that a change in job title would be accompanied by the sacrifice of all economic interest in the GP or the funds it manages. It is also feasible that the princeling would quietly wield his influence on deals. Nevertheless, the timing of Nepoch's emergence is interesting: He Guoqiang is a retiring politician, not one still on the rise.
Some LPs are prone to flights of fancy when it come to China funds. If a GP has a unique selling point that suggests access to deals beyond the reach of others, warning signs in the due diligence might be overlooked. But the more experienced China investors want to see evidence of a sustainable franchise before they commit to a fund, and team stability is a key part of this.
In this respect, the cult of personality that characterizes Chinese private equity is not altogether helpful. Firms are often created on the basis of a certain individual's contacts and pedigree; they can hire all the associates they like but that person's relationship with a senior official at the China Securities Regulatory Commission, for example, is what gets portfolio companies to the front of the listing queue.
This dynamic is to be expected in an emerging market, but as a private equity firm matures its talent pool should deepen. A princeling operation therefore has a limited shelf life unless it is able to demonstrate that its competitive advantages stretch beyond nepotism.
In some cases this is already happening. New Horizon raised $1 billion for its most recent buyout fund despite Wen's departure; Boyu Capital may count Alvin Jiang, grandson of former President Jiang Zemin, among its ranks, but the firm has a strong team overall, led by ex-TPG Capital executive Mary Ma; and CITIC Private Equity has always been more than just a princeling operation, given its association with the CITIC and close ties to domestic brokerage CITIC Securities.
Nepoch is said to have received $200 million in LP commitments towards an overall target of $500 million, so the business is certain to get off the ground. Whether it gains credibility with foreign institutional investors - which remains a must if a GP is to scale up its fund sizes - remains to be seen.
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Join us at the 11th Annual AVCJ Private Equity & Venture Australia and New Zealand Forum on 5-7 March at the Four Seasons Hotel in Sydney to find out how funds of varying size are raising capital, sourcing deals and exits, as well as all you need to know to effectively navigate Australasia's changing alternative asset landscape.
After a decade-long mining boom the economy is experiencing a loss of momentum and the resulting deal flow reduction and lack of value in the market means GPs are chasing many of the same acquisition targets. That said, the exit market is recovering with both IPOs and M&A activity picking up, and an increase in LPs appetite for the asset class, and the recent government change means that the industry is cautiously optimistic for the future and expecting a rise in activity over the next 12 months.
5-7 March 2014, Four Seasons Hotel, Sydney