LP interview: Tsinghua University Education Foundation

The combined assets of the top 10 Chinese university endowments amount to less than the $35.7 billion held by Harvard University, the largest of their US counterparts. The disparity exists because the two countries have different education systems. While Chinese universities are mostly government funded, private donations are vital to many US educational institutions. However, China’s endowment community has seen significant change over the last 20 years. 

Tsinghua University Education Foundation (TUEF) was created by Tsinghua University in 1994 to handle RMB20 million ($3 million) in donations. It was the first non-profit university organization in China.

Between 2010 and 2015, TUEF’s assets grew from RMB1.49 billion to RMB5.17 billion, and it made distributions RMB3.53 billion to the university and to charities. This growth was primarily driven by an annual average of RMB1.1 billion in donations over the same period, 90% of which came from social organizations and individuals and the rest from alumni. The capital goes towards general improvements at the university, although some donors request that their money be spent on specific projects.

We are seeing Chinese GPs have become more professional in specific segments and we prefer to back those candidates – Ying Huang

“Part of the remaining capital is used for making investments,” says Ying Huang, investment manager at TUEF Asset Management, the endowment’s investment platform. “But it took us several years to accumulate sufficient capital to make meaningful investments.”

TUEF started making external commitments in 2005. Like other institutional investors, the initial focus was on fixed income and public equities. Three years later, it made its debut private equity investment – becoming the first endowment in China to make the jump. As of 2015, it had deployed RMB2 billion across multiple asset classes, with a total market value of RMB4 billion. The private equity portfolio, including direct and fund investments, accounted for 20% of the total asset value.

Narrowing focus

That first PE commitment stayed close to home as TUEF established a joint venture with Tus-Holdings, a Tsinghua-backed science park developer that incubated Chinese start-ups. The JV invested in Tsinghua family funds, such as vehicles managed by TusPark Ventures, a VC arm of the university. Coverage broadened to include third-party domestic GPs in response to government policies that encouraged this behavior, giving rise to a host of new renminbi-denominated funds.

TUEF had a bias towards large generalist funds managed by reputable GPs in the early days because the industry was still nascent – for example, it invested in Hony Capital’s second renminbi fund, which closed at RMB10 billion in 2010. But over the ensuing years, the endowment has gradually diversified its approach, backing smaller GPs with niche strategies that are expected to deliver higher returns. 

A number of commitments have been made to industry-focused vehicles launched by generalist GPs, and also to funds operated by specialists. CDH Investments counts TUEF as an LP in its mezzanine, real estate and acquisition financing project funds. A healthcare vehicle managed by CITIC Capital has also received an allocation, as have Cathay Private Equity’s Sino-US small and medium-sized enterprise (SME) fund and sports-focused Chinese GP Yao Capital.

On the VC side, TUEF invested in the first renminbi fund launched by Joy Capital, a recent spin-out from Legend Capital led by Erhai Liu. The GP typically targets at start-ups operating in auto industry and other consumer-related segments. “We are seeing Chinese GPs have become more professional in specific segments and we prefer to back those candidates,” says Huang. “If a GP comes to us and says it wants to do anything and everything, we would be concerned that they are too diverse.”

With a five-strong investment team to oversee all asset classes, TUEF relies heavily on its own network to source GPs. For example, Yao Capital co-founder David Han is a Tsinghua graduate and he previously worked on potential collaborations with TUEF while with Chinese conglomerate Wanda Group. “We normally would not invest in new GPs if there is no established any relationship. It takes us several years to evaluate a GP before we invest,” Huang adds.

TUEF invests in both in renminbi and US dollar vehicles, committing approximately $10 million each time. For direct investments, it cannot account for more than 10% of the transaction size. The endowment previously invested several agriculture-related projects initiated by Tsinghua University. Renminbi funds tend to be of shorter duration than traditional US dollar vehicles, and TUEF used to be wary of tying up its capital for extended periods.

“When we invested in a seven-year PE fund, we became very nervous and worried about whether portfolio companies could go for IPOs or achieve strong exits," says Huang. "Now, with more experience, we feel comfortable with the traditional US dollar fund lifespan of 10 years. It's been a learning process for us.”

Overseas experiments

For much the same reason, TUEF hasn’t rushed into international private equity. In 2007, it formed a tech-focused Sino-foreign joint venture, known as SBI & TH Venture Capital, alongside Japanese conglomerate SBI Holdings. The JV invested in early-stage companies based in China and overseas, but it is no longer making new commitments.

TUEF is now working with its existing GPs to gain exposure to overseas assets that have a China relevance. Through CDH’s project financing funds, it participated in WH Group’s $7.1 billion acquisition of US-based Smithfield Foods and supported the GP’s purchase of Nanfu Battery from Procter & Gamble. In each case, TUEF converted renminbi into US dollars in order to invest.

“Our fund volume is small compared to the likes of Chinese insurers. When it comes to overseas fund investments, insurers have to focus on large established GPs that can accommodate their check size and provide stable returns. We can’t write such big checks right now. We’re are more focused on alpha returns, and that’s why we prefer specialists,” says Huang.

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• Topics
• Greater China
• LPs
• Fundraising
• China
• Endowments