LP interview: Quilvest Capital Partners

Like many investors, family office-cum-fund-of-funds Quilvest Capital Partners has slowed its pace of investment in China recently. But among its latest deals – approved by the investment committee and going through final legal processing as of last week – is a fund commitment to a new relationship in the country.

It’s worth noting that the relationship is only new in the sense that there was no prior capital commitment; Quilvest had been tracking the GP for several years. Still, the investment reveals an understanding that while China risk has changed, it hasn’t necessarily increased.

In the past few years, China’s PE pitfalls have revolved around inflated valuations, fear of missing out, and the difficulties of allocating responsibly in such an environment. Now the rudimentary jurisdictional hazards of a policy-driven developing market have come back into focus. And as the pendulum of sentiment swings, investors must be careful not to forsake something core.

“This perception of risk depends on which perspective you are taking. We have some Middle Eastern investors who are extremely long on China and some North American investors at the low point in the cycle regarding their interest,” said Catherine Shih (pictured), a Hong Kong-based partner at Quilvest, who heads the Asia PE funds and co-invest team.

“We strongly believe in the geographical diversification of private equity portfolios through direct exposure to Asia, and China specifically. If you perceive the risk as too high and back out completely, you miss out on the tremendous opportunities that are backed by strong underlying growth trends.”

Shih added that the coming years should be good vintages in China, with the capital base and the quality of the GPs remaining strong. “We have some significant GP relationships there – people who have been through market cycles and have operational knowhow,” she said. “All that remains intact.”

Portfolio peek

Quilvest traces its history back to 1917, when it was set up in France to manage the wealth of Argentina’s Bemberg family of beer brewing fame. Private equity entered the strategy in the 1970s, with third-party capital under management as of 2002. Shih joined in 2010 after several years at HarbourVest Partners, where she last served as a vice president.

Emerging managers represent 25% to 30% of fund commitments. There are currently about 150 GP relationships globally; they have historically ranged from Thoma Bravo to Capital Today China Group to Kedaara Capital. There is pride in being the first non-US investor in Boston’s burgeoning PE scene in the 1980s, with Quilvest having backed Bain Capital’s debut fund.

Credible status as one of the pioneers of the industry has not translated into massive scale or tentacles in every strategy, however. Assets under management (AUM) stand at USD 7bn across direct and fund-level PE investments, real estate, and private debt.

About USD 1.5bn of this is in Asia, all of it in funds and co-investments. There is scope for doing direct, non-co-investment deals in the region but not in the short term. In addition to Hong Kong, the firm has offices in Paris, New York, and London, with about 100 staff globally. Investment professionals are typically responsible for about 10 GP relationships each.

There is a desire to tilt the balance of the investor base toward more institutional players versus family offices despite a strong sense of alignment and shared history with the latter. But this is playing out gradually and largely by word-of-mouth.

The first two flagship emerging markets fund-of-funds closed on USD 216m in 2007 and USD 400m in 2012. A third vintage has been in the market since at least 2020. Quilvest declined to comment on fundraising.

“We’re looking to grow more in the coming years and will continue investing in the highest quality talent without losing our focus on the mid-cap space across asset classes,” said Alexis Meffre, executive chairman of the firm. “We don’t want to grow for the sake of growing. Ultimately, it’s about generating strong returns for our investors.”

Meffre has more than 20 years’ experience in private equity, having set up the PE team for French development finance institution Proparco in the early 2000s. He also serves on the Bemberg family council.

Meffre notes that Quilvest distinguishes itself as one of only a few global platforms with a middle market focus; 70% to 80% of deployments historically have gone to buyout versus 20% to 30% to venture. This ratio is skewed more toward venture in Asia due to the relative immaturity of the market.

China vs India?

China and India are the dominant geographies, representing a combined 80% of the firm’s exposure to the region. The core investment themes are healthcare, software, consumer, and sustainability, including renewables and climate change.

India currently represents about USD 500m in AUM, and this expected to tick higher, stubbornly high valuations in the country notwithstanding. This is not a reaction to the slowdown in China deployment; Quilvest has not observed a shift in allocations from China to India in its investor base or the broader market.

“Demand for India will temporarily be affected by current events – such as rising interest rates in the US and Adani Group – but the longer-term nature of institutional capital should allow for a more sustainable investment and growth environment,” said Maninder Saluja, global head of private equity funds and co-investment.

“Interestingly, many large corporates have also proactively targeted the economy to execute on both their domestic and global strategies, which has added an additional layer of investment stability.”

Volatility in global fund flows and LP dislocations in the lower-mid market space in India are seen as having provided scope to be tactical. Abhishek Damani, a principal at Quilvest who leads PE coverage of India and Southeast Asia, noted that opportunistic investments of this kind have provided compelling entry points and now represent a significant portion of the India portfolio.

“Global family offices have been keen to learn about the positive developments in India, but their previous experience in the market has been disappointing and has led to a cautious approach,” Damani said.

“Indian family offices on the other hand have been active in allocating to both funds and direct and co-investments domestically, driven by a vibrant wealth management distribution network and excitement around new-economy deals. There is a strong need to formalise the ad-hoc decision making for some of the domestic family offices and develop a more holistic approach to portfolio construction.”

Speaking about private equity broadly, Meffre observed that despite investors’ anxieties in the current macro environment, there has been no significant rebalancing of portfolios via secondaries. He expects to see fewer re-ups and smaller allocations to private equity in the near term but remains but remains unequivocally optimistic about the asset class.

“Not only will there be more allocations to private equity in the years to come, but the pie is growing. The quality of private equity teams with a thematic focus and the ability to add value has only been increasing,” Meffre said.

“I think private equity will remain – as it has been for 25 years – an overperforming asset class despite the current noise about things such as valuations and the denominator effect. The opportunity set is infinite.”

The shift toward thematic strategies and sector funds is factoring into manager selection, globally and in Asia. Recent activity on this front includes Quilvest backing India medical tech specialist HealthQuad’s second fund. That vehicle closed on USD 162m, beating a target of USD 68m, last year.

Healthcare is an important theme for Quilvest, but HealthQuad, as an early-stage investor, is only minimally representative of the overall strategy. There is an imperative to limit venture and growth in the Asia portfolio, although deep tech and policy-aligned innovation in China are also areas of growing interest.

Unorthodox approaches

It remains to be seen whether a greater focus on deep tech and specialist domains will translate into more nuanced due diligences processes and therefore further slowdown in deployment. Quilvest’s DNA as an organisation has always been in direct investing, which means that fund commitments require significant due diligence of underlying assets.

One offsetting facilitator could be a growing openness among GPs to accommodate at least slightly less traditional LP commitments, including late primary investments, secondaries, and staples. For example, Shih noted that the recent China fund commitment was a secondary position where Quilvest developed unique insights on the potential of the portfolio assets to underwrite a strong return.

These openings are arguably all the more feasible with flexibility in cheque size: deals can range from USD 5m to more than USD 100m, when investing as part of a syndicate. There is also the idea that the trend of managers increasingly entertaining non-vanilla GP-LP relationships has coincided with greater transparency – which bodes well for Quilvest’s intentions of ramping up investment.

“What distinguishes GPs is their ability to add value, make decisions on a portfolio, help management teams, and anticipate what’s going to happen next in the portfolio,” Shih said. “When we see GPs who can do this and communicate it proactively, it cements the relationship.”

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• Topics
• Greater China
• South Asia
• LPs
• Fund-of-funds
• Healthcare
• Technology
• Consumer
• China
• India
• Family office