Q&A: Magic Stone's Jenny Zeng

Q: Renminbi-denominated fundraising is been on the slide these past two years. What is the problem?

A: It's difficult for managers to raise capital at the moment. The most important issue is the lack of long-term intuitional investors. Insurance companies and the National Social Security Fund (NSSF) are evolving into important LPs. All fund managers in China have big expectations for insurance companies in particular. However, the institutional market has yet to mature. For example, insurance companies are still not really active investors in private equity funds as LPs. First, the China Insurance Regulatory Commission (CIRC) restricts them from investing more than 10% of their total assets in the asset class, and then they have to report to the regulator on a deal-by-deal basis. Second, they are not comfortable with the management fees that must be paid to GPs. And third, they are also restricted in terms of the managers they are able to back. A GP must have at least RMB3 billion ($480 million) in assets under management and a lot of emerging renminbi-denominated GPs don't qualify.

Q: What are insurance companies doing in terms of developing their private equity investment teams?

A: Currently every insurance company has an investment department but many of them are staffed by just 2-3 professionals. They don't have enough time to do due diligence and often rely on third-party financial advisory firms to assist them with it.

Q: To what extent are you now seeing specialization, particularly in terms of sector, among renminbi GPs?

A: We call the last decade the "golden PE market" - a lot of renminbi fund managers could easily raise capital and make good returns by relying on a pre-IPO strategy. The IPO market shut down last year, and although it has since re-opened, these pre-IPO mangers have become less attractive. The renminbi funds market is consolidating and this will continue. We now prefer to back real value-added players, often with a particular sector focus. Where we do go into generalist funds, they must have a stable team and a proven track record.

Q: China is still a growth capital-driven market, but does a predominantly buyout-focused fund now represent a viable strategy?

A: A lot of US dollar managers have wanted to do buyouts over the past few years but the market wasn't ready for it. Now I think there are opportunities for GPs raising reasonable size buyout on both the US dollar and renminbi sides. You increasingly find entrepreneurs want to get out of their companies, but the second generation doesn't want to take over the business. They have often been educated overseas, they might have experience working for investment banks, and they have no desire to take over a real operating business. US dollar managers have more professional skills and experience in this space, but the renminbi funds will find it easier to structure deals from a legal perspective.

Q: How does Magic Stone position itself in this changing environment?

A: We don't refer to ourselves as a traditional fund-of-funds - we are a hybrid fund manager. Half of the capital we raise is allocated to selected fund managers through a comingled fund-of-funds. We follow emerging GPs especially closely because our team has been covering the Chinese market for more than a decade and we can offer expertise in this area. The other half of the capital we raise is for direct and co-investment.

Q: You previously were considering launching a dedicated secondaries fund. What happened and how closely are you involved in the secondaries market?

A: We are not raising secondaries fund but we are active in secondaries deals in China. We use the secondaries market to shorten our j-curve as well as to invest in funds of different vintages. That is important to our strategy. There are a lot of individual LPs that entered the market without really understanding the long term and low liquidity nature of the asset class. They signed all the legal documents but then three years later they say they cannot continue. We will source these positions via GPs that we know well. These firms would sometimes rather come to us than put a secondary position on the open market.

Q: Would you ever deal with these individual LPs as investors in your funds?

A: We tend not to deal with them directly. When we come across these high-net-worth individuals, we often try to persuade them to set up their own family office and then educate them on how to allocate to allocate resources globally, not just in China, and not just in private equity but also in fixed income, hedge funds, and so on, so they can diversify risk.

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• Topics
• Fund-of-funds
• LPs
• Greater China
• Fund-of-funds
• China
• LPs
• Magic Stone Alternative Investment