CDH closes China mid-market fund at $800m hard cap

The fund, which closed in December, comprises two separate pools of capital: approximately $300 million in US dollars and the equivalent of $500 million in renminbi, according to a source familiar with the situation. It is led by Lin Wang, one of CDH's six founding partners. Other team members include investment professionals from the firm's venture business, who will simultaneously manage out the legacy VC portoflio.

When the vehicle launched in the summer of 2015, the intention was to have the two tranches operate in tandem, effectively as a single fund. However, since then China has tightened controls on capital outflows while proposals to relax the approvals process for foreign investment have yet to come to fruition as originally envisaged, making co-investment in every single deal an impractical goal.

CDH raised $2.55 billion for its fifth US dollar-denominated fund in 2014 and its most recent renminbi fund closed at $1.2 billion. With an average of about $800 million to deploy per year the private equity firm is obliged to consider investments in the $100 million range, Shangzhi Wu, chairman of CDH, told AVCJ last November.

"People put forward attractive smaller deals to the investment committee and it is hard to reject them just because of size. We wanted to take advantage of these opportunities and the only way to do it was to have a separate team," he explained.

Another consideration is sector expertise. The mid-market team has been divided into three segments, covering healthcare, consumer and technology, media and telecom, respectively. They will collaborate with their colleagues working on the main private equity fund, cross-pollinating ideas and looking at opportunities for the main fund to invest in companies backed by the mid-market fund once they reach a certain size.

CDH, which closed its first US dollar fund at $100 million in 2002, is not alone in seeing jumps in fund size with each vintage. Within the last four months, FountainVest Partners raised $2.1 billion for its third vehicle, up from $1.35 billion last time around, while Boyu Capital went from $1.5 billion on Fund II to $2 billion on Fund III, and Primavera Capital closed its second fund at $1.93 billion, compared to $1 billion in the previous vintage.

Hony Capital's experience suggests that sizes do top out - the firm closed its latest fund, which includes US dollars and renminbi, at approximately $2.7 billion in 2016, having raised a $2.36 billion US dollar fund and a $1.6 billion renminbi vehicle in 2012 - but this does appear to leave a gap in the middle market.

Between 2001 and 2008, five China-focused, US dollar-denominated funds raised in excess of $800 million while 140 or so achieved final closes of $600 million or below, according to AVCJ Research. Since 2009, there have been 24 funds of $800 million or more, including 10 of at least $1.5 billion. Of the approximately 150 other final closes, 52 have been in the $300-800 million range, but more than half are VC funds.

CDH has more than $16 billion under management across private equity, venture capital, real assets, mezzanine and credit, public equities and wealth management. Private equity assets alone stand at $10.5 billion, including five US dollar funds and two renminbi vehicles. Last August, CDH closed its latest mezzanine fund at RMB3.5 billion ($525 million), exceeding a target of RMB2 billion.

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• Topics
• Greater China
• Fundraising
• Growth
• Renminbi fund
• GPs
• China
• CDH Investments Management
• Growth capital