Fund focus: FountainVest scales up for Fund III

FountainVest Partners' acquisition of a 19.44% stake in Kehua Bio-Engineering (KHB) for $264 million in 2014 represents one of few occasions in which a foreign investment fund has become the largest shareholder in an A-share listed company. But the deal originated from a succession-planning problem.

KHB, a leading in vitro diagnostics businesses, was established in 1981 by three entrepreneurs. All three were keen to step back but their children had moved overseas were not interested in leading a manufacturing enterprise. FountainVest came in, installed a new management team, and wants to use the company as an industry consolidation platform.

It is one of approximately 11 deals in the GP's second fund. Frank Tang, CEO of FountainVest, expects succession-planning to be an increasingly prevalent theme as the firm prepares to deploy Fund III, which recently closed at the hard cap of $2.1 billion. "We are at the start of this trend - there hasn't been a massive spate of retirements among the first generation of entrepreneurs yet, but we see evidence of it in our investment history and it will become more common," he says.

These will be hard-won deals, based on discrete conversations with founders who want to be certain that the new owner will strengthen not tarnish their legacies. They may take years to cultivate and some will not go through, particularly in situations where the business is so reliant on the founder that a change of control would prove difficult.

However, the expectation of more big buyouts is one reason why FountainVest's third fund is much larger than the second, which closed at $1.35 billion in 2012. Industry consolidation and an increasingly complex environment - and a consequent demand for sector and operational expertise that can drive value - are likely to play as significant a role in this as succession planning.

Tang notes that larger check sizes are already a feature of Fund II, with an average commitment size of $110 million, before co-investment is factored in. This figure is not distorted by Focus Media, a take-private and re-listing said to be the firm's largest and most successful investment to date. The Fund II contribution to that deal was $150 million, with capital also coming from Fund I and co-investors.

FountainVest was set up in 2007 as a spin-out by members of Temasek Holdings' China investment team, and it won support for its debut fund from several anchor investors. The LP base began to diversify in Fund II but AVCJ understands that two of these anchors - Ontario Teachers' Pension Plan (OTPP) and Canada Pension Plan Investment Board (CPPIB) - re-upped for the new vehicle.

Tang admits that concerns about China's economic prospects were more apparent during due diligence than for the previous fundraise. He credits the willingness to participate to LPs "taking a long-term view and appreciating that China has a lot of potential," and acknowledging that the country's economic transition has created a more nuanced investment environment, but one not lacking in opportunity.

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• Topics
• Greater China
• Fundraising
• GPs
• Buyout
• Fountainvest Partners
• China