Fund focus: TR raises $350m for China-heavy secondaries strategy

China accounted for $4 in every $5 raised through private equity-backed IPOs in Asia last year, a level of dominance unmatched in nearly a decade. In 2011, mainland bourses were the preferred port of call. Within two years, however, those markets were inactive following a regulatory intervention.

It wasn’t until last year that Shanghai and Shenzhen reclaimed their former highs in terms of IPO proceeds. A total of $24.9 billion was raised by companies with financial sponsors – up from $20.4 billion in 2011 – with Shanghai’s Star Market the focal point of activity, its lighter-touch approval process offering a smoother path to liquidity. With similar reforms being rolled out on other markets, the mainland now represents a more reliable counterpoint to Hong Kong and the US.

For secondary investors exploring the renminbi-denominated fund space, this is an interesting dynamic. Three years ago, the first renminbi-to-US dollar restructuring was completed, moving the structure offshore and enabling portfolio companies to target international IPOs. More recently, investors have started targeting restructurings offshore, replacing renminbi LPs through the qualified foreign limited partner (QFLP) program. This is typically used when portfolio companies need to list domestically.

TR Capital backed the first renminbi-to-US dollar restructuring – for Loyal Valley Capital – through its third fund. Another, involving Kinzon Capital, is among the first three deals in Fund IV. Paul Robine, founder and CEO of TR, expects QFLP to become an equally prominent theme.

“We are about to close a new one and there will be more. I wouldn’t be surprised if we see a number of these deals in 2021,” he says. “QFLP deals give international investors the opportunity to invest in renminbi-denominated companies.  Whether a deal is a QFLP or a renminbi-to-US dollar deal is largely driven by where a company wants to list to optimize its value and raise further capital – for QFLP it would be the domestic markets, for renminbi-to-US dollar, it would be Hong Kong or NASDAQ.”

In demand

TR recently closed Fund IV at the hard cap of $350 million, a significant step-up from the $175 million raised in the previous vintage. Co-investment capacity is also likely to increase, not least because it allows the firm to write larger checks for fund restructurings and thereby extract better governance rights from GPs. A total of $300 million was deployed during the Fund III cycle; it is likely to be $600 million for Fund IV.

TR launched the fund 18 months ago with a target of $300 million. A first close came swiftly as 90% of existing LPs re-upped. Then COVID-19 intervened and the process was put on hold in January 2020. Five months later, with target markets stabilizing, investors reengaged. By November, the fund was substantially oversubscribed, according to Robine. The ensuing period was largely devoted to documentation.

The LP base is split equally between Asia, Europe and North America, with commitments coming from sovereign wealth funds, pension funds, asset management firms, and family offices. New investors in Fund IV include some well-established North American pension funds and large Asian family offices, Robine notes. They tend to have some existing secondaries exposure but want greater diversity – by extending into the middle market where deal flow isn’t dominated by portfolios of LP positions.

“LPs are getting more sophisticated and they appreciate the difference between passive – or traditional LP – secondaries and more active secondaries like direct deals and fund restructurings. They recognize the traditional LP-secondaries market is crowded and prices are still high," says Robine.

"At the same time, they see more opportunities in areas like fund restructurings, especially renminbi-to-US dollar restructurings, where there was nothing three years ago. A lot of attractive opportunities can be created but most of the traditional players are not yet in this space."

Technology centric

Established in 2007, TR now manages $1 billion in commitments across its four funds and has closed 34 investments to date. In addition to Kinzon – a $100 million fund-level deal with seven underlying portfolio companies – Fund IV investments include the purchase of a stake in Pharmacity, Vietnam’s largest pharmacy chain, and a China combination deal involving an interest in Genesis Capital’s first fund and direct positions in trucking platform Full Truck Alliance and artificial intelligence specialist Aibee.

The China assets came from a single seller that needed liquidity. This transaction is a fairly typically representation of what TR is looking to do. The firm – which has 20 professionals based in Hong Kong, Shanghai and Mumbai – deployed 60% of Fund III in China, with Southeast Asia and India, accounting for 30% and 20%, respectively. Fund IV is likely to be much the same, once again with a 50-50 split between fund restructurings and direct positions.

China is appealing because it offers a combination of growth and innovation – a good fit for TR’s core new economy focus. “We invest in technology champions, healthcare champions, and digital consumer champions,” says Robine. “Entering via secondaries is less risky and the investment duration is shorter. We normally acquire a stake from another private equity firm that has been in there for some time, so our entry-to-exit is only 3.6 years.”

Getting exposure to a technology start-up once it has achieved a certain level of maturity – which implies a proven business model, stable revenues, and a clear line of sight towards sustainable unit economics – dials down the risk, but TR is selective. Three in four deals involve high-quality businesses where an investor needs liquidity or the target company wants to recalibrate its cap table, perhaps replacing onshore investors ahead of an offshore IPO. TR is willing to pay up to participate.

The remaining one-quarter of transactions are acquisitions of stakes in companies held by funds that are six years or older and the onus is on cleaning up the remainder of a portfolio. “It is only one out of four because we only target established, industry-leading businesses, even if the discount is smaller, maybe in the single digits,” Robine explains. “With average assets, you often run into value traps. You think you’ve got a good deal at entry, but the assets end up being hard to sell.”

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• Topics
• Fundraising
• Secondaries
• Secondaries
• GPs
• Asia
• China
• TR Capital
• Secondaries