AVCJ China Awards: Firm of the Year – Hony Capital

For Hony Capital, another busy year of investments, exits and fundraising was reflected by continued dominance at the AVCJ China Awards. The firm retained its Firm of the Year title and also took away the prize for best US dollar fundraise, coming after it won the parallel award for renminbi fundraising in 2011.

With more than $6.8 billion under management across six funds, Hony can legitimately claim to have an influence in Asia that matches some of the pan-regional players. The strength of demand for an LP ticket in the Chinese GP's fifth US dollar-denominated vehicle was a stark illustration of its emergence as a heavyweight.

Hony Capital Fund V entered the market in September 2011, with a target of $2 billion. It closed four months later on $2.4 billion, nearly $1 billion larger than its predecessor. It is China's biggest country-focused US dollar vehicle since Hopu Investment Management attracted $2.5 billion for its one and only fund in 2008.

"China's continuous rapid growth with economic restructuring call for tremendous needs for capital backed with resources, which means that China will continue to be one of the most active and important PE markets," says John Zhao (pictured), Hony's founder and CEO.

Gaining momentum

When the private equity firm rolled out its maiden fund in 2003, parent company Legend Holdings was the only investor. No more than 25 LPs were said to have committed capital to its second and third vehicles.

By the time of the fourth fund in 2008, however, Hony's track record had won over some of the biggest institutions. According to AVCJ Research, California State Teachers Retirement System (CalSTRS) and Canada Pension Plan Investment Board (CPPIB) participated. Sources tell AVCJ that around 45 LPs applied to commit more than $1.4 billion to the fund and another 70 or so were on the sidelines looking for a way in.

It was likely a similar situation with fund five. CalSTRS and CPPIB both re-upped, while Los Angeles City Employees' Retirement System (LACERS) was among the first-time participants.

The level of demand presents Hony with a gilt-edged chance to diversify its LP base. The priority is securing investors that are large enough to support the firm's future growth, but Zhao says he wants to develop a healthy mix of family offices, pension funds, endowments, sovereign wealth funds and insurance companies. Roughly one-third of the LPs come from North America, one third from Asia, and the remaining from Europe and the rest of the world.

The larger fund will inevitably have a knock-on effect on average deal size. The company expects to handle 20-25 transactions each year ranging from $20 million to $500 million, but its sweet spot is sliding up the scale and now sits at $80-200 million.

State-owned enterprise (SOE) restructuring is a clearly an area in which these larger-scale transactions might be found. Hony is already looking for appropriate targets. In August 2011, it paid $100 million for a 60% stake in China Yaohua Glass Group, with a view to tapping a rich vein in glass industry consolidation opportunities. The PE firm previously bought Jiangsu Glass Group, taking the company public as China Glass and supporting an acquisition spree of other state-owned glass assets.

Yaohua is using the capital to boost its output and has targeted annual sales in excess of RMB5 billion ($777 million) by the end of 2015.

"There are substantial opportunities investing into state-owned enterprises (SOEs) as they require capital to become more competitive amid global competition," Zhao told AVCJ earlier. "We have around 60 portfolio companies, and around half of them are SOEs that achieve growth IRR as well as our other investments in the private sector."

Opportunities overseas

Outbound are also likely to feature prominently in Hony Capital Fund V. The firm completed its first ever cross-border investment last July, buying a 20% stake in Tokyo-listed hotel and real estate business Tokai Kanko for $17.8 million. The link with Hony and Tokai Kanko could be traced back to Zhao's interest in investing in Japanese hotel businesses due to a growing demand from Chinese tourists.

"The focus of our cross-border investments is always on the Chinese economy as many international companies now want to better serve Chinese consumers," Zhao added.

Finally, on the exit front, the highlight of Hony's year came in December 2011 as New China Life Insurance raised $1.9 billion in its dual Hong Kong and Shanghai listing. The private equity firm secured a $208 million partial exit from the insurer, and still retains about 6% of the A-share equity.

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• Topics
• Performance
• GPs
• Greater China
• Fundraising
• Hony Capital
• China
• GPs
• AVCJ Awards
• Fundraising