
US LPs in China: Willing buyers?
There is no clear evidence of US LPs passing on China funds as a result of tensions between the two countries, but their current or future reluctance could be shrouded in various obfuscations
China remains a market of interest for global institutional investors, based on their willingness to support country-focused private equity managers this year. Approximately $20 billion has been committed to US dollar-denominated China funds as of early September, according to AVCJ Research. This isn’t far off the 12-month total of $24 billion for 2019.
The likes of Qiming Venture Partners, Matrix Partners China, and CMC Group all accumulated relatively meaningful pools of capital. And US LPs feature prominently in some of these funds. A question that has been asked for some time now is will these investors continue to make new commitments to China managers as the country’s relations with the US deteriorate.
A few months ago, the Trump administration pressured the Federal Retirement Thrift Investment Board into postponing changes to its international portfolio that would have given it exposure to Chinese companies. Last month, the State Department called on US university endowments to divest their interests in US-listed Chinese companies, citing the likelihood of a wholesale delisting due to a failure to comply with local accounting regulations.
If this purge gains momentum within the institutional investor community, there would be a lot to unwind. The US Securities & Exchange Commission (SEC) said in a recent note that US mutual funds have $385 billion in exposure to China-headquartered companies through stocks and bonds trading on China’s domestic financial markets as well as in Hong Kong and the US.
The implications for private equity are uncertain. It is not unfeasible that US public institutions could face calls – directly from the government or from members – to divest their China holdings, in public and private markets. It remains to be seen what impact this would have on interpretations of their fiduciary duty. Or to what extent US-China tensions weigh on investment risk assessment.
As it stands, there is little actual or anecdotal evidence of US institutions reversing their positions on China private equity, though there has been a lot of discussion about the potential risks. COVID-19 is an obvious complication. First, travel restrictions mean most LPs haven’t been able to do much internationally apart from re-ups. Second, concerns about China might be bound up in a web of other considerations.
An investor might say that they can’t travel to Asia, so they aren’t going to make new commitments there for the time being, without making specific reference to China. They might say that China is not a priority in their global portfolio, given the geopolitical risk and general market uncertainties. They might say that, in the current climate, the number of China re-ups is being cut back for this year. These are neither complete rejections nor ringing endorsements.
As always, LPs with existing exposure to China may remain reasonably bullish. But those considering a first commitment to a country manager are looking at a lengthening list of reasons to stay on the sidelines.
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