Asia fundraising: Be prepared

China venture capital fundraising is on a hot streak with more than $12 billion raised so far this year, up from $9.5 billion in 2019. The $9.2 billion committed to US dollar-denominated funds is already the second-highest total on record, despite travel restrictions curbing roadshows by GPs and on-the-ground due diligence by LPs. But as ever, fundraising experiences differ markedly.

While Gaorong Capital accumulated $1.15 billion for its fifth US dollar fund – twice the amount raised in the previous vintage – in just over one month, China Creation Ventures (CCV) took about nine months to raise $300 million for its second. After a fast first close of $160 million, COVID-19 and US-China tensions prompted some LPs to hold back. The GP considered postponing the final close until next year, but the money began to flow again in June.

There are several issues at play here. First, Gaorong is now a well-established name sitting on a 30x return on its second fund, largely thanks to an early investment in Pinduoduo. CCV may have some home runs of its own, but the firm is at an earlier stage of development.

Second, timing. Gaorong launched its fund much later, with the pandemic seemingly behind China and LPs having concluded that prevarication was the enemy of portfolio diversification. As Wei Zhou, founding partner of CCV, puts it, by June some LPs were still wary of making commitments but others had thought through the risks and recognized the opportunities, returning with greater conviction – and speed of action – than before.

Investors are certainly adapting to a new normal, replacing in-person meetings with desktop due diligence and video calls. Eaton Partners recently published the results of a global LP survey in which 83% of respondents said they didn’t expect to resume physical meetings until next year and two-thirds said they were comfortable making new investments without face-to-face interactions.

Two-thirds seems high, based on anecdotal evidence, but much depends on the situation. According to industry sources, investors are committing to KKR’s latest pan-Asian fund without conducting on-the-ground due diligence. Beyond the blue-chip names, it gets trickier. Some small and mid-cap private equity firms in Asia have replicated the entire on-site program online to bridge the gap. However, technology isn’t flawless, engagement is less fluid, and it is generally difficult to build trust.

Speaking at last week’s AVCJ Japan Forum, Alicia Gregory, head of private equity at Australia’s Future Fund, noted that LPs are generally willing to do more virtually. She has attended numerous virtual annual general meetings and found the experience rewarding. But has Future Fund backed a manager without any previous in-person interaction? Not yet. All the commitments it has made or is working on this year involve managers the LP has been tracking for at least a couple of years.

The situation becomes more complicated the longer travel restrictions last. More conservative LPs might be happy limiting themselves to a diet of re-ups for now, but they cannot hold fire on new relationships indefinitely. Investment programs would suffer for it.

Sam Robinson, a managing partner at family office Northeast Private Equity Asia, observed that he has 20 GPs in his portfolio, and he’s known all but one of those managers for more than five years. “It takes a long time for a new manager to get into the fund, but how do you replenish that fund if [the pandemic] lasts for a number of years?” he asked, speaking at the same forum.

For GPs that do not enjoy the luxury of open-and-shut fundraises, in times like these careful preparation pays off. All the new LPs coming into CCV’s latest fund who relied on virtual due diligence were already personally familiar with Zhou, having caught up with him face-to-face on previous occasions.

Similarly, Australia-based Adamantem Capital launched its second fund in February, a few weeks before COVID-19 hit the country. A first close came in September just short of the full target of A$700 million ($514 million), with more than 50% of the corpus coming from new investors, including several non-Australians. Wanting to diversify its LP base, Adamantem engaged in a concerted outreach effort in 2018 and 2019, which prompted some investors to visit Australia.

Anthony Kerwick, a managing director at the firm, described it as “a victory for good planning and a bit of good luck.”

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• Topics
• Fundraising
• Funds
• Venture
• Greater China
• Australasia
• Asia
• Gaorong Capital
• Adamantem Capital
• Future Fund
• North-East Private Equity Asia
• China Creation Ventures