PE Panorama: China investing no longer a hairy pursuit

25 August 2014   Category: News, Asia, China, Global, USA   By Paul Mackintosh

Despite widespread comment on the downturn in fundraising for China-focussed vehicles in 2014, there is obviously still considerable appetite out there for the right kind of proposition. At least, judging by the latest success of Orchid Asia, with its US$920 million final close for its latest platform, Orchid Asia VI, which initially launched in March 2014 with only a $750 million target. The speed of this fundraising exercise is a success in itself, again questioning the received wisdom that fundraising periods have become more protracted. And expressed interest in the fund reportedly rose as high as $1.3 billion.

Orchid Asia's numbers go a long way towards explaining this. Under Gabriel Li, the firm has been in existence for over 15 years. "Our 16-year-long investment experience and our brand name in the market uniquely position us to take advantage of the trend in providing growth capital in private companies in China" says the firm's website. That kind of track record, and the ability to raise six consecutive funds, is already rare enough in Chinese private equity, but on top of that comes enviable performance figures. According to publicly available figures cited by Reuters, the firm's previous fund, Orchid Asia V LP, raised in 2010 with $650 million, has been delivering a 55% internal rate of return.

Also explaining Orchid Asia's success is the fact that it is sticking to the venerable formula of growth capital investment in China's dynamically growing private companies. "We focus on backing experienced executives in building franchises in Asia, with an emphasis in China. We seek to invest in expanding domestic enterprises in high barrier to entry businesses that have good growth prospects in the consumer services and products sector, as well as the outsourced manufacturing and services sector," the firm declares. Despite the advent of China buyouts and other forms of control investing, growth capital is still the preferred form for those who are capable of navigating the difficult waters of alignment with Chinese entrepreneurs. Problems with recalcitrant investees where the investor has only a minority stake have been the stuff of Chinese investment stories for decades – but after six funds, Orchid Asia has clearly built up enough expertise in handling PRC founders and chairmen.

Also significant is Orchid Asia's body of investors. Entities quoted as limited partners (LPs) in this round include the Pennsylvania Public School Employees Retirement System and the Oregon Investment Council – the most respectable of traditional pension fund LPs. The backing of these kind of entities shows that no one regards China investing as a hairy pursuit any more - provided that the firm has the requisite numbers and reputation.