Global fund managers building out private markets activities in China are finding lucrative opportunities to deploy capital even as heightened geopolitical tensions chill fundraising efforts, leading others to scale back operations.
BlackRock Inc, Schroders PLC and AllianceBernstein Holding LP are among the international firms with operations in the region that are actively buying up mainland China private credit, private equity and distressed debt assets that in some cases offer steep discounts.
One such target is software and services companies that have robust revenue streams from a blue-chip client base but few assets, said Simon Chan, director, Asia Pacific private credit team for BlackRock.
The lack of assets means such firms may struggle to persuade banks to underwrite their funding activities, prompting them to turn to private sources, Chan said at a panel at the ASIFMA China Capital Markets conference in Hong Kong on Tuesday.
“These companies are actually finding it very difficult to borrow from traditional channels,” Chan said. “This is a typical segment where BlackRock likes to step in.”
Schroders said it’s found success in China’s yuan-denominated private equity secondaries market.
While US-dollar fundraising for China private equity deals has slowed, local currency fundraising remains active. In yuan private equity funds, up to 70% of limited partners are not institutional investors and discounts on secondaries deals are common, according to Jun Qian, head of Private Equity China, Schroders Capital.
Attractive Field
“In many cases they are not long-term investors,” Jun said at the same event. “For the RMB secondary deals which we see, typically you can ask for between a 30% to 40% discount, which translates to 1.5x to 1.5x on day one,” Qian said at the same panel. “It’s a very attractive field.”
Some firms are taking steps to shift their business as ties between China and the US fray and the geopolitical outlook grows more clouded. KKR & Co. recently reshuffled its Asia-Pacific private equity team in a move that placed its head of India private equity to be the sole Asia-Pacific head for the asset class. Sequoia Capital earlier this month announced it would split into three, carving off China and India from its US business.
While Greater China-focused private equity assets under management rose to record$539 billion last year, fundraising for China-based funds was just a quarter of the average over the three prior years, according to Preqin data.
Beijing’s recent crackdowns on private enterprise and US efforts to limit China’s access to certain technologies also means firms can be wrongfooted. The Biden administration is nearing completion of an executive order that would regulate and potentially cut off certain US investments in China, people familiar with the deliberations said earlier this month.
Too Big to Ignore
But for some funds, China remains a potentially rich source of profits.
Singapore-based AB Carval Investors LP, a private markets fund manager acquired by AllianceBernstein in 2022, is another firm hunting opportunities in China, according to managing director Avery Colcord, who also spoke on the panel. The firm has targeted nonperforming loans and hopes to launch a fund in China in part to target debt from struggling property developers.
“The market size in China is too large to ignore,” Blackrock’s Chan said. “The uneven access to capital actually opens up a very interesting scene for private lenders like ourselves to serve the underserved borrowers on the ground.”