Chinese private equity firm CDH Investment closes on US$2b fund

CDH Investments, one of the largest homegrown mainland private equity firms, is a few months from completing fundraising for its US$2 billion fifth fund.

The success of the fund comes at the time when the deal-making industry struggles to exit investments through initial public offerings.

Founded in 2002, CDH Investments, a spin-off unit of Beijing-based investment bank CICC, manages about US$8 billion in assets.

It aims to use the freshly raised proceeds from the latest fund for investments in "growth, buyout and consolidation opportunities in health care, consumer and financial services", according to people with direct knowledge of the matter, who declined to be named because the fund is still going through the marketing process.

Apart from raising funds from existing investors, much of the new money comes from an influx of Asia and US-based institutional investors who are willing to take a lock-up period of 10 years, reflecting their commitment to China's growth story, they added.

With the door to cashing out in China's listing market remaining largely shut, only a few international and well-connected domestic funds, including KKR and the Lenovo-backed Hony Capital, are able to raise fresh capital in order to exploit the opportunities available.

Valuations of publicly listed companies are trading much lower than other emerging markets such as India and Indonesia.

The mainland IPO market, including the Shanghai and Shenzhen stock exchanges, has been the single most important exit for private equity investments in China for the past two decades as well as for some large state-owned enterprises seeking fresh capital.

Speaking in an industry forum yesterday, Ching Tan, managing partner at CDB Kaiyuan Fund, the private-equity arm of China Development Bank, said there was a direct correlation between robustness in China's exit conditions for funds and the fund-raising landscape, which private equity companies often view as a signal of market peaks and troughs.

The difficult exit environment meant private equity firms found it challenging to raise new money, despite emerging signs authorities will lift the ban on domestic listings.

Recent public speculation suggests that the domestic IPO market, which has been effectively shut since last November, could even potentially restart before October 1 after the securities regulator completes a detailed plan on reforming the stock offering process.

Tan also said that nimble low-profile funds tend to outperform peers, probably because they can stay away from the spotlight and quietly make deals.