Market-wide Screening of Emerging Private Equity Managers in China

The private equity market in China is characterised by a large proportion of emerging or new funds. This is inevitable in a market that is relatively young (the earliest PE funds were formed in the mid 1990s).

Should one discount such funds altogether and just stick to “tried and tested” “top” funds? A pro-active investment strategy has to include the vision to spot emerging top funds of tomorrow.

While there are many of these new funds that would probably not succeed, a small number are worth serious consideration. They consist of teams that fall into one of the following categories: spin-outs from a major fund, teams composed from experienced 2nd level investment professionals (below partner or managing partner level) with autonomous deal execution responsibility, team defections, successful entrepreneurs returning from the US, etc. Some fund teams have already managed small amounts of capital in club-sized funds and have proven track records.

Using well-defined criteria, AddVenture undertook an extensive mandate, screening and ranking such managers in China on behalf of a major European private equity house.

A further task was to select a sub-universe of such emerging teams that would be appropriate for a fund sponsorship strategy. (Sponsorship which would entail an anchor investment in exchange for a share of the economic interests in the management company and the carried interest.) We assisted in the challenging negotiations with the short-listed teams on the sharing of roles and economic interests.