A: We will focus more on managers’ sector expertise and post investment management capability.
Ten years ago, every fund manager was a generalist, but they will need to make themselves into industry experts going forward. They will also need to become operational experts to help add value to their portfolio companies.
Q: Do you prefer certain sectors?
A: Well, most funds in China focus on the “new economy” section such as consumer, healthcare, clean tech. But we think there will be interesting opportunities in distressed debt or special situations, where funds can help restructure an ailing company, likely in the traditional industries, back to health.
Q: But there aren’t many funds in China focused on these two strategies?
A: Yes, it’s still early stage, but we will see more newcomers. There aren’t a lot of experienced players in the space as growth equity has dominated in the past, but you can still find a handful of managers including Clearwater Capital Partners, Shoreline Capital, and ADV Partners.
We are not sure if it’s too early or which manager will do better. We are just tracking funds and keeping dialogues with them for now. Hopefully, we will be able to single out some better ones in the near future.
Q: Popular funds in China often get oversubscribed. Do you find yourself in that situation?
A: Yes, but our cutback ratio is very low, maybe around 1.5% (in oversubscription situations), I’d say. That means we get 98.5% of our planned allocation. Funds understand our strength and want to work with us.
Q: For the funds’ portfolio companies, how have their top-line and bottom-line been impacted by China’s growth slowdown?
A: The impact has been different for each sector. For the consumer industry, the top-line growth rate might have dropped to single digits from 20%, 30% or more in the past. But companies can still manage their operations and costs to maintain double-digit growth for their bottom-line.
Heavy industrials like construction, manufacturing, and even service providers to these sectors, are experiencing very difficult times.
But in general, the portfolios of Chinese private equity firms are in healthy shape as most of their exposure is in the growing “new economy”.
Q: Even so, it’s still going to drag down funds’ performance?
A: I think the 2007 or 2008 vintage funds’ returns will be lower than previous funds, because they still had exposure to traditional sectors. For 2010 to 2012 vintages will not be bad. The more recent vintages will be better.
The exit markets are getting better. In 2014 and 2015, we have seen the strongest realization activities in Asia and China.
Q: Last year, Hamilton Lane was among 25 investors in buying a 30% stake in the retail business of Sinopec. What interactions have investors and Sinopec had after the deal?
A: It’s a passive investment, so the influence of external investors will be limited. Any influence would be more on corporate governance and strategy as some investors are sitting on the company’s board.
Q: Still, state-owned enterprise (SOE) reform is one of the top priorities for the government going forward. How can Chinese private equity firms play this strategy?
A: There is no shortcut as normally the acquisition of SOE assets is an open and transparent auction process. But I do think there are lots of potentials here, either through a minority strategic investment or restructuring.
Q: Lastly, China is increasingly becoming a destination from where international investors raise money. Is Hamilton Lane considering that?
A: Yes, definitely as a future option for us to tap the domestic RMB capital.
About Xia Mingchen:
Xia Mingchen is a principal at Hamilton Lane’s fund investment team, based in the firm’s Hong Kong office. Prior to joining Hamilton Lane in 2014, Xia was a senior fund manager at Tokio Marine Asset Management in Japan, where he was responsible for private equity fund investment globally. Before that, he worked at Mitsubishi UFJ Securities and Mizuho Securities.