Chinese private equity firm CDH Investments has reaching a first closing of RMB3.2 billion (US$484 million) for its fifth mezzanine fund, Ning Hu, a managing director at CDH Investments told local Chinese medial.
The RMB-denominated fifth fund, like CDH’s fourth mezzanine fund completed in February, raised capital from insurance companies, banks, trust companies and other institutional investors. The fifth fund aims to raise roughly twice the amount of capital as the fourth fund, which secured RB3.5 billion (US$529 million), Hu said. If so, CDH’s fifth mezzanine fund aims to raise over RMB7 billion (US$1.06 billion).
“The speed of fundraising is accelerating, indicating increased recognition of CDH’s mezzanine funds by limited partners,” Hu told local media. CDH Investments spent more than one year raising its fourth mezzanine fund. For the fifth fund, it took the firm only seven months to raise a similar amount of capital.
“As institutional investors increase their allocation to private equity and venture capital, they also want to put more capital into assets that have shorter terms and higher potential returns, which is why we started the mezzanine funds,” Wu Shangzhi, chairman of CDH Investments commented.
CDH Mezzanine and Credit was launched in 2011 and managed more than US$1.3 billion in assets across four RMB funds. With the first closing of its fifth fund, CDH Mezzanine and Credit will have increased its assets-under-management to US$1.8 billion. Since inception, CDH Mezzanine and Credit has invested in 58 projects and completed exits for 60% of its investments, according to its website. CDH’s four mezzanine funds are all fully invested, and its first fund is fully exited, securing returns higher than the 11% average for this market, Hu said.
After ten years of development, mezzanine investment funds are becoming more mainstream in China, CDH said. “When we raised our third fund, we still needed to spend a lot of energy to introduce to limited partners what mezzanine funds do. But with the current fifth fund, it’s much easier as investors understand this strategy much better now,” Hu added.
In September 2014, China’s State Council issued a series of new policies on the insurance sector, in which mezzanine investments were clearly categorized as insurance investments for the first time. Since then, mezzanine investments have seen strong growth as more insurers are setting up their own mezzanine funds.
A classic example of CDH’s investment strategy includes a deal done in December 2016 when CDH Mezzanine invested in an international school operator to help finance its Hong Kong IPO. The investment was structured in two parts: one financing to the company as it pursued the IPO, the other subscribing to the listed company’s convertible bonds.
In addition, CDH Mezzanine has started investing in special situations such as restructuring, crisis financing and non-performing assets, which it believes can provide outsize returns while offering enough margin for error. CDH has also participated in non-performing asset secularization and asset-backed securities.