by Stephen Aldred
Executives of Nepoch Capital, one of China’s so-called “princeling” private equity funds, have spun out into a new fund called Pagoda Capital after Nepoch co-founder He Jintao, the son of China’s former head of Communist Party discipline He Guoqiang, was questioned in connection to a corruption investigation, said two sources close to the situation.
Members of the original team at Nepoch, including Duncan Zheng, are managing Nepoch’s portfolio assets as the fund winds down. The firm’s investments have included Alibaba Group Holdings and Mongolian dairy firm China ZhongDi Dairy Holdings, said the sources.
In contrast to a 2012 fundraising for Nepoch, where the fund’s ties to He Jintao were touted despite an ongoing anti-graft campaign in China, the fundraising for Pagoda has not highlighted the association of some of its executives with Nepoch, said the sources.
“I would assume investors will either do their homework, or they’ll invest on the basis of the executives involved, and may find out the connection later,” said the first source close.
Despite the problems of its co-founder, Nepoch’s USD 300m fund is set to return around 2.5x net to its investors, primarily due to its 2012 Alibaba investment, said the first source close.
Pagoda is led by former QIC and China Investment Corporation (CIC) senior executive James Leong, said the sources. The firm has already invested in Chinese online tutoring company VIPABC, said the second source close, but invests across tech, media and telecom, health, consumer and education, said the first and a third source close.
An SEC filing from 22 March 2015, for Cayman Islands-incorporated Pagoda Investment Limited Partnership lists James Leong, Ying Wang and Shi Zheng as directors for a private equity fund, which has raised USD 215m and is seeking to raise up to USD 500m.
Pagoda’s plan to raise USD 500m from limited partners (LPs), matches Nepoch’s original plans for a fund of USD 500m when it launched in 2012. Nepoch eventually raised around USD 300m, but the fundraising was curtailed following He Jintao’s detention, and his name was removed from documents that the company showed to potential investors, as reported.
This is the second Chinese princeling private equity fund known to have spun out executives under a new name, after members of New Horizon Capital, which was originally co-founded by the son of China’s former premier Wen Jiabao, spun out last year, as reported.
Princelings, the sons and daughters of China’s elite politicians, have a long association with private equity in China. LPs are often drawn to these funds, in part because they believe their political connections can help them source the best deals, and earn outsized returns for the funds on the back of them.
But while Nepoch shows the risks that can emerge from investing in China’s politically connected private equity funds, the profile of another princeling-connected fund, Boyu Capital, stands in stark contrast.
Boyu, co-founded by Alvin Jiang, the grandson of former China premier Jiang Zemin, recently closed its third private equity investment fund at USD 2bn, through a rapid but low-key fundraising, the first and a fourth source close said.
Both Nepoch, Boyu, and other princeling-linked funds share a common connection in their 2012 investments in Alibaba, a deal which would return 5.2x to those investors based on Alibaba’s current market capitalisation.
Nepoch attracted investors into its first fund on the back of its pre-IPO investment in Alibaba, which proved to the LP community that the firm did in fact have the connections to land lucrative deals, as reported.
The firm had invested USD 100m in the Alibaba deal in 2012, with USD 40m of that total coming from co-investors Siguler Guff, JP Morgan and Neuberger Bermann, who were early investors in the fund, as reported.
As part of the deal, the co-investors paid none of the usual management fees or carried interest to Nepoch on their investments, increasing their profits. Funds of Siguler Guff – Siguler Guff BRIC Opportunities Fund III, LP and Siguler Guff HP China Opportunities Fund, LP – were listed in Alibaba’s IPO prospectus as selling a total of 483,872 shares, or 50% of their holdings at the IPO.
Other funds with princeling connections also invested in the deal, when a consortium led by China sovereign wealth fund China Investment Corp helped to finance Alibaba’s USD 7.1bn buyback of its own shares in Yahoo!.
Boyu Capital and New Horizon also invested in the share buyback, as reported.
The deal valued Alibaba at around USD 38bn at the time.
Alibaba raised USD 21.8bn through a New York listing in September 2014, valuing the firm at USD 167.6bn. The company currently has a market value of around USD 203bn.
On that market value, the 2012 investors’ paper profit from Alibaba currently would stand at around 5.2x the initial investment.
Boyu did not respond to request for comment. Pagoda declined to comment.
While the Nepoch saga shows the headline risks associated with princeling-linked funds, such was the demand for Boyu’s low-profile third fundraising that few new investors gained access.
While Boyu could have raised substantially more money, a source close to the fund had previously told Debtwire that it would be unlikely to raise more than around USD 2bn for investment, as it did not feel the need for further operational expansion.
Boyu’s third US dollar fund follows swiftly from a USD 1.5bn fund closed early in 2014. Boyu has also raised two separate local-currency Chinese yuan funds to enable it to do onshore deals, as well as secondary buyouts from Chinese CNY funds, and also to be involved in going private bids which require local-currency financing, as reported.
While LPs have become wary of investing in firms with princeling ties, due to the ongoing crackdown in China by Xi Jinping, those same investors regard Boyu as among the best-connected firms in China, with a strong bench of professionals, and it has deployed swiftly from its last fund.
Established in Hong Kong in 2010, Boyu’s partners include Alvin Jiang, Sean Tong, a top China dealmaker and former senior executive at General Atlantic in the US and Providence Equity Partners in Hong Kong, Mary Ma, a former CFO at Lenovo Group and former senior executive at TPG Capital, and Louis Cheung, the former executive director of Ping An Insurance Group of China.
The firm’s investments in China include the logistics space, through a 2014 Investment into Singapore-listed warehouse company Global Logistic Properties, travel and tourism, through a 2013 investment into Tongcheng Network Technology, duty free retail, through Sunrise Duty Free, distressed debt through a pre-IPO investment in China Cinda Asset Management, and food production through a 2014 consortium investment in COFCO Meat alongside KKR & Co, Baring Private Equity Asia, and Hopu Investments.
Boyu is also among a consortium that took formerly New York-listed medical devices WuXi PharmaTech private at a valuation of around USD 3.2bn. The buyout consortium includes the company founder, Ge Li, Boyu, Temasek, an investment unit of Ping An, Hillhouse Capital, and Ally Bridge. The buyout was backed by an underwritten loan of USD 1.1bn from Shanghai Pudong Development Bank and Ping An Bank.
Boyu’s first USD fund raised USD 1bn in 2011, with investors including Singapore sovereign wealth fund Temasek, an investment fund of Li Ka-shing, and funds of George Soros, as reported.