* First time that execs have spun out of a high-profile princeling fund
* Co-founder Yu Jianming to step back from managing partner role, but remain as investor in new funds
Executives at New Horizon Capital, a “princeling” private equity firm founded by the son of China’s former premier Wen Jiabao, are planning to spin out and raise funds of as much as $1 billion, according to three sources who have been approached about potentially backing the fund.
This is the first time that executives from such a high-profile Chinese princeling firm are known to have spun out into a separate fund structure, and comes after a lengthy legal process that saw the firm halt plans for a $1.5 billion fund, originally scheduled to launch in 2014 off the back of a successful investment in Alibaba Group.
Princelings are the sons and daughters of senior government officials in China, and New Horizon, founded in 2005 by Wen Yunsong, also known as Winston Wen, is among the best-known of China’s princeling private equity firms. The firm blazed a trail by raising and investing a series of ever-larger US dollar funds, but its deals drew sharp criticism and accusations of favouritism in China’s blogosphere. Wen officially stepped away from the business in 2009-2010, but has told investors he retains financial interests in the firm, said two of the sources.
The restructuring at New Horizon comes amid an ongoing crackdown on corruption under Xi Jinping’s administration, which has forced officials and their offspring to keep a low profile, and made investors wary of putting money into funds with princeling ties. While investors downplay the changes at New Horizon, they are widely discussed in private equity circles as investors try to gauge political sentiment for princeling firms in China.
“These disputes over partnership structures are common in private equity, and I see nothing unusual about the changes at New Horizon,” said one investor source. “They have good people in the firm who can take over, and Jianming (the firm’s co-founder) is staying involved, so it’s not like a full spinout,” the source added.
As part of the restructuring, investors have been told that Yu Jianming, the firm’s managing partner, who co-founded New Horizon with Wen and who is widely regarded as Wen’s right-hand man, is stepping away from day-to-day operations of the business and “retiring” to Singapore, but he will invest in the fund as a limited partner (LP) and sit on its investor committee.
New Horizon did not respond to questions related to the content of this story.
BULL RUN
Wen and Yu founded New Horizon in 2005, raising a $100 million debut fund with money from backers including Softbank and Singapore sovereign wealth fund Temasek, according to two sources with direct knowledge.
New Horizon’s launch coincided with the start of an I.P.O. bull run in China. GDP was growing at 11.3%, according to World Bank statistics, and authorities that had once viewed private equity firms as capitalist vulture funds were warming to the idea of private equity as a way to distribute capital to start-up companies, to fuel economic growth and long-term stability.
Access to deals, and high profits, attracted more capital for New Horizon from a wider range of investors. The first fund returned over 5 times its money at a time when China funds were typically returning 3 times, said one of the two sources with direct knowledge.
New Horizon raised and deployed a series of dollar funds with increasing speed, tapping investors keen to profit from China’s economic boom. On the strength of its first fund, the firm raised a second fund in 2007 of $500 million, while Fund III raised $750 million in 2009 and Fund IV raised $1.05 billion in 2011, despite a global downturn and increasingly tough fundraising climate.
Investors in New Horizon funds have also included Abu Dhabi Investment Authority, AlpInvest Partners, Deutsche Bank, JPMorgan, Notre Dame Endowment and Vanderbilt University Office of Investments, according to sources with knowledge of the funds.
The firm’s deals and profits — such as an unrealised investment return of 184.5 times from its pre-IPO investment in wind power company Sinovel Wind Group — drew increasing criticism in China’s blogosphere. An $80 million-equivalent pre-IPO investment into Sihuan Pharmaceuticals Holding Group ahead of a Hong Kong listing also attracted media coverage in late 2010, when the deal was overturned by Hong Kong’s securities regulator for violating its rules on timing of investments, and for offering a substantial discount to the IPO price that regular investors would pay.
Hong Kong Exchanges and Clearing subsequently issued an interim guidance note on pre-IPO investments.
Further fuelling the controversy, public documents show that New Horizon still netted a 60% profit from its roughly two-month investment in Sihuan Pharmaceuticals — or around $47 million — under the buyback agreement inserted in the investment documents.
After the Sihuan investment, New Horizon stated that Wen officially stepped away from the business in around 2009-2010 for a role at China Aerospace Science & Technology Corporation. He became chairman of state-owned China Satellite Communications Corp in 2012.
NEW STRUCTURE
Yu Jianming, like Winston Wen, a graduate of Northwestern University’s Kellogg School of Business, is expected to take responsibility for the continued running of New Horizon’s $750 million 2009 Fund III, and its $1.05 billion 2011 Fund IV, one of the first three sources approached on the funds said.
Under the new structure, two new funds, Redview Capital and Advantec will be created, both targeting $350 million, with hard caps at $500 million, meaning they will raise as much as $1 billion, said a second source.
The funds will target core sectors for private equity and venture capital investments in China. Redview will focus on investments in consumer, manufacturing and clean technology sectors, while Advantec will focus on technology and healthcare investments, said the second source.
The current plan is for Yu Jianming to sit on the investor committees (IC) of both funds, and to be a limited partner (LP) in each fund, the source added.
Existing executives at the firm include Jie Zhang, a managing director who has been with the firm since 2006, and Sun Zhuang, another managing director.
ALIBABA
New Horizon had originally planned to launch a fifth investment fund of up to $1.5 billion in late 2014, the sources said.
However, the fundraising was postponed, as executives at the firm entered a protracted legal process to deal with distribution of profits, ownership and running of existing funds, as well as the structure of the new funds, two of the three sources said.
New Horizon’s fifth fund was originally planned to capitalise on the firm’s investment in Alibaba Group, and was timed for launch immediately after the Chinese tech company’s blowout listing in New York in 2014.
Alibaba Group shares were hotly sought after long before the 2014 IPO listing. Private equity insiders knew that the firm’s dominance of China’s booming ecommerce market offered a potentially huge windfall profit from the planned IPO. They also knew that gaining access to Alibaba shares would show evidence of strong political and business connections in China.
Launching a fund immediately after the Alibaba IPO would encourage new and existing investors to join any new private equity fund.
New Horizon’s investment in Alibaba was made in 2012, when a consortium led by China sovereign wealth fund CIC helped to finance Alibaba’s $7.1 billion buyback of its own shares from Yahoo!.
The deal valued Alibaba at around $38 billion at the time.
Alibaba raised $21.8 billion through a New York listing in September 2014, valuing the firm at $167.6 billion. The company currently has a market value of around $194 billion.
On that market value, New Horizon’s paper profit from Alibaba currently would stand at around 5.1 times its initial investment.
NEW ORDER
Princelings have an established association with private equity investing in China, and the belief that princeling-linked funds have the political connections to gain access to the best deals — like Alibaba — remains attractive to investors, particularly as China’s economic growth stutters, and profits become harder to find.
The 2012 Alibaba deal saw two other firms with princeling co-founders gain access to shares: Boyu Capital and Nepoch Capital.
But Nepoch’s Alibaba investment illustrates both the risks and rewards of an investment strategy tied to princelings.
Nepoch’s co-founder, He Jintao, the son of former politburo member He Guoqiang, was removed in 2014 from the documents that Nepoch shows its investors, after he was detained in connection with an anti-corruption case against Song Lin, the former chairman of state-run conglomerate China Resources, two sources close to the situation said.
Nepoch had invested $100 million in the Alibaba deal in 2012, with $40 million of that total coming from co-investors Siguler Guff, JPMorgan and Neuberger Bermann, who were early investors in the fund, the sources said.
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, said the sources.
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.
Siguler Guff declined to comment. Neuberger Bermann and JPMorgan did not respond to requests for comment.
Nepoch eventually raised $300 million out of an initial target fund of $500 million, said the two sources close.
“The fund is already in profit for the co-investors, based on that one investment,” said one investor in the fund.
It is not clear, though, if Nepoch will be able to raise a second investment fund from investors.
by Stephen Aldred