China-ASEAN fund to target up to $3bn

The $1bn China-ASEAN Investment and Cooperation Fund intends to resume fundraising for an additional $1bn to $3bn, despite a poor fundraising environment.

The China-ASEAN Investment and Cooperation Fund is planning to target an additional $1 to $3 billion to increase the size of Fund I, with fundraising efforts beginning in the second half, according to Yao Li, the fund’s chief executive.

China-ASEAN is an infrastructure and private equity fund founded by the Chinese government in 2009 to invest in the ASEAN region. It reached the fund's first phase target of $1 billion in mid-2012 and has already deployed half its capital, Li told Private Equity International, Infrastructure Investor's sister publication. China-ASEAN hopes to raise a total of $10 billion in several phases over ten years.

“This is almost like a test for China’s outbound investment,” Li said. Around 80 percent of the fund's deals are in the ASEAN region, while only 20 percent are in China.

Despite the harsh fundraising climate in Asia – the capital raised for Asia dropped 30 percent in 2012, according to PEI’s Research & Analytics division – Li says he is confident that the fund will be able to attract international LPs with their investment story.

“Our goal is to combine commercial success and social impact, [focusing] especially on sustainable growth,” Li said. LPs are primarily focused on returns, but he says a number that he has talked to are also interested in the fund’s social impact story.

China-ASEAN’s first fundraising round was primarily backed by Chinese LPs, including the China Investment Corporation, the Export-Import Bank of China and other state-owned enterprises. The International Finance Corporation, the private arm of the World Bank, was the fund’s only international investor, and it committed $100 million to the fund, according to PEI’s Research & Analytics division.

One of the most common questions international LPs ask about China-ASEAN is about its relationship with the Chinese government. Li explained that while the government endorses its mission, it has no influence on the fund’s operations.

One challenge may be China-ASEAN's large fund size, which is not typical for funds with a social impact thesis, according to Niklas Amundsson, partner at MVision Asia. Most Western LPs interested in social impact investing primarily seek smaller funds, he said.

Li said that China-ASEAN does not shy away from small deals and the fund's average investment size is $40 million, which is crucial for finding projects in developing markets.

“Our strategy is not rigid – we don’t only look at deals that give the highest return and thus kill a lot of deals,” Li said.

He added that China-ASEAN has an IRR just below 20 percent, and one partial exit gave a 30 percent IRR. The fund hopes to have one more exit and two to four more investments this quarter before it begins fundraising again, Li said.