Goldman’s Fang to lead Chinese-sponsored PE fund

Goldman Sachs Gao Hua Securities chairman Fang Fenglei will take the helm of China-Singapore Hi-tech Industrial Investment Fund, a government-backed fund approved earlier this month. It makes Fenglei the first high profile manager at one of several domestic private equity funds recently approved by the Chinese government.

“Fang is a very interesting choice, because he is not really a private equity investor,” a limited partner active in the region, but unaffiliated with the funds, told PEO. “He has great relationships, but he doesn’t have the track record, so we will have to wait and see.”

Fang has a reputation as a rainmaker in China. In his youth he joined the Red Guard, a radical anti-bourgeois student group formed during the Cultural Revolution, then went on to run two state-owned enterprises, Central China International Trading Company and Henan Food & Oil Import-Export Company. In 1995 he launched China’s first investment bank, China International Capital Corp. In 2004 Goldman loaned Fang $100 million to set up Gao Hua Securitites, and shortly thereafter the two firms formed a partnership.

The new state-sponsored private equity fund will target enterprises in the Yangtze delta region, especially in Suzhou Industrial Park (SIP), with a particular emphasis on IT and biomedical companies, according to the park’s website. Investments will be selected “in accordance with the national industrial policies and requirements of SIP structural reform”.
PEO reported in August that Fang planned to raise a RMB6 billion ($811 million; €553 million) private equity fund. But rather than raise his own fund, he has partnered with state-backed Suzhou Ventures Group to manage the RMB5 billion China-Singapore Hi-tech Industrial Investment Fund. He has said managing the fund will not cause him to step down from his post at Gao Hua, a 3-year old joint venture with Goldman Sachs.

The growth of China’s domestic private equity industry presents the possibility that foreign vehicles could face stiff competition on deals in the future. Local fund managers would have a formidable advantage in terms of both relationships and legal treatment. In Fang’s case, he could potentially compete with his US employer on deals.

But all of the domestic funds launched so far have mandates that resemble Japanese industrial policy during the 1990s more than traditional private equity. Although the government has made few public statements about the funds, their primary objective seems to be investing government capital in sectors of strategic importance, particularly in state-owned enterprises, according to the LP.

China approved its first locally managed and sponsored private equity fund, the Bohai Industrial Development Fund, in 2006. The RMB20 million fund was charged with providing funding for companies struggling to access bank loans in the Binhai New Area of northern port city Tianjin. Earlier this year China also approved several regionally focussed funds targeting coal and nuclear power investments.

These funds are also closed to foreign limited partners, according to the LP, so they will not compete with offshore funds for sponsors. The China-Singapore fund’s main backer will be the Suzhou government, possibly along with local insurance companies and banks.

Nonetheless, given the lack of disclosure about these Chinese funds, it is difficult to say how they will interact with foreign-backed funds. This is the first time local governments have invested in private equity funds, so it is unclear how consistent they will be as backers, the LP said.