(Bloomberg) — One of China’s most high-profile bankers Bao Fan is ramping up private investments in China, even as global funds reel from government crackdowns targeting everything from tech to education.
China Renaissance Holdings Ltd., which made its name in investment banking, is pouring more resources in private equity, betting that a long-term commitment in the country will continue to pay off. To address the shifting tides, the firm is focusing on companies in health care, consumer brands and enterprise technology, founder Bao said.
“If you take China as a corporation, the challenge, problems the company has been facing in the past 40 years versus the challenges that it’s facing for the next 40 years are very different,” Bao said in an interview. “It’s a paradigm shift; what it really requires is new thinking.”
China Renaissance, which managed more than $8.8 billion of assets as of December, is planning a first close of its new dollar fund of at least $1 billion as early as September, according to people familiar with the matter. It’s also planning to raise another yuan fund. Investors hail mostly from Southeast Asia, the Middle East or wealthy individuals in China, the people said, asking not to be identified because the information is private.
If Bao pulls off his plans, his company will be one of the few China-focused investment vehicles completing a funding round this year, amid continued Covid-19 disruptions, U.S.-China tensions, an economic slowdown and China’s recent regulatory crackdowns. The firm said it was in the process of raising money, declining to comment further.
Bao, a well-connected financier known for being outspoken, said he’s taken a personal interest in the private equity arm, spending most of his time unearthing and working with China’s next generation of founders.
“I’m a deals guy, I enjoy working on deals with these top entrepreneurs,” said Bao, 50, adding that he foresees three pillars for China Renaissance’s revenue contribution in the future: private equity, investment banking and wealth management. All three are built on the premise of serving China’s top rainmakers.
The investment business has grown in importance, accounting for 50% of revenue last year. Most of the money is being managed by its flagship Huaxing Growth Capital Fund, which includes three U.S. dollar and three yuan funds. The company also operates a health care fund.
China Renaissance’s private equity funds have generated internal rates of return of 45% as of December, the firm said. It’s invested in 122 companies, with 17 surpassing $10 billion in valuation as of March and nine worth more than $30 billion. Among its portfolio, 28 companies have gone public as of March.
Bao’s mandate for his hundred-strong staff in the investment division — accounting for about one eighth of the company’s total — is that they focus on growth stage enterprises. He doesn’t swing his bat often, only backing about 10 companies a year. But when he does, his firm takes a lead role with a big cheque, helping the founders with capital markets planning, senior recruiting and strategy development.
“One of the qualities that we look at when we invest into these companies is the entrepreneur’s ability to evolve,” said Bao. “In addition to technology innovation trends or structural changes, social change is also very important,” he said, referring to the shifting environment in China.
While China Renaissance is known for its portfolio of consumer-facing internet platforms including Kuaishou Technology, KE Holdings Inc., Meituan and Didi Global Inc., the company has been backing startups in sectors now deemed less susceptible to government scrutiny.
For its latest Huaxing Growth Capital Fund III, it already scaled back on consumer internet investments and had no exposure to edtech related to core curriculum-focused tutoring, according to Bao.
China has told the nation’s curriculum-focused tutoring companies to go non-profit, banning them from taking foreign capital. Regulators suspended ride-hailing giant Didi from app stores. Authorities are also placing greater scrutiny on everything from e-commerce to short videos and food delivery, as President Xi Jinping tames the private sector to tackle social inequity.
“Markets have been rattled by recent events, but I do think for people who have studied policy directions in China carefully enough this shouldn’t come as a surprise,” said Bao.
Bao is looking to back companies that provide smart industrial technology that can transform supply chains, contracts and transactions. His company is also investing in driverless technology, having already bought stakes in Nio Inc. and Li Auto Inc. In health care, China Renaissance is sifting through companies that provide early diagnostics, screening and monitoring devices.
Bao’s conviction in China Inc. is rooted in reasoning that new opportunities will emerge as the country tackles issues beyond economic efficiency, such as social inequity, sustainable growth and environmental problems.
While most of the new generation of startups are based in China, many still hold overseas ambitions and have been expanding in Southeast Asia and Japan.
“We’re in different times. China today versus China 1980s is vastly different both internally and externally, so as a country, as a nation, we have different issues that we have to address,” said Bao. “It is essential as a private equity investor to understand and anticipate these profound fundamental changes.”
(Updates with number of companies valued at more than $30 billion in the ninth paragraph)
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