Harvard Endowment debate shows struggle of PE funds in China


(Bloomberg) – China-focused private equity firms are struggling to secure new funds, hit by heightened skepticism among U.S. pension funds and endowments about growing political and market risks in China’s biggest economy. Asia.

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In a sign of a potential setback, Harvard University’s endowment is considering cutting its investments in China, according to people familiar with the matter, who asked not to be named to discuss private information. A pension fund for Pennsylvania state employees has not committed new funds to Chinese private equity funds in the past 12 months, while Florida’s retirement system has halted new investments in China as he assessed the risks.

Such reluctance means U.S. dollar-denominated funds that invest in China raised $1.4 billion in the first quarter, the lowest amount for the same period since 2018 and a third consecutive quarter of declines, according to the investment firm. Preqin search. The decline affects even the most prominent Chinese names. The fund of former Goldman Sachs Group Inc. rainmaker Fred Hu is still $500 million to $1 billion short of its peak increase with time running out. Companies in previous years had little difficulty reaching the so-called hard cap.

The investment landscape in China is in turmoil, with some top investors fleeing the country after President Xi Jinping unleashed a massive crackdown on the private sector, curbing tech giants such as Tencent Holdings Ltd. . and Alibaba Group Holding Ltd. The United States has also imposed sanctions on Chinese companies and delisted some companies from New York markets. Now, close relations between China and Russia and persistent travel restrictions in mainland China and Hong Kong add to the risks.

As Chinese stocks tumble and IPOs stagnate, outflows from private equity firms have been subdued. Industry watchers say a shake-up is coming after years of skyrocketing growth.

The number of active private equity managers in China in 2019-21 reached around 1,200, up 25% from the previous three-year period, according to Bain & Co. Newer, smaller funds with no track record Solids are now the hardest hit, and the sector is set for consolidation if caution continues, the people said.

Even established names take longer to attract investors.

Hu’s Primavera Capital group was able to hit its $4 billion target, but it has just two months left to reach its cap of $4.5 billion to $5 billion, the sources said. The company has yet to decide whether it will need an extension before its deadline expires at the end of May, they said.

Founded by Goldman Sachs Group Inc. alumni Frank Tang, FountainVest Partners is also below its hard cap target after starting fundraising in late 2020, the people said.

A Primavera spokesperson declined to comment. Text messages and emails to Tang from FountainVest went unanswered.

“It’s clear that everything happening in the world, including the US-China relationship, has had an impact on the financial markets as a whole,” Hu said in an interview in March. “We have really sophisticated, high-quality blue-chip global investors” and that helps “drown out the noise and the uncertainty,” he said.

A successful fundraiser typically takes less than 18 months to exceed the hard cap – the maximum size stipulated in limited partnership agreements.


Thomas Derr, spokesman for Pennsylvania’s $40 billion state employee retirement system, said he hadn’t debated or taken a position on cutting investment in China. It has around 2% exposure to China.

Harvard declined to provide information on its share of investments in China.

Given the uncertainties in emerging markets, the Florida State Board of Directors has, for the time being, stopped funding new investment strategies in China as it continues to assess the risks involved. ensue, according to Kent Perez, Deputy Executive Director. The pension fund made this known at a public meeting in March, outlining actions taken following an investigation into its holdings in China earlier in 2022, Perez said.

The fund had less than 3% of its $253 billion in assets in January, which includes the Florida Retirement System, invested in China.

The Washington State Investment Board, which invests 3.5% of its $156 billion in Chinese assets, conducts periodic risk analysis, including China, as geopolitical issues receive significant attention. Staff will present their findings later this month, said Chris Phillips, a spokesman. “Emerging markets are often an integral part of the risk report,” Phillips said. “We spend a lot of time analyzing risk, but that rarely translates into a short-term change in investment strategy.”

The reduced block allocations come after many US pension funds were “tapped” in terms of capital capacity for new managers, one of the people said.

Still, some endowments and family office funds may still want to over-allocate to China, seeking healthcare-focused venture capital managers because of their outsized returns, the people said.

Michigan State University is not changing its strategy when it comes to China, which accounts for about 2% of its $4 billion endowment. He invested $50 million in a long-short hedge fund in China at the end of 2021.

“We’re not looking to take anything out,” said Phil Zecher, chief investment officer. “We are always concerned about governance issues wherever we invest, whether it is corporate governance in the United States or in the countries to which we are exposed.”

But alternative investors are shifting their preferences to other Asian markets, at least in the short term. A Preqin survey showed that half of 350 respondents saw Southeast Asia as the best opportunity within emerging markets at the end of last year, up from 37% a year earlier. The change reflects some investors’ delay in planned capital commitments in China, the research firm said.

Many global investors in 2021 have focused on “re-ups” – allocating to the same manager in previous rounds, and focusing on those with a geographic spread in Asia rather than a country-specific mandate, said the people. Blackstone Inc. raised $6.4 billion in Asia in January, with nearly 100% of investors in its first fund participating in the second capital pool.

So-called exits, or when private equity firms take out their investments, fell in the second half of last year to 30% of volume in the first six months of 2021, according to Bain. Only 35% of Chinese investment managers were confident in the country’s outlook, a sharply divergent view that could signal a fundamental shift in China’s performance in 2022, Bain said. This compares to over 60% in Asia as a whole.

(Adds a comment from Hu to the 11th paragraph. A previous version fixed the output decline in the last paragraph.)

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