Date: 24 Mar 2009
By: George Chen
HONG KONG, March 24 (Reuters) – Private equity firm FountainVest, backed by Singapore state investor Temasek, will focus on Chinese consumer demand, urbanization and sustainable development as it puts its first $1 billion fund to work.
FountainVest will look to take minority stakes in privately held firms that will benefit from Beijing’s moves to boost domestic consumption, Chief Executive Frank Tang told the Reuters Private Equity and Hedge Funds Summit.
“A lot of structural changes are happening in China and that is going to bring the growth. Many people there still need to take their first shower, and upgrades are going to be driving the demand,” Tang said.
FountainVest Partners, whose top management team includes four former senior Temasek executives, raised its first nearly $1 billion fund in November and has done one deal, which Tang said was in an environment-related business.
Tang said his team is now looking for opportunities to invest in property firms targeting the mid-market in top-tier cities as it invests its fund over the next four to five years. He also said the firm likes retail-related opportunities targeting the country’s growing middle-class.
VALUATION IN QUESTION
FountainVest competes with global private equity heavyweights in China, such as Carlyle Group [CYL.UL] and Blackstone Group LP
Tang said Beijing and local governments welcome investments from private equity funds in the hope that they will create jobs.
China has lost tens of millions of jobs during the current downturn and is worried that rising unemployment poses threats to social stability.
But for big foreign buyouts in some sectors regarded by Beijing as strategically sensitive, it will still be hard to convince Chinese leaders to give approvals, said Tang, adding his firm will not focus on turnaround of state-owned enterprises.
Early last year, Carlyle finally walked away from three years of negotiations to buy Xugong, China’s top construction equipment maker, after running into bureaucratic obstacles.
Tang also noted that the valuations for deal making in China are still high for now, though the gap between what sellers demand and what buyers are willing to pay is narrowing fast.
“In the first half of 2008, the gap was the biggest. The key argument today is what the reasonable level is, given how volatile the external environment has been. So it is really difficult to pin down,” he said.
“But we don’t have to wait for the economy to recover before we put in the money as that would be too late,” said Tang, adding his team had been in active discussions with potential deal targets in the past few months.
Major investors in FountainVest include Singapore’s sovereign wealth fund Temasek Holdings Plc [TEM.UL], Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan.
Tang, a former senior managing director at Temasek, said competition for deals had decreased partly due to fewer rivals as some investment banks and hedge funds had left the stage as the global financial crisis worsened.
“This is the time private equity investors can play a role. The next two, three or four years will really be a golden period for us,” Tang said.