Interest in Asian markets - including China's - is rising, as several institutional investors make at least their second private equity commitments to the region.
Pension funds, including those of GTE Corp. and General Mills Inc., have moved beyond their first commitments to China, while endowments of the University of Michigan and University of Minnesota both signed up for their second private equity allocations to the region.
Having earlier this year committed $2 million to the Trust Co. of the West's China Automotive Fund for private equity investments, the $1 billion pension fund of General Mills, Minneapolis, is now considering investing in a second unnamed private equity fund targeted for China.
The $1 billion endowment of the University of Michigan, Ann Arbor, committed some $15 million to two vehicles, including the $85 million China Walden Venture Investments Ltd., a fund of the Asian arm of the Walden Group in San Francisco, and the $261 million Prudential Asia Private Equity Limited Partnership, sponsored by Prudential Asset Management Asia Ltd., Hong Kong.
The $900 million endowment of the University of Minnesota, Minneapolis, committed a total of $30 million to two such funds - the Asia Corporate Partners Fund and China Walden Venture Investments.
But these investments pale in comparison to the "four or five" private equity commitments of the $12 billion fund of GTE Corp., Stamford, Conn. According to John Carroll, president of GTE Investment Management Corp., the investments are for "various limited partnerships that invest privately in different parts of China's growing economy. While most are for China, one is not" exclusively - that being the AIG Asian Infrastructure Fund. To date, GTE's "strategic" private equity commitments to China are "in excess of $150 million," said Mr. Carroll.
In GTE's case, the strategy consists of having a "core program," which is the infrastructure fund, surrounded by smaller, more targeted investments in industrial and service companies. While returns on the infrastructure portion, expected in the 15% to 20% per year range, would be lower than the higher-risk, higher-return smaller investments, the infrastructure fund would make "large, visible joint venture investments with government assurances in terms of return," Mr. Carroll said.
Certainly, not all institutional investors are so ambitiously exploring direct investments in China or greater Asia. But those that are combing the territory cite a number of incentives: the high economic growth of the area; the desire to "get in on the ground floor" of this potential gold mine; the wish to diversify through different kinds of private equity arrangements; and the ability to do so amid the growing number of such funds available.
For instance, Ian Wilson, editor of the Micropal Emerging Market Fund Monitor, Glen Allen, Va., counts at least 30 closed-end direct investment funds for China and 35 to 40 Asian regional direct investment funds. That's up 20% to 30% from the level this time last year, he said.
Roger Paschke, treasurer of the University of Minnesota, said the endowment has designated up to 5% of total assets to direct investment in China and "China-related markets." To reach the target allocation - if indeed it does - the endowment expects to use "limited partnerships that will have a number of different ... focuses in the region." The intent is to get "substantial diversity in the kinds of partnerships we invest in," he said.
Evidently, this already has happened with the first two commitments. In the case of the China Walden Venture Investments Ltd. fund, where the endowment committed $10 million, the fund will target only Chinese companies and smaller Chinese infrastructure projects. Conversely, the Asia Corporate Partners Fund, to which the endowment has a $20 million commitment, expects to invest up to 50% in China and the remainder in other Asia-Pacific countries.
(The closed-end Asia Corporate Partners Fund is sponsored and managed by Lynch & Mayer Asia, the Asian investment unit of Lynch & Mayer Inc., New York, and Taiwan's China Development Corp. While formal marketing of the private equity fund is expected to begin this week, the fund already has $70 million in commitments; it is expected to be $250 million when it closes.)
Besides its $5 million allocation to the China Walden fund, the University of Michigan's endowment also committed $10 million to the Prudential Asia Private Equity Limited Partnership. Unlike Walden's China fund, the new Prudential vehicle will aim for stakes in small to midsized private enterprises throughout the Asia-Pacific region. The fund, which closed in July, already made its first investment, a $5 million minority interest in Austal Ships Pty. Ltd., based in Fremantle, Australia.
However, Asian private equity investing is clearly not for everyone.
Some consultants for pension funds and endowments claim none of their clients has made commitments, presumably because of the perceived risk involved, especially in China.
According to Adam Spector, director of the international investment group of SEI Corp., Wayne, Pa., only the largest investors so far are playing the private equity game in Asia; pension funds now making direct investments in emerging markets often do so in areas where the overall corporation sees a business interest, he said.
But for the bulk of institutional investors, the stock markets remain the preferred mode of international investing - perhaps especially in emerging markets.
The $2.7 billion endowment of Stanford University is not among those now seeking broader private stakes in Asia. Recently, the endowment did make its first "very modest first step into the Asian private equity markets," said Laurance R. Hoagland Jr., chief executive officer of Stanford Management Co., Menlo Park, Calif. The endowment was among 16 institutional investors joining the Prudential Asia Private Equity Limited Partnership.
Stanford likes the Prudential fund in part because of its diversification across countries and because it has investment staff "on the ground in Southeast Asia," said Mr. Hoagland. Nonetheless, the endowment "is moving cautiously in the private equity area. We might not be quick to make another" such investment "until we see how this one is going," Mr. Hoagland said.
