HK private equity firm to launch China's first ultra-long fund

HONG KONG, June 6 Fri Jun 6, 2014 6:25am EDT

HONG KONG, June 6 (Reuters) - A private equity firm which has made huge profits off investments in China's technology sector is launching a fund unprecedented in the country for its ultra-long horizon.

Hong Kong-based Capital Today, an early investor in e-commerce company JD.com Inc and helmed by one of China's top dealmakers, aims to raise a $400 million "evergreen" fund, according to a term sheet seen by Reuters on Friday.

The fund's long-term structure is typically shunned by private-equity investors, because the global industry is built around investing, and getting returns, over much shorter periods.

Capital Today founder and former Baring Private Equity senior executive Kathy Xu declined to comment on the new fund, citing legal restrictions in an emailed response to Reuters questions.

Private equity firms traditionally make investments using 10-year funds, and sell them after three to five years. Any gains made are returned to investors in the fund.

But Internet companies such as Alibaba Group Holding Ltd, Baidu Inc and Tencent Holdings Ltd continued to grow strongly long after private equity firms sold their stakes.

An evergreen fund would allow Capital Today to hold stakes in emerging Chinese companies for far longer than is usual, enabling the firm to share in future profits, according to an investor familiar with plans for the new fund.

The new fund, Capital Today Evergreen Fund, will charge a regular 2 percent management fee, but will have a 28-year life, according to the term sheet. That is likely to appeal to investors who are comfortable investing over a long period, such as U.S. endowment funds or family offices.

Evergreen funds are highly unusual in private equity. In the United States, General Atlantic is among the larger firms that do have them.

With evergreen funds, private equity firms are not pressured to sell assets - sometimes at a discount - to meet the demands of a shorter investment period, and do not have to regularly raise new capital since the fund can be topped up from the sale of assets.

Investors in private equity funds typically plan investment strategies around 10-year cycles, investing and receiving returns over short periods. That means the pool of capital for evergreen funds is small.

EXS Capital is among private equity firms that have tried to raise an evergreen fund in Asia but without success, EXS Chief Executive Eric Sohlberg told Reuters.

Capital Today's evergreen fund comes off the back of a series of lucrative investments. Bets on Chinese technology companies in particular have earned big payouts for the firm's investors, which include International Finance Corp and CDC Group PLC, according to Thomson Reuters data.

The new fund is widely believed to be the first of its kind in China, and comes with the firm sitting on a windfall from its stake in JD.com.

Xu put $17 million into JD.com, then known as 360buy, over 2007 and 2008 from the Capital Today China Growth Fund L.P., according to Thomson Reuters data. That made Capital Today the first institutional stakeholder of JD.com, which recently raised $1.78 billion in a U.S. listing.

The JD.com stake is returning over 100 times the amount of money put in. At the same time, the China Growth Fund is returning over 8 times the money of its investors, placing the fund among the most successful China private equity funds ever, according to an investor.

Other Capital Today interests include web-based broadcaster China Central Television, video sharing site Tudou.com and logistics and distribution company Shandong Rongqing Logistics Co Ltd, according to Thomson Reuters data. (Editing by Christopher Cushing)

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