In this episode of China Money Podcast, guest Monte Brem, CEO of private equity firm StepStone Group, shares his firm's investments in China and how offshore investors can protect themselves when investing with local Chinese managers.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: You have been relocated to China for more than two years, and StepStone’s office in Beijing opened about two years ago. How have your businesses in China grown during this time?
A: We’ve increased the amount of capital we invest into China by a huge amount. We used to invest around $25 to $30 million into Chinese managers and deals. Now we are investing around $300 to $500 million a year. So on the investment side, there has been huge growth.
Q: So where do you see attractive opportunities right now?
A: Almost all the money we invest into China is somehow connected to the consumer market. (Because) a lot of markets like mining and resources are very difficult. Most of them are not accessible to foreign investors anyway. The consumer markets tend to be more open and less politically oriented.
We’ve invested in a firm called QiMing Venture Partners, which is a private equity firm that does both consumer and health care investments. The other one is CDH Private Equity that has a focus on consumers. We’ve also done some nontraditional investments as well, such as Citic Capital, which does SOE (State-Owned-Enterprise) buyouts.
Q: What kind of return are you targeting?
A: Most investments are targeting return of 30 percent IRR as China is such a growth oriented market. Globally, the target is in the range of 20 percent on a growth basis.
Q: Do you mostly invest in overseas funds or Chinese locally run USD funds?
A: As a firm, we tend to favor local managers, particularly in China, so those managers with local approach and have a local team.
When we invest in local managers, one of the challenges we face is that we can’t invest in RMB funds because we are not a local Chinese entity.
So today we are investing in offshore USD funds of Chinese managers. Most of these managers manage both a USD fund and a RMB fund.
Q: There may be potential conflict of interests when a manager invests both a USD and a RMB fund. What’s your observation on how managers handle this?
A: Overall, it has been a major headache. It’s one of the things that makes the Chinese market more complicated and less appealing.
But those managers who are committed to their offshore businesses have gotten very good in balancing the conflicts and put together structures that protect the offshore investors.
I think the most important thing is that you have to find the managers who really value the offshore part of their strategy. That’s the main protection you have as many managers understand that foreign capital tends to be more institutional and long-term.
About Monte Brem:
Monte Brem is the CEO and founding partner at StepStone Group, a San Diego-headquartered private equity firm overseeing more than $53 billion of private equity allocations. Previously, Brem was the president of Pacific Corporate Group and a lawyer with Gibson Dunn & Crutcher LLP. He holds a JD and MBA degree from the University of San Diego.