Huagai Capital, a China-focused private equity firm that invests in healthcare, TMT, and culture sectors, has restructured its healthcare investments into an 800-million-yuan ($124.4 million) continuation fund.
Shenzhen Capital Group, a Chinese investment conglomerate with about 412.2 billion yuan ($64.1 billion) in total assets under management (AUM), co-launched the fund as its biggest limited partner (LP). Hong Kong-based TR Capital, which specialises in secondary PE investments in the Asia-Pacific region, was another cornerstone LP.
The transaction saw Beijing-based Huagai restructure six healthcare investments from three of its existing funds into the new RMB-denominated continuation fund – a vehicle built to take on the portfolio investments of a fund that is nearing the end of its lifespan. By setting up a continuation fund, LPs are given the option to cash out or to stay invested by recommitting to the new vehicle.
Huagai, founded in 2012 and now manages over 15 billion yuan ($2.3 billion), has joined a growing list of PE players to set up continuation funds, also known as secondary funds, to hold on to their quality investments reeling from the impact of the COVID-19 pandemic. Earlier this month, China’s Legend Capital also announced the close of its healthcare continuation fund, LC Healthcare Continued Fund I, at $270 million.
Globally, the trend of secondary funds is expected to gain more popularity as GPs demand a longer runway amid virus-induced market dislocations. Although the number of secondary funds closed in 2020 was down to 29 compared with 44 in 2019, a record $96.6 billion in new secondary funds was amassed last year, according to PitchBook data.
As the only international investor in the deal, TR Capital said that it made the investment through its Fund IV using Qualified Foreign Limited Partner (QFLP), which allows qualified foreign institutions to make PE investments in China. The firm announced in February the final close of its Fund IV at an expanded size of $350 million, after seeing “significant oversubscription” and “an ever-increasing pipeline” of secondary opportunities in Asia, particularly in China.
In a statement, TR Capital said that the transaction is “highly innovative in its structuring,” as it has introduced a new concept in the secondary market, i.e., hybrid RMB and USD QFLP secondaries.
“We forecast strong demand for this new innovative structure in China, and see this as a better way to invest in fast-growing and innovative companies in the digital consumer, technology and healthcare sectors,” said TR Capital managing partner Frederic Azemard in the statement.
“The healthcare sector is a key focus area for TR Capital in China given its growth and innovation. We see an increasing number of leaders emerging amongst biopharmaceutical, medical devices and in particular oncology companies,” he said.