Founding partner Alberto Forchielli speaks to Amy King about expectations for the firm’s current fundraise, why Germany is the only option left for Chinese industrial investment and Chinese GPs’ lack of international presence.
Last week, Sino-European investor Mandarin Capital Partners (MCP) announced the opening of a new office in Frankfurt ahead of a first close of its latest fund. Having traditionally focused on Italian and Chinese companies, the GP’s announcement marks a change in strategy.
Amy King: What stage are you at in terms of fundraising for the second fund?
Alberto Forchielli: We began fundraising in Italy first where, in spite of the crisis, we are going to raise as much as we did for Fund I. So Italy was very easy, and we are going to do a first close with just Italian money and possibly some German money by the end of June on €200-250m.
We are just shuffling the papers now, getting signatures and so on. We need the money quickly to make a couple of investments that we could not make with Fund I. We hired two placement agents in London (Lancea and Wedge), and they are taking care of everything that is outside of Italy and China, which we can take care of ourselves.
But in the meantime, Germany has opened up very quickly, so we are going to have a few landmark German investors in the fund. Some of them might even come into the first closing. We have been pleasantly surprised by the German market.
We are really only now starting fundraising in China properly, because there have been big changes in China, which are only coming to an end now. First in September, we had the new Secretary of the Party, who became the president in March at the National People’s Congress. And then we had a new government and all the heads of the states of enterprise changed. Also, the deputy mayor of Shanghai is expected to be appointed chairman of China Investment Corporation (CIC) [the Chinese sovereign wealth fund]. There has been an incredible chair dance.
What is the final target for the fund?
The final target is €500m, but I always said I want to raise a €1bn fund. I always felt our fundraising potential is very big, because none of the large Chinese private equity investors have offices overseas (not counting Hong Kong, where they are all present). Not one. CIC only has an office in Toronto.
The two big private equity funds in China, Hony and CVH, say they do outbound investments but they have no office whatsoever outside China. These guys are investing huge amounts of money with no office.
Why is that?
It’s cultural. The Chinese find it difficult to get into the local context, so then they cannot go after the good deals. If you want to go after mid-market plays, you have to be part of the industrial, commercial and civil society. The government-to-government approach does not work. So you need to have a presence, but they don’t.
The really good staff are able to integrate, but they are hard to find and then they want really good money and that creates imbalances in the payment structure. So the decision to set up an office, hire local people and integrate them within a Chinese structure is complicated for the Chinese still. The Americans and British find it much easier.
The new fund marks a change in investment strategy. What is the rationale behind the widened focus?
We have always focused on mid-caps, we only invest in high-tech medium-sized industrial companies. And we started as a European fund in 2007, but we got so much business in northern Italy that we always stuck to doing the deals that came our way in Italy. We had business leads for Germany, the Netherlands and Denmark but it was too risky and less convenient; most deals in Italy are within a three kilometre radius of Milan. So it was very easy.
And that’s why we did very well; we could invest most of our fund in the 2007 vintage and we expect multiples of more than 2.5x. But I always felt that Fund II should go up to Germany.
Opening the Frankfurt office is the beginning and the end of a year-long exercise; I moved to Munich almost a year ago. We had to set up the legal structure and search for a partner, which took a very long time, so this was a carefully-crafted strategy.
The reason? Germany as a market for mid-caps is twice the size of Italy. It is now the only market left for Chinese industrial companies looking outbound. I’m talking about industrial companies only.
For the Chinese to go after high-tech businesses, they have three chances. It’s Europe, Japan or North America. Now Japan is closed. It has always been difficult but now it is closed. The US, for technology assets, is closed. There is a growing feeling of Cold War between the US and China, so the Chinese don’t have easy access to precious tech assets in the States.
Having said Europe is the only market they can go to, in fact in Europe 90% of their targets are in the corridor that goes from Florence to Hamburg. So that is north of Italy, Switzerland, Austria, Germany and then it touches upon the Netherlands. Because all the eastern Europe industrial companies have been wiped out, there are no brands left, and eastern European companies are usually subsidiaries of western European ones.
The Germans have never thought of building up an outbound fund but we already have 5-6 years’ successful experience. We had to move to Germany before the Germans thought of doing the fund themselves and come down to Italy.
We were lucky in the sense that Germany opened to Chinese investment much later than in Italy, which was in 2005-2006. Germany only opened in 2010-2011 with the eurocrisis, when they too had to scramble for investment, especially for their mid-size companies. So China became more relevant. Being a historically weaker country with a much weaker economy we had some advantage in welcoming and warming up to the concept of greeting foreign industrial investment.