Exclusive: Princeling-backed firm eyes $500 million China buyout fund - sources

Nepoch Capital, a new private equity firm founded by the son of a former member of China's politburo, has launched the first 'princeling' fundraising since the new government took power last month vowing to clamp down on cronyism and nepotism.

China's so-called princelings, the sons and daughters of the country's elite, have a long association with private equity funds, and their investments - and sometimes bumper profits from a swift exit from lucrative initial public offerings - have drawn accusations of favoritism and corruption.

The view that princelings have the inside track on investments through their families' political connections is often what attracts investors, industry executives say.

He Jintao, the son of He Guoqiang, who used to be in charge of Communist Party discipline, has quickly raised $200 million from investors despite a tough fundraising climate, and is expected to reach a target of as much as $500 million by the mid-year, two people with knowledge of the plans told Reuters.

The success of He's fundraising may put Beijing in an awkward position, so soon after Xi Jingping took over as China's new president pledging to tackle widespread corruption within government. The behavior and wealth of the nation's princelings came to symbolize that corruption.

Four of the best-known funds with a history of high-level princeling involvement have raised a combined $10.4 billion for investments, according to Thomson Reuters and Preqin data.

Their ranks include Liu Lefei, CEO of CITIC Private Equity Funds Management and the son of politburo standing committee member Liu Yunshan; Winston Wen, co-founder of New Horizon Capital and the son of former premier Wen Jiabao; and Jiang Mianheng, a board member at New Margin Venture Capital in the 1990s and son of former China President Jiang Zemin.

INSIDE TRACK

Despite Xi's drive for more austere government and a clean-up of official excesses such as lavish banquets that fuelled social resentment, the Nepoch launch shows that princelings are still pursuing business interests, attracting investors through their political ties.

"It's getting harder to make money in Asia, and you need someone with an inside track," said one investor in China private equity funds, explaining the strong interest in Nepoch.

Skeptics question whether it's realistic to expect the government to root out endemic Communist Party favors. They see princelings remaining active, though maybe less in plain view.

"They will eventually find some way to find more distant relatives or find more subtle ways to control these economic resources," said Ho-fung Hung, associate professor of sociology at Johns Hopkins University and author of "China and the Transformation of Global Capitalism".

Hung believes the opaque nature of private equity makes it more of a safe haven for princelings. "If you say Wen Jiabao's family has connections to the gem and diamond industry, people immediately understand what that is and how it makes money," he told Reuters in a telephone interview. "Most people don't understand how private equity works. That's why it's under the radar and people's reaction won't be that strong."

Even if Nepoch's founder operates entirely outside his father's circle, the connection between the fund and He Guoqiang's former position as head of China's Central Commission for Discipline Inspection - responsible for stamping out corruption among government officials - is unavoidable.

"In this market, everyone is looking for distinguishing factors. You could say this distinguishes the fund," said the private equity fund investor.

RESTRICTED INVESTMENT

Investors in private equity funds usually meet the fund's founders to discuss investment strategies before they commit money. At Nepoch, investors only get to meet He Jintao after they have agreed to invest, said one of the people familiar with the matter.

Nepoch has already made two investments, including one in the technology, media and telecommunications sector, which is a restricted area for foreign investors, said the people with knowledge of the plans. They declined to name the investments.

Duncan Zheng, a former principal at European buyout firm Triton Partners, is a co-founder with He, the people said, declining to be identified as they are not authorized to talk to the media.

Nepoch, He and Zheng did not respond to phone calls and messages seeking comment for this article.

Returns from China private equity have proved disappointing, and fundraising more than halved last year to $23.4 billion, according to Asia Venture Capital Journal data.

(Additional reporting by Megan Zhao; Editing by Michael Flaherty and Ian Geoghegan)