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China’s Buhuo completes yuan restructuring as it eyes international capital

Buhuo is the latest Chinese GP using secondaries to raise capital from what is perceived to be a more stable LP base than those at home.

Buhuo Ventures has completed a yuan-to-dollar restructuring to help raise its first USD-denominated venture capital fund, affiliate title Private Equity International has learned.

The Beijing-headquartered firm transferred partial stakes in four assets from Buhuo Ventures RMB Fund I, a 500 million yuan ($77 million; €64 million) 2017-vintage vehicle, into Buhuo Ventures USD Fund I, founding partner Jay Li told PEI. The assets included Chinese equipment rental company Zhongneng United.

The transaction was worth more than $100 million, of which around two-thirds was net asset value and the remainder was follow-on capital for new investments, Li said. Assets traded at a slight or no discount, or at a premium to their individual net asset values.

Buhuo’s transaction was backed by two US-based funds of funds and one Asia-based fund of funds, Li said, declining to name them. Two LPs from RMB Fund I also participated in the new fund, which has a six-year term.

USD Fund I used some of the follow-on capital to acquire new shares in Guoquan, a Chinese hot pot ingredients supplier in which Buhuo had invested about 350 million yuan via its RMB Fund II – an 800 million yuan 2019-vintage – and special purpose vehicles. The business has risen from a 300 million yuan valuation to nearly $2 billion in about 18 months.

USD Fund I had delivered a 1.5x gross multiple of invested capital at final close.

“Buhuo’s goal is to become a dual currency management firm as USD LPs are more stable, and more financially driven investors,” Li said. “Also, most of our deals are JV structures, which enables them to raise money from both RMB and USD funds, so that’s an advantage.”

The transaction was advised by Chinese fund placement business AlphaLoop and took approximately four months.

Li, a former partner of Chinese VC firm ZhenFund, launched Buhuo in 2017 alongside Ray Yi, a former investment team founder at CICC Alpha, the directs platform of CICC. The firm invests from Pre-A funding rounds to growth stage into Chinese supply chain businesses. Its name, Buhuo, is a reference to the Analects of Confucius and roughly translates to the attainment of an unperturbed mind after the age of 40.

The firm’s portfolio includes Chinese autoparts supplier CarZone; health food brand Sharkfit; and internet of things business EasyLinkin. It has deployed about 30 percent of RMB Fund II, Li added.

Yuan restructurings are gathering momentum as China’s maturing private equity market looks to tap international capital. Last year saw TR Capital back the transfer of seven assets out of a yuan-denominated Kinzon Capital fund into a dollar-denominated vehicle, as reported by Secondaries Investor. In September, Secondaries Investor reported that HarbourVest Partners and LGT Capital Partners had backed a $600 million deal involving Beijing-based IDG Capital.

These transactions provide domestic LPs with much-needed liquidity, an issue Chinese private equity funds have struggled with historically. Such vehicles tend to have four-to-five-year terms, so can be left with significant amounts of unrealised capital at the end of their lives, PEI reported last year.

“There are people that seek liquidity which they didn’t get in the promised horizon and want to use that money elsewhere,” Rainer Ender, head of private equity at Schroder Adveq, said at the time. “So, the secondary market has special appeal, and there’s not many buyers on the RMB side.”