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Exclusive: China investment guru Fang targets comeback with $2 billion Hopu II fund

By Stephen Aldred

HONG KONG (Reuters) - Fang Fenglei, a former Goldman Sachs banker and co-founder of Hopu Investment Management, is raising up to $2 billion in a new fund, people familiar with the matter said, as one of China's best known bankers seeks to add to his riches.

The launch of another Hopu fund removes the mystery surrounding the next move of a politically connected and closely watched China financier who stepped out of the limelight three years ago.

The new fund also revives a potential conflict, as Fang's dual role as a non-executive chairman of Goldman Sachs Gao Hua Securities, a unit of Goldman Sachs' China investment bank, and also as co-founder of Hopu, could put the rainmaker in the awkward position of competing with Goldman for deals.

Hopu surprised investors and rivals in 2010 when it suddenly wound down operations after raising and investing just one fund, which generated big returns and took part in several high-profile and profitable deals.

Sixty-one-year-old Fang is a veteran China dealmaker who earned his stripes by working in China International Capital Corp and Bank of China International, and led the restructuring and listing of state-owned enterprises such as China Mobile Ltd. In 2004, he became chairman of Goldman Sachs Gao Hua and Beijing Gao Hua Securities.

Hopu Master Fund II, as the new fund is called, has received about $1 billion in commitments, Fang has told some investors without disclosing the source of funds, the people said. The second fund's investment strategy is unclear at this time, they added.

Hopu's debut fund raised $2.5 billion in 2008 and was generating an internal rate of return of about 46 percent at the end of last year. Over the next two years it deployed most of the capital - adopting an investment strategy more akin to a hedge fund than a regular private equity firm - and made money through a series of quickfire public and private deals.

Hopu rose to prominence by buying Chinese bank stakes that were being offloaded by retreating European and U.S. financial institutions in the wake of the global financial crisis.

A spokesman for Hopu declined to comment on the new fund's plans. Goldman declined to comment. Sources declined to be identified as Hopu's fundraising plans were confidential.

NEW ENVIRONMENT

Fang is returning to a very different market, and with a dramatically altered team, to the one he knew when Hopu raised its first fund.

At that time, Western markets were in turmoil and China offered huge opportunity for investors, with annual economic growth humming along at almost 10 percent.

China's scale and growth, even at the 7.7 percent it posted in the first quarter this year, still draw investors to private equity funds but disappointing returns mean they are much more discerning about where they put their money.

"Fund raising is tough all round right now, even for top names," one investor in China private equity funds said.

Capital raised by private equity funds for China in the first quarter fell nearly 70 percent to $2.9 billion from a year ago, according to Asia Venture Capital Journal data.

Hopu will be entering a crowded market where the pension funds and insurers that invest in private equity have narrowed their focus to top performing funds and marquee names like Bain Capital and KKR & Co.

Tighter supervision of stock exchange flotations since the end of last year has made it even tougher for private equity funds seeking to profitably exit their holdings.

Private equity firms have made as many as 7,500 investments in China over the past 15 years which they have not yet liquidated, according to a recent report from China First Capital.

The first Hopu vehicle's moves included the purchase of stakes in Bank of China and China Construction Bank from Royal Bank of Scotland and Bank of America, respectively.

Its backers included Singapore state investor Temasek Holdings and Goldman, and it concentrated on Chinese assets. It also advised on some cross-border deals, leveraging the partners' deep connections, that once again differentiated Hopu from its regional competitors.

But just when the fund was in its prime, its key dealmaker Richard Ong left in 2011 to launch a rival buyout firm, RRJ Capital.

Fang also lost Dominic Ho, a former KPMG partner, who has moved to the board at Singapore Telecommunications Ltd.

(This story corrects the company name to Goldman Sachs Gao Hua in the third and fifth paragraphs)

(Reporting by Stephen Aldred; Editing by Denny Thomas and Stephen Coates)

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