Venture Firm Oriental Fortune Capital Raising Its First Dollar Fund

Shenzhen, China-based venture capital firm Shenzhen Oriental Fortune Capital is currently raising its first $100 million U.S.-dollar investment fund, VentureWire has learned.

The venture and growth capital investor is looking to raise U.S. dollars to diversify its limited partner base and its portfolio, according to managing partner Joe Zhou. The firm also wants to ensure that as its Chinese companies grow, they can compete internationally as well as domestically, Zhou said.

They are almost the same reasons cited by U.S. investors looking to raise Chinese yuan-based funds, except they also see it as a way to gain access to Chinese companies looking to list on local markets. Several U.S.-based investors are in the process of raising local-currency funds to gain access to local deals from which they are now barred.

It's a two-tier investment system that benefits Chinese investment firms disproportionately, their U.S. counterparts say, especially as foreign funds are also mostly proscribed fromChina's most attractive investment sectors like media and financial services.

The potential to get around these prohibitions is the reason why the Carlyle Group, which has raised a small 100-million-yuan ($14.6 million) co-investment fund alongside Shanghai-based conglomerate Fosun Group, and the Blackstone Group (BX), which is working with Beijing to raise a CNY5 billion fund, are so active in the country. Carlyle is also targeting a larger, CNY5 billion fund of its own.

As for Oriental Fortune Capital, Zhou said that his firm wanted to have the flexibility to invest in either dollars or yuan, because he expected currency exchange barriers to begin to fall, and wanted to be able to invest from a more international perspective.

He also said that investing from a dollar fund gives Chinese investors more strategic flexibility because of the differences in the structure of local funds relative to international funds.

"Local investors are more concerned about short term investment returns," Zhou said. "From the [General Partners'] view, if you want to have a long-term commitment to the fund, you need to consider a U.S. dollar fund."

The lifetime of a domestic fund can range from three to five years, which is half the time that U.S., or international, limited partners require to return capital and dissolve the fund.

That shorter time horizon means that investors are pushed to make more growth investments and investments preparing a company for a public offering, Zhou said.

Investing in yuan also locks a fund in to domestic Chinese markets for its exit opportunities, said Zhou, and limits companies' ability to expand internationally.

"Entrepreneurs are more mature inChinaand they are growing their businesses faster than before, so we are thinking about their international scalability," he said. "Maybe in the future our entrepreneurs can extend their business outside of China."

Though the dollar fund would be Oriental Fortune Capital's first, the firm has been investing from two yuan-denominated investment vehicles since it was founded in 2006.

Oriental Fortune Capital raised CNY900 million for its first fund in 2006 and followed it with a CNY758 million second fund from which it is still investing, Zhou said.

The firm is targeting a CNY1 billion third fund and expects to begin fundraising for that vehicle in the fourth quarter of this year or early next year, according to Zhou.

From the 42 companies in its portfolio, Oriental Fortune has already had three exits including 3Nod Group Inc., a technology conglomerate listed on the Korean Kosdaq exchange; Meizhou City, China-based Guangdong Chao-Hua Technology Co., which makes a range of products from circuit boards to pulp and paper; and Shenzhen-based chemical manufacturer Shenzhen Rainbow Fine Chemical Industry Co. (002256.SZ).

The firm invests in energy technology, financial services, consumer goods, healthcare and life sciences and information technology, according to its Web site.

Its most recent investment was in Beijing-based supercapacitor technology developer Supreme Power Solutions Co.