KKR backs off new China smaller-cap fund as it eyes bigger returns

U.S. private equity firm KKR & Co LP has told investors it will refrain from launching a new fund targeting small- and medium-sized companies in China and will instead focus on larger, more profitable buyouts, people familiar with the plans told Reuters.

New York-based KKR's move underscores a shift underway in Asia, where global private equity firms are shying away from bite-sized investments to the tune of $50 million to $100 million.

It comes at a time when growth is slowing in China and questions are increasing over the health of its corporate landscape, often indebted and lacking transparency.

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Carlyle Group LP, another large private equity firm with a big presence in Asia, said last week it expects an increase in deals where private equity investors buy control of companies instead of minority stakes, particularly in China where slowing economic growth is likely to convince more owners to sell.

KKR's $1 billion China Growth Fund, launched in 2010, has returned 14.3 percent since its inception till end-June. It outperformed the benchmark MSCI China index, which lost about 10 percent over the same period.

KKR's larger, regional $6 billion Asian Fund II, which focuses on big ticket transactions, has returned 36.2 percent since its launch in 2013.

The China Growth Fund has deployed about three-quarters of its capital, KKR filings show, reaching the stage when private equity companies would typically go back to investors to launch a new fund.

But KKR told some of its limited partners (LPs) it wouldn't raise a successor fund, said the sources. The message was delivered last year at the time of KKR's regional investor conference in Asia, they said, but the details were not made public.

KKR declined to comment. The sources couldn't be named because talks were private.

The China Growth Fund had taken stakes in Chinese education provider Tarena International, China Cord Blood Corp, chicken meat company Fujian Sunner Development Co and appliance maker Qingdao Haier, with the Asian Fund II also investing in Haier and Sunner.

The China Growth Fund has also invested in large-scale dairy farms in China as well as in apparel retailer Novo Holdco, which operates LeSportsac stores in China, fish feed company Yuehai Feed Group and Uxin, China's largest online used car auction company.

KKR is expected to formally launch its third pan-Asia fund by year end, targeting a record $7 billion.

The firm recently lost two of its top China dealmakers, David Liu and Julian Wolhardt, who decided to form their own rival investment firm, prompting a restructuring of its Asia management team.