Ex-Warburg partner narrows investment focus with second China impact fund

Asia Green Fund, the Chinese impact investing firm led by a former partner at Warburg Pincus, has narrowed the investment focus of its latest fund, affiliate Private Equity International has learned.

The Beijing-headquartered firm launched its second yuan-denominated growth and venture capital fund in March, chief executive Bo Bai told PEI. AGF Carbon Neutrality New Materials Fund is seeking 1 billion yuan ($155 million; €130 million) and is expected to hold a first close on about two-thirds of that figure in Q3 2021.

Unlike its 2016-vintage predecessor, the 3.2 billion-yuan US-China Green Fund I, AGF’s new vehicle will target only new material technologies such as battery storage, and digital technologies such as big data and AI that can boost the efficiency of impact efforts. Fund I had also targeted areas including logistics and mobility, e-commerce and environment services.

“When everybody’s rushing to carbon neutrality, our second RMB fund is trying to be even more narrowly targeted,” Bai said. “Among all the categories we worked on for Fund I, we feel these two are most narrowly defined and most effective to achieve both goals: environmental impact and financial return.”

Bai founded AGF in 2016 following a seven-year spell as a Hong Kong-based partner and managing director at Warburg, where he led its investments in the energy, industrials and business services sectors across Asia. He has a PhD in physics from the Massachusetts Institute of Technology, according to his LinkedIn profile.

AGF’s debut fund raised the majority of its capital from domestic corporations such as renewables giants Trina Solar, Envision Wind and Three Gorges, as well as PetroChina and China Construction Bank, Bai said.

Fund I is fully deployed and has generated a 0.38x distributed-to-paid-in multiple, 1.7x multiple of invested capital and 22 percent internal rate of return. Its portfolio includes battery switching service Immotor, liquid cooling designer CoolTera and energy savings business East Low Carbon.

The firm co-manages two impact joint ventures. Four Rivers is a $1.1 billion investment management firm co-founded with China Merchants Group, Invesco and Baowu Group, while its $700 million Three Gorges Green Fund was co-founded with China Three Gorges Capital and Tsinghua Asset Management.

AGF has also formed special purpose vehicles for larger deals with capital from the likes of Saudi Arabia’s Public Investment Fund and Aramco, Bai said. It plans to launch a USD-denominated impact fund in late 2022.

“Another reason we’re not doing this RMB fund too big is we shall launch our USD fund,” Bai added. “Travel constraints have been more challenging for a first-time USD fund [but] our general plan is by 4Q 2022 we will probably launch.”

Last year, AGF achieved 2.6 million tonnes of carbon dioxide emissions reduction and 1.6 million tons in water pollution reduction, according to its inaugural Carbon Neutrality and Green Impact Report. This equates to 173,000 tonnes of CO2 reduced for every 100 million yuan invested.

“There are people who really don’t care about ESG and impact investing and frankly five years ago that would be most of them in China,” Bai said. “But now it’s actually very encouraging to see people move away from that category. More people are beginning to care.”