Swimming against the tide: M&G’s £5bn Catalyst fund ponders China entry

These days, it’s not common for an investor to mull over ways to enter China’s private equity market – on the contrary, many are actively rethinking their exposure. M&G Investments is proving an exception to this rule.

The asset manager is exploring opportunities to invest in China through its £5 billion ($6.2 billion; €5.8 billion) Catalyst fund, a sustainability-focused mandate spanning private equity, private credit, and real and financial assets, Matthew O’Sullivan, Catalyst’s head of Asia-Pacific private investments in Singapore, tells affiliate title Private Equity International.

“I don’t think you can be active in Asia and not be thinking about China,” he says. “So, it’s definitely something we’re considering – what’s the right way to get exposure to China.”

Launched in 2021, Catalyst is – for now – solely funded by M&G’s For-Profits fund. Private equity accounts for roughly 30-40 percent of the vehicle, which has the flexibility to invest both directly and via funds, O’Sullivan says. He adds that about one-third of the strategy will be deployed in Asia-Pacific.

To date, most of Catalyst’s activity in the region has been through India, with Australia and New Zealand a minority. Its decision to consider China comes at a pivotal moment for the market: many US investors are reassessing their exposure to China due to a confluence of factors, not least of which are deteriorating tensions between the two nations and a regulatory crackdown in 2021.

And yet, some firms – Carlyle Group included – see this pullback as an opportunity to capture assets at more attractive valuations.

“It is an interesting time to be exploring going into China, and clearly there is the potential for there being value there,” O’Sullivan notes.

“I think it’s just being cognisant of the risks that there are – one of the challenges with private investment is you are potentially invested for a longer period of time, and because of that, really having trust in your investee company is incredibly important. And to be able to get that trust in your investments, we really want to have people that we trust on the ground who can help us, and trusted adviser relationships.”

One possibility being considered is a China joint venture, he says, noting the Catalyst is “considering a lot of different options”.

ESG enthusiasts

Catalyst uses the Impact Management Project’s investment classification framework to assess potential opportunities in three categories: ESG, or businesses and assets that act to avoid harm; sustainable, or investments that benefit stakeholders by generating positive outcomes for people and the planet; and impact, or those contributing solutions to societal and environmental challenges.

China’s aim to reach peak carbon emissions by 2030 and carbon neutrality by 2060 – sometimes referred to as its 30-60 goal – makes it an obvious destination for such a strategy.

“It is, I believe, the largest renewable energy market in the world,” O’Sullivan says. “There seems to be a lot of support for more clean energy and clean technology, and on the other hand, they are the world’s largest manufacturer and the world’s largest producer of emissions, which gives a lot of opportunity to be reducing emissions.”

Climate is just one pillar of Catalyst’s investment focus, with the others being inequality and health and wellbeing, O’Sullivan notes. “Within that, we’re trying to have more of a focus on empowerment of women, which we think can very much sit across the health and wellbeing side, and sometimes sits across the climate side as well,” he adds.

“We think that, being private investors, you can really help to influence businesses with issues like having more representation of women on boards, on senior management. So we’re very focused on trying to find ways that we can invest into products that are helping the empowerment of women, and we’re very interested in finding more investments that have that focus across the region.”

O’Sullivan notes that Catalyst’s focus on the empowerment of women is reflected in the composition of its Asia-Pacific investment team. In Singapore, women account for 50 percent of the team; in India, that figure reaches 63 percent.

Catalyst’s activity isn’t limited purely to direct investments: the fund may also commit to funds, whether these be special purpose vehicles on the asset equity side, or traditional, closed-end blind-pool funds.

“It’s not often that we’re completely passive – being direct investors, I just don’t think we have that in our mindset,” O’Sullivan notes. “If we are working with an established manager in an established product, we may put in an LP stake and will usually [be] on an LPAC, but that may be the limit of our involvement.

“We use that predominantly as ways to kind of get access to new [pipelines], so usually that would be working with funds that are targeting earlier stage businesses than we are.”

Doing so enables the fund to promote ESG at both the GP level and portfolio level, O’Sullivan says.

Catalyst’s commitment activity also includes funds with a pre-existing ESG focus. “I expect more of the funds we invest in in that space will be more ESG-focused,” O’Sullivan says. “So rather than just having an ESG policy and an ESG exclusion list, there will be an ESG framework and assessment.”

Dealmaking difficulties

In May, Catalyst committed $75 million to Vivriti Asset Management’s India Retail Asset Fund, an asset-backed securitisation fund in India comprising debt securities with assets backed by microfinance and micro-small-medium enterprise loans, where women make up a significant number of the borrowers, according to an International Finance Corporation disclosure.

India is a major focus for Catalyst and to date has accounted for the lion’s share of its investment pipeline in Asia-Pacific. The country’s private equity market has soared in recent years thanks to a confluence of factors, including a diminished focus on China from pan-regional investors and structural changes such as deeper capital markets and socioeconomic tailwinds.

Growth can prove a double-edged sword. “US rates were moving up last year and Indian rates were moving up slower, and there was significant liquidity in the Indian market,” O’Sullivan notes. “We were effectively priced out of the debt market for a while because of that. Having growth is great – but sometimes the challenge with that is whether the founders are being realistic about valuations with a lot of other markets being depressed, and India not being depressed.”

The global macroeconomic environment has made dealmaking a challenge. “Given our focus and the strong performance of the team, I actually think we’ll do pretty well in terms of deploying a similar amount of capital,” O’Sullivan says. “But it’s challenging, and we’re having to work very hard. All the teams are working diligently on this and finding strong opportunities with a lot of filtering and a lot of discussions with founders that they don’t want us to be having and, ideally, we don’t want to be having.”

Asia-Pacific dealmaking fell 44 percent to $198 billion last year, according to Bain & Co’s Asia-Pacific Private Equity Report 2023. Greater China’s share of APAC fundraising shrank to 24 percent in 2022 – a 15-year low. Its share of deal value fell to 31 percent – a nine-year low.

Anecdotally, those who weathered the global financial crisis and had money to deploy were able to snap up assets at attractive valuations. Being so early in its life, Catalyst too is likely to have a healthy amount of dry powder to invest.

“I think whenever capital is more cautious, there can be opportunities,” O’Sullivan notes. “But again, it’s about being very selective, not kind of just running in and throwing your capital at things.”’