Sick of the Trade War? The $550m US-China Green Fund is a breath of fresh air

The US-China trade war has sent shockwaves through the global economy. It’s gone on for over a year, and after the 13th round of talks, US President Donald Trump said on October 11 that both countries have reached a ‘phase one deal.’ But nothing’s on paper and details are scarce about whether there’s an end to the 15-month trade war in sight. As of October 16, China’s state-run media hasn’t even mentioned the promise to buy all those soybeans and other agricultural products.

As stock markets fluctuate, agreements unravel and supply chains shift, causing anxiety for the global financial community, here’s a breath of fresh air – especially if you’re a startup.

The US-China Green Fund (USCGF) is a “market and impact-driven” private equity fund that aims to promote sustainable development through US-China cross-border tie-ups. Impact areas include finance, tech, and business models. With its maiden fund, it has pumped in over ¥3.7 billion ($550 million) into Chinese companies that open channels into major local markets for the cleantech transformation of agriculture, housing, building, manufacturing, transportation and small businesses.

The firm is now moving into its second stage, where it’s currently raising a second, yuan-denominated fund to be worth as much as $1 billion. This time, the USCGF plans to expand its portfolio by investing in western firms with proven clean technologies.

“One of our key areas of focus is sustainable agriculture & food, including safe pesticides, fertilizers, alternative protein, and microbials,” says Annie Zhou, director of overseas external affairs at the fund, speaking to AFN in an interview. “The fund’s ag platform will bring American sustainable food and ag products and tech to the Chinese market through strategic advisory, market development, and equity investments.”

“The distribution channels the Green Fund established through its first set of investments will help the foreign companies enter and navigate the Chinese economy, and plug their technologies into the growing demand – and government mandates – for low-carbon solutions,” elaborates Zhou.

Doug Cameron, senior managing director of the fund, served as chief scientist of Cargill and Khosla Ventures, racking up over 30 years of experience in cleantech and food & ag research, as well as investments. He leads the firm’s US office and efforts in investments and strategic advisory.

Joe Gan: Let’s kick things off by defining what  ‘green finance’ means to you.

Doug Cameron: For me, green finance involves investing in companies and projects that have a positive environmental impact and provide a competitive financial return. Some of our US-China Green portfolio companies are not obviously green, but have the ability to influence green markets and products–for example, our building management companies are not traditional green investments but they can influence the use of green energy and building materials and green behaviors like recycling.

Congratulations on the massive maiden fund of $550 million. It would most definitely turn other such groups green. Take us through, where has the money gone? What sorts of companies has the fund sunken its teeth into? Which company’s gotten a big slice of the pie? Which are your favorites and why?

Thanks Joe. We certainly hope that with the success of our first RMB fund, we can inspire more fund managers and institutional investors to direct their capital into green sectors in China. USCGF believes in applying advanced technologies such as artificial intelligence, big data, and smart analytics towards leading cleantech or environmental companies. Many of the companies we invested in have strategic synergies with each other, and I will explain how and why we chose them.

Huitongda (HTD)

In our opinion, Huitongda was one of our most interesting investments as it is directly related to the work of AgFunder. HTD operates a network of 105,000 mom-and-pop shops in 17,300 villages and townships in 20 provinces and it enables its member shop owners, through modern online-to-offline tools and capabilities, to become local entrepreneurs to spur economic activity and innovation. HTD has transformed these traditional village shops from selling simple products such as home appliances to selling and servicing distributed solar products, electric pick-up trucks, and sustainable agricultural products and agtech. It has become a channel for green products and solutions to more than 70 million of the rural population and has achieved annual GMV of RMB 35 billion. After our series C investment of RMB 500 million, Alibaba injected RMB 4.5 billion into the company to help further develop its logistics and product offering. We are very happy with this investment due to its potential and the green products/services it is providing to a vast rural market in China.

Besides HTD, the USCGF has also invested RMB 300 million in ELC, a leading Energy Service Company (“ESCO”) company that provides tech, management, and monitoring tools to improve energy efficiency for hotels, major hospitals, government buildings, and industrial plants.

Your team is working on a second and larger yuan fund. What sets it apart from its predecessor?

Given our success in Fund I, with over 20% of internal rate of returns, we hope to replicate our financial returns and impact through a second and larger yuan fund. While we are investing in the same sectors, we are targeting larger pipeline companies with greater market access and penetration, as well as advanced technologies. For example, some of the companies we are exploring include clean heating technology, smart and green logistics and packaging, as well as wastewater treatment. These will be larger private equity plays, and we believe will address more eminent environmental and climate challenges in China.

The USCGF has been called a “bright spot” in the global trade strife – with tech and agriculture coming under threat. Canada, the US, China have all taken shots at each other. Large corporates have backed away, caved in or retracted. So amid this backdrop – what was behind the decision to do this now? And contrary to what we think – that the sentiment would be skittish – has there been signs that companies and investors want to get in on this?

Having built a successful China side of the U.S.-China Green Fund, with large portfolio companies with channels to market for environmental technologies, it was always the fund’s intention to develop its US operations as well. Given the uncertainties in the macro-environment, we sought to build a tangible bridge and solutions to the trade conflicts by offering accelerated paths for US food, ag, and agtech to enter the vast Chinese market.

Leveraging our trusted partners with 20+ years of experience, our newly established US-China Green AG platform can expedite the process for a wide range of ag-related products and technologies to access and penetrate this market, reducing operational costs and regulatory risk. We believe we can provide tremendous value to connect product supply and demand and also help Western companies grow through our advisory services and investments.

What’s your outlook for cleantech in the US and China?

We believe that the US-China relationship should be built on natural strategic partnerships to address global issues including climate and environment. Thus, there will be a natural demand for cleantech going forward, as governments, corporations, investors, and consumers require cleaner air, water, soil, and living conditions. As China’s economy slows down to accommodate more balanced growth to address the environment and pollution, more people will be employing clean technologies and energy to grow. Therefore, we believe there is immense need for cleantech from both countries to address not only domestic climate and pollution but on a global scale as well.

What has been the most difficult?

The USCGF has experienced its share of challenges as we grew our fund in China. First, we were met with stringent regulatory conditions as liquidity dried up in capital markets and insurance companies were not allowed to invest into alternative strategies. In addition, we experienced all the challenges of raising a first-time fund, even with the previous track records of our senior investment team members, in convincing our prospective investors that we can replicate the first-quartile returns from our previous funds. While there are many externalities that we could not control, I think we all learned a lot from the process and were able to overcome the challenges.

Are the Chinese receptive to new tech?

In our experience, a lot of our portfolio companies are very focused on business development and market growth. However, once they reach a certain tipping point, they are receptive to new technologies that add value to their product offerings and can be a competitive advantage against other firms. We find that increasingly, companies are competing on advanced technologies and services rather than on cost.

What has been the most rewarding part of your journey?

Environmental impact has always been the founding mission of the US-China Green Fund and witnessing the growth of the fund, from the original planning committee to completing our first fundraise, from being in a small shared office space to now having three wonderful offices in Beijing, Shanghai, and Chicago, from a small team of under 10 full-time people to now almost 45 full-time employees.

I believe our team consists of impact-driven entrepreneurial-minded professionals who really believe in our mission and genuinely want to contribute towards a greener economy and society. It is very inspiring to work with our colleagues, each of whom brings unique skills and immense value to the fund.

Know of a US company that’s making waves in China, or vice versa? Drop me a note at [email protected].