By Francis Chan

DBS Bank has set up a US$100 million (S$152.7 million) private equity fund that will invest in China.

The fund - to be run by DBS Private Equity - will put its money in promising unlisted firms that could eventually seek listings on China's bourses.

Mr Melvin Teo, the managing director and head of the private equity group, said yesterday that despite the difficult economic conditions, China remains a key market for DBS. Indeed, the market turmoil has brought valuations back to more affordable levels.

'We believe in China's long-term potential and, as one of the best capitalised banks in Asia, we are well-positioned to stand by our customers as well as to cultivate new ones,' said Mr Teo, who is based in Hong Kong.

He pointed out that China is the single largest private equity market in Asia and saw almost US$10 billion in investment transactions last year.

It is thus a highly attractive investment hub for private equity firms, especially those positioned to tap into the upturn when global markets recover.

'We believe the China growth story remains intact and, when the recovery comes, China will probably be among those economies in the region that will experience an earlier and faster recovery,' said Mr Teo.

He added that by setting up the fund now, DBS will be able to step up its investment pace in the various industries and companies it believes could be winners.

The fund will provide capital to mid- and late-stage companies in growth industries, especially those dealing in daily consumer goods and services. Later-stage or mezzanine investments help a firm that is already producing and selling a product or service to reach a stage where it can go public.

Over the next two to three years, DBS will invest US$10 million to US$20 million on average in each company that it picks in exchange for minority stakes. It will also consider eventually listing the companies in China.

Mr Teo noted that the fund will help DBS capitalise on the opportunities that will arise when more Chinese firms experience liquidity problems as traditional sources of financing dry up.

In addition, valuations are much lower now than during the last boom.

Mr Teo pointed out that many Chinese entrepreneurs have 'lowered their valuation expectations to more realistic levels, so it is slightly easier for us to proceed with transactions'.

DBS Private Equity made its first investment in China seven years ago. It has since made successful investments in companies such as Yingli Green Energy, Yangzijiang Shipbuilding and China Infrastructure Machinery.

Before this latest fund was established, DBS' Asia private equity portfolio was already valued at $500 million.

According to Mr Teo, since 2002, DBS has managed to achieve an internal rate of return of 30 per cent on the portfolio from just over 20 direct equity and mezzanine investments in Asia.

In particular, DBS has a strong investment track record in China, where some of the highest historical returns for key industries have been generated, Mr Teo noted.

However, he admitted that private equity investment returns of six to seven times, which could be achieved previously, are unlikely to be seen in today's economic climate.

This article was first published in The Straits Times.