Report and Recommendation of the President to the Board of Directors

Project Number: 55076-001 May 2021

Proposed Equity Investment PAG Limited Investment in PAG Growth II L.P. (Regional)

This is a redacted version of the document approved by ADB's Board of Directors, which excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy.

ABBREVIATIONS

ADB – Asian Development Bank ESG – environmental, social, and governance ESMS – environmental and social management system GDP – gross domestic product IRC – investment review committee IRR – internal rate of return IT – information technology MOIC – multiple on invested capital PAGAC – PAG Asia Capital Limited PAGG I – PAG Growth I L.P. PAGG II – PAG Growth II L.P. PAGGC – PAG Growth Capital Limited PAGPE – PAG Private Equity PRC – People’s Republic of China SPS – Safeguard Policy Statement

NOTE

In this report, “$” refers to United States dollars.

Vice-President Ashok Lavasa, Private Sector Operations and Public–Private Partnerships Director General Suzanne Gaboury, Private Sector Operations Department (PSOD) Deputy Director General Christopher Thieme, PSOD Director Janette Hall, Private Sector Investment Funds and Special Initiatives Division (PSIS), PSOD

Team leader Davide Conti, Investment Specialist, PSIS, PSOD Team members Elizabeth Alpe, Senior Transaction Support Specialist (Integrity), Private Sector Transaction Support Division (PSTS), PSOD Ian Bryson, Senior Safeguards Specialist, PSTS, PSOD Ka Seen Gabrielle Chan, Safeguards Specialist, PSTS, PSOD Karlo Alberto De Asis, Social Development Officer (Safeguards), PSTS, PSOD Laurence Genee, Senior Safeguards Specialist, PSTS, PSOD Manfred Kiefer, Senior Economist, PSTS, PSOD Farshed Mahmud, Senior Investment Specialist, PSIS, PSOD Catherine Marsh, Assistant General Counsel, Office of the General Counsel a Yee Hean Teo, Principal Investment Specialist, PSIS, PSOD F Anne Valko, Social Development Specialist (Gender and Development), PSTS, PSOD a Outposted to the ADB Office.

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE FUND 1 A. Investment Identification and Description 1 B. Business Overview and Strategy 2 C. Ownership, Management, and Governance 2 D. Financial Performance 3 III. THE PROPOSED ADB ASSISTANCE 3 A. The Assistance 3 B. Financial Analysis of Expected Returns and Assumptions 3 C. Implementation Arrangements 3 D. Value Added by ADB Assistance 3 E. Risks 4 IV. DEVELOPMENT IMPACT AND STRATEGIC ALIGNMENT 4 A. Development Impact, Outcomes, and Outputs 4 B. Alignment with ADB Strategy and Operations 4 V. POLICY COMPLIANCE 5 A. Safeguards and Social Dimensions 5 B. Anticorruption Policy 6 C. Investment Limitations 6 D. Assurances 6 VI. RECOMMENDATION 6

APPENDIXES 1. Design and Monitoring Framework 7 2. List of Linked Documents 9

Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 55076-001 Project Name Investment in PAG Growth II, Department/Division PSOD/PSIS L.P. Country REG (PRC, SIN) Investee PAG Growth II L.P.

Portfolio at a Glance https://www.adb.org/Documents/ LinkedDocs/?id=55076-001-Port AtaGlance qq 2. Sector Subsector(s) ADB Financing ($ million) Health Health system development 25.00 Finance Infrastructure finance and investment funds 25.00 Total 50.00 qq 3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities GHG reductions (tons per annum) 0.000 Accelerating progress in gender equality Climate Change impact on the Project Low

ADB Financing Adaptation ($ million) 0.00 Mitigation ($ million) 0.00

Cofinancing Adaptation ($ million) 0.00 Mitigation ($ million) 0.00 Qq Sustainable Development Goals Gender Equity and Mainstreaming SDG 3.8 Some gender elements (SGE) SDG 5.2, 5.5 SDG 8.10 Poverty Targeting General Intervention on Poverty qq 4. Nonsovereign Operation Risk Rating - NA

5. Safeguard Categorization Environment: FI Involuntary Resettlement: FI Indigenous Peoples: FI Qq 6. Financing Modality and Sources Amount ($ million) ADB 50.00 Nonsovereign Investment Fund: Ordinary capital resources 50.00 Cofinancing 0.00 None 0.00 Others a 450.00 Total 500.00

Currency of ADB Financing: US Dollar

a Derived by deducting ADB financing and Cofinancing from Total Project Cost.

Source: Asian Development Bank This document must only be generated in eOps. 26032021152952824228 Generated Date: 14-Jun-2021 12:25:19 PM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed equity investment of up to $50,000,000 in PAG Growth II L.P.

2. PAG Growth II L.P. (PAGG II, the fund) is a private equity fund established as a Cayman Islands exempted with an expected size of $500 million. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

3. PAGG II aims to provide growth capital to a portfolio of 10–15 companies operating primarily in the health care, financial services, education, and information technology (IT) sectors mainly in the People’s Republic of China (PRC).1 The investment is in line with the objectives of the Asian Development Bank (ADB) to promote private sector development in the PRC, especially in secondary and tertiary markets such as Yantai, Nanjing, and Taizhou where equity capital availability is limited, and accessing traditional bank financing without hard assets to pledge as collateral remains challenging for growing companies. 2 PAGG II is expected to identify and support promising and talented business leaders, thereby helping to foster a new generation of entrepreneurs in the PRC. Through investments in IT-related businesses, the fund is also expected to promote innovation and technology adoption.3 In terms of value addition, ADB will help PAGGC to further enhance its environmental and social management system (ESMS) and incorporate gender-inclusive practices in its operations.

II. THE FUND

A. Investment Identification and Description

4. Description. The PAG Group, a relatively well-known and established investment manager in the PRC, employs more than 400 staff, including 190 investment professionals, across 10 offices in Asia. The PAG Group manages investments across three distinct asset classes—(i) private equity, (ii) real estate, and (iii) absolute returns—each of which is managed by separate investment teams. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

5. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

6. Investment identification. ADB first met with the PAG Group in 2016 when it was raising PAGG I. Since then, ADB has closely tracked PAGPE and PAGG I’s performance through several follow-up meetings and due diligence sessions with managing director Kevin Xu, who leads PAGGC. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

7. Through the investment, ADB seeks to participate in high-growth opportunities in the PRC, particularly in “new economy” sectors that are supported by secular consumption tailwinds.

1 [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]. 2 [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]. 3 A climate change target amount cannot be specified as this is an investment into a fund (as opposed to an investment into a company) and the composition of the underlying investee companies is not yet known.

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Companies operating in the new economy are focusing on innovation to update existing or build new business models that improve the quality and accessibility of their products and services, including in the health care, financial services, and education sectors. The focus on new economy investments is consistent with the Government of the PRC’s emphasis on policies to boost the growth of domestic innovative businesses and enhance local capabilities.4 [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

B. Business Overview and Strategy

8. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)] PAGG II seeks to invest in a portfolio of 10–15 companies primarily through equity and equity-like instruments. Focus sectors include health care, financial services, education, and IT.

9. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

C. Ownership, Management, and Governance

10. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

11. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

12. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

13. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

14. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

15. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

16. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

17. Advisory committee. PAGG II will form an advisory committee representing PAGG II’s limited partners to be appointed by the general partner. ADB is expected to be represented on PAGG II’s advisory committee, which will opine on matters related to certain potential conflicts of interest, exercise its right to consent to certain matters in accordance with the provisions of the limited partnership agreement, and act in a governance advisory role to the general partner and its advisor.

4 J. Woetzel et al. 2019. China and the World: Inside the Dynamics of a Changing Relationship. Washington, DC: McKinsey Global Institute.

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D. Financial Performance

18. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

III. THE PROPOSED ADB ASSISTANCE

A. The Assistance

19. ADB intends to make an equity investment of up to $50 million in PAGG II, representing 10% of the expected fund size. ADB’s investment will not exceed 25% of PAGG II’s total committed capital and will not result in ADB being the single largest investor in PAGG II.

B. Financial Analysis of Expected Returns and Assumptions

20. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

C. Implementation Arrangements

21. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

22. Reporting arrangements. The general partner will be required to provide ADB with unaudited quarterly reports, audited annual reports with financial statements, a fund overview, annual development effectiveness monitoring reports, and an overview of the portfolio. ADB will review this information and follow-up with the general partner if more information or clarification is needed. If the information received from the general partner raises issues that could impair the value of ADB’s investment in PAGG II, ADB could decide to put the fund on a watch list for more frequent and detailed reviews.

D. Value Added by ADB Assistance

23. Gender. The general partner and PAGCC have committed to working with ADB to adopt measures to achieve a more gender-equitable workforce at PAGPE and the fund’s portfolio companies. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

24. Environmental, social, standards. ADB's participation will obligate the general partner to ensure that PAGG II's investee companies comply with ADB's environment and social safeguard standards, and report on development indicators.

25. Governance oversight. ADB, along with other members of PAGG II's advisory committee, will also provide oversight on important governance matters including issues relating to conflicts of interest.

26. Cofinancing opportunities. PAGCC values ADB’s ability to provide both debt and equity financing directly to its portfolio companies to fund growth plans. ADB can also help mobilize additional financing from third-party sources.

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E. Risks

27. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

28. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

29. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

30. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

31. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

32. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)]

IV. DEVELOPMENT IMPACT AND STRATEGIC ALIGNMENT

A. Development Impact, Outcomes, and Outputs

33. Impact. Accessibility to and quality of goods and services in the health care, financial services, and education sectors in the PRC are improved.

34. Outcomes. Financial sustainability and operational value addition of private equity investments are achieved, and goods and services to target sectors in the PRC are expanded.

35. Outputs. PAGG II is established; capital to support greater economic development in the PRC is invested; gender equality at the investee level is improved; and gender inclusiveness at the PAGPE level is enhanced.

B. Alignment with ADB Strategy and Operations

36. Consistency with ADB strategy. The investment in PAGG II aligns with ADB’s Strategy 2030 operational priority 1 (addressing remaining poverty and reducing inequalities), which mandates ADB to undertake efforts to contribute to the overarching goal of universal health coverage and to generate quality jobs to support inclusive growth for all.5 This engagement also accelerates progress in gender equality, contributing to Strategy 2030 operational priority 2.

37. Consistency with country strategies. The investment is consistent with ADB’s country partnership strategy for the PRC, 2021–2025, which seeks to address key challenges in adapting to an aging society, increasing national and regional health security, promoting food safety and security, and delivering quality social services through private sector solutions.6

5 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 6 ADB. 2021. Country Partnership Strategy: People’s Republic of China, 2021–2025—Toward High-Quality, Green Development. Manila.

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38. Consistency with sector strategy and relevant ADB operations. The investment in PAGG II is consistent with (i) ADB’s operational plan for private sector operations, which supports investments in private equity funds that enable ADB to efficiently deploy and mobilize equity capital to support companies in realizing their expansion plans, thereby generating strong multiplier effects on ADB’s capital;7 and (ii) ADB’s operational plan for health, which encourages private sector investments to address issues on quality, affordability, and accessibility in the health sector.8

39. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

V. POLICY COMPLIANCE

A. Safeguards and Social Dimensions

40. ADB has categorized the investment in compliance with ADB’s Safeguard Policy Statement (SPS) (2009).9

41. Category FI. ADB has assessed the investment's potential environmental and social impacts, its risks associated with PAGG I’s existing and PAGG II’s likely future portfolio, and its commitment and capacity for environmental and social management. [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

42. The general partner has agreed that the revised ESMS will be developed and maintained in a form and with content that is satisfactory to ADB prior to ADB’s first capital disbursement. 10 The fund will be required to carry out due diligence to confirm that investments using ADB’s capital comply with ADB’s SPS and applicable national laws and regulations. The revised ESMS will set out requirements, as applicable, for compliance with national labor laws and measures to comply with the internationally recognized core labor standards, pursuant to ADB’s Social Protection Strategy. ADB is seeking a right to be excused from contributing capital to any proposed portfolio company investment (i) that is categorized A across all ADB’s SPS safeguard categories or (ii) that ADB determines is not in accordance with the revised ESMS. The revised ESMS will also contain requirements, as applicable, for information disclosure and consultation with affected people in accordance with ADB’s requirements. The general partner will include in its annual reporting information to ADB (i) the nature of the fund’s portfolio and categorization, (ii) compliance with the safeguard and social requirements, and (iii) compliance with applicable national and international laws and standards.

43. Some gender elements. PAGPE is committed to providing an enabling working environment based on equal opportunities, and diversity. While the PRC is showing strong female-to-male labor force participation ratio and high presence of women in professional and technical jobs, women continue to be underrepresented in leadership positions. 11 Following

7 ADB. 2019. Operational Plan for Private Sector Operations 2019–2024. Manila. 8 ADB. 2015. Health in Asia and Pacific: A Focused Approach to Address the Health Needs of ADB Developing Member Countries—Operational Plan for Health, 2015–2020. Manila. 9 ADB. Safeguard Categories. 10 Summary Poverty Reduction and Social Strategy; and Environmental and Social Management System: Audit Findings and Details of Arrangement (accessible from the list of linked documents in Appendix 2). 11 J. Woetzel et al. 2018. The Power of Parity: Advancing Women’s Equality in Asia Pacific. Washington, DC: McKinsey Global Institute.

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ADB’s Policy on Gender and Development, the general partner will incorporate measures to promote gender equality and women’s empowerment in its business activities.12 [This information has been removed as it falls under the exception to disclosure in ADB’s Access to Information Policy, para. 17.2.(v)].

B. Anticorruption Policy

44. The general partner was advised of ADB’s policy of implementing best international practice relating to combating corruption, money laundering, and the financing of terrorism. ADB will ensure that the investment documentation includes appropriate provisions prohibiting corruption, money laundering, and the financing of terrorism; and remedies for ADB in the event of noncompliance.

C. Investment Limitations

45. The proposed equity investment is within the medium-term, country, industry, group, and single exposure limits for nonsovereign investments.

D. Assurances

46. Consistent with the Agreement Establishing the Asian Development Bank (the Charter),13 ADB will proceed with the assistance upon establishing that the governments of ADB member countries where PAGG II will invest using ADB finance have no objection to the proposed assistance to PAGG II. ADB will enter into suitable finance documentation, in form and substance satisfactory to ADB, following approval of the proposed assistance by the ADB Board of Directors.

VI. RECOMMENDATION

47. I am satisfied that the proposed equity investment would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the equity investment of up to $50,000,000 from ADB’s ordinary capital resources in PAG Growth II L.P., with such terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board. 48. Masatsugu Asakawa President

7 May 2021

12 ADB. 2003. Policy on Gender and Development. Manila. 13 ADB. 1966. Agreement Establishing the Asian Development Bank. Manila.

Appendix 1 7

DESIGN AND MONITORING FRAMEWORK

Impacts the Project is Aligned with Accessibility to and quality of goods and services in the health care, financial services, and education sectors in the PRC improveda

Data Sources and Risks and Reporting Critical Results Chain Performance Indicators Mechanisms Assumptions Outcomes By 2033

Financial a. PAGG II (the fund) is profitable a–f. The Unusual market sustainability and (distributions-to-paid-in capital ratio greater fund’s annual dynamics and operational value than 1.0 times) at ADB’s exit (2021 development sector cycles addition of baseline: 0) effectiveness negatively private equity monitoring impact investments b. Employment of fund investee companies report, and investment achieved, and grew on an aggregate basis by at least 10% the fund’s opportunities goods and during the holding period (2021 baseline: quarterly and within target services to target Not applicable) (OP 1.2) annual sectors sectors in the reports PRC expanded c. Taxes paid by fund investee companies Unfavorable increased by 10% on an aggregate basis macroeconomic during the holding period (2021 baseline: and political Not applicable) conditions lead to low returns d. Number of customers served by investee and companies in the health care sector unsuccessful increased by 10% during the holding period exits from (2021 baseline: Number of customers at investments PAGG II entry)b

e. Number of customers served by investee companies in the financial services sector increased by 10% during the holding period (2021 baseline: Number of customers at PAGG II entry)c

f. Number of customers served by investee companies in the education sector increased by 10% during the holding period (2021 baseline: Number of customers at PAGG II entry)d Outputs

1. PAGG II 1. The fund is established with at least $500 1–4. The Investment established million in aggregate commitments by Q1 2022 fund’s annual pipeline is (2021 baseline: Not applicable) development weaker than effectiveness expected, 2. Capital to 2. At least 50% of the fund’s capital is invested monitoring leading to support in target sectors by 2026 (2021 baseline: 0%)e report, and deployment greater the fund’s challenges economic quarterly and development

8 Appendix 1

Data Sources and Risks and Reporting Critical Results Chain Performance Indicators Mechanisms Assumptions in the PRC annual Strong invested reports competition from other 3. Gender 3a. At least 15% of the fund’s board of directors’ investors equality at nominations on investee boards are women by reduces investee 2026 (2021 baseline: Not applicable) (OP 2.3) attractiveness level of investment improved 3b. The general partner milestones to develop a opportunities gender-inclusive investment strategy for the fund by 2026 (2021 baseline: Not applicable)f Women are not interested or 4. Gender 4. At least 40% of female professionals are unable to inclusiveness participate in PAGPE leadership programs by collaborate with at PAGPE 2026 (2021 baseline: 10%) (OP 2.3.1) the level implemented enhanced programs

Key Activities with Milestones

1. PAGG II established 1.1 Execute ADB’s legal documentation by Q4 2021. 1.2 ADB and other investors invest in the fund by Q1 2022.

2. Capital to support greater economic development in the PRC invested 2.1 The fund sources, screens, and invests in portfolio companies from 2021 to Q1 2027. A. B. 3. Gender equality at investee level improved 3.1 Nominate women as board directors on investee boards by 2026.

C. 4. Gender inclusiveness at PAGPE level enhanced 4.1 Increase female participation in PAGPE leadership programs by 2026. Inputs ADB: Up to $50 million (equity) Other investors: up to $450 million (equity)

ADB = Asian Development Bank, OP = operational priority, PAGG II = PAG Growth II L.P., PAGPE = PAG Private Equity, PRC = People’s Republic of China, Q = quarter. a Defined by the project. b Investee companies in the health care sector may include pharmaceutical companies, medical devices manufacturers, and specialized hospitals such as trauma centers, rehabilitation hospitals, and children's hospitals. Customers or beneficiaries of these companies include individuals for pharmaceutical companies, users and/or businesses for medical devices manufacturers, and patients for specialized hospitals. c Investee companies in the financial services sector may include companies, online payment solutions developers, and consumer lending businesses. Customers or beneficiaries of these companies include people insured for insurance companies, users for online payment solutions developers, and borrowers and/or companies for consumer lending businesses. d Investee companies in the education sector may include technology enabled business across test preparation, K– 12, and vocational training sub-sectors. Customers or beneficiaries of these companies include students enrolled for K–12 schools, individuals for test preparation centers, and students enrolled for vocational training firms. e Target sectors include health care, financial services, and education. f A gender-inclusive investment strategy for PAG Growth Capital Limited (the advisor of the general partner) could provide guidelines and/or include actions the fund and the investee companies could take to increase their gender impact, starting with data collection on investees’ management and workforce diversity. Source: ADB.

Appendix 2 9

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=55076-001-4

1. Sector Overview 2. Ownership, Management, and Governance 3. Details of Implementation Arrangements 4. Contribution to Strategy 2030 Operational Priorities 5. Financial Analysis 6. Country Economic Indicators 7. Summary Poverty Reduction and Social Strategy 8. Environmental and Social Management System: Audit Findings and Details of Arrangement