Temasek Holdings, the Singapore state investment agency, is setting up a fund that will have up to S$2.5bn ($1.9bn) to invest in northern Asia, primarily in China.

Pavilion Capital, which will be run by Tow Heng Tan, Temasek’s former chief investment officer, is still in the formative stages and it is not clear how closely tied to its parent it will be or who will sit on its board, according to people familiar with the matter. Temasek has also not yet decided if the new fund will accept third-party money.

By establishing a small investment fund Temasek hopes to streamline the investment process at a time when there is growing competition for a shrinking number of China deals. Pavilion is likely to focus on investing in smaller enterprises, in keeping with one of the stated goals of China’s five-year plan for 2011 to 2015, bankers say, noting that Mr Tow has many relationships in China. “Today, money is the last thing China needs,” said one person familiar with the thinking at Temasek. “We want to be more attractive than private equity firms like KKR.”