WSJ – Private-Equity Slowdown? Not for Yuan Funds – Eaton’s David Love and Eric Gu

Elsewhere in the world, fund raising for  private-equity funds is down considerably from three years ago. But  funds in China denominated in the country’s own currency, known as both  the yuan and the renminbi, are seeing a fund-raising bonanza. So far  this year, such funds have raised US$9.13 billion, making up 77% of all  China-focused private-equity funds raised this year, according to Asia  Private Equity Review. Yuan funds, which raise capital only from Chinese  investors, saw similar success last year, raising US$6.18 billion, or  63% of the amount raised for China private-equity funds. Offshore China  funds target investors outside the country.

Yuan funds aren’t just raising more money than  dollar funds, they’re doing more deals. According to Dealogic,  yuan-denominated private-equity funds have done deals worth at least  US$3.6 billion since the beginning of 2009, while non-yuan funds have  done US$2.8 billion in deals.

Some of the largest funds raised in Asia this year  have been yuan-denominated. Beijing-based Citic Private Equity Funds  Management, part of Citic Securities Co. Ltd., raised a nine-billion  yuan ($1.32 billion) private-equity fund called Mianyang Scientific City  Investment Fund, the largest such fund raised in China so far.

Western firms are doing it as well. U.S. private  equity firm Carlyle Group raised the equivalent of US$350 million for  the first closing of its yuan-denominated private equity fund last month  and is targeting five billion yuan. Another U.S. private-equity firm,  TPG, this month announced not one, but two yuan-denominated funds of  five billion yuan (US$735.5 million) each. Blackstone Group LP also  announced plans to raise a five-billion yuan fund.

Demand for yuan funds is coming from a rising class  of prosperous Chinese investors, as well as Chinese regulations that are  spurring the development of a homegrown private-equity industry.  China’s government sees private equity as a means to channel money into  small and medium-sized enterprises that don’t always have ready access  to bank lending or public markets, says Kathleen Ng, managing director  at the Centre for Private Equity Research in Hong Kong.

Seeing growth in the new market, C.P. Eaton Partners  earlier this year became the first foreign fund-raising agency to  launch a yuan fund-raising platform in China. The firm hired Eric Gu,  who previously worked at the China National Social Security Fund, to  lead the effort from the Eaton’s representative office in Shanghai. “The  [renminbi] market will grow rapidly. . . we want to be involved in this  market,” said David Love, a partner at Eaton.

Mr. Love added that while both Chinese and western  firms have been busy raising funds, Chinese firms seem to be having more  success. “For Western [firms] it’s been very slow,” he said.

Foreign firms see yuan funds as a way to buy  political capital in an important market. Yuan funds also are a means to  avoid arduous regulatory hurdles that can complicate investments from  an offshore private-equity fund. But it’s not clear that  yuan-denominated funds truly get better treatment.

Private-equity firms typically inject some capital  into funds and investments so they have some skin in the game. That  means yuan-denominated funds raised by foreign firms ultimately have  some foreign ownership involved.

“Even such small amounts could bring into question  the funds’ status as a Chinese investor for investment approvals. We  hope that’s not the case but there’s no official pronouncement on this,”  said Ying Zhang, funds formation lawyer at Ropes & Gray LLP.

Dealing with local inexperienced Chinese investors  may also prove tricky, say industry insiders. Not all foreign funds are  jumping onto the yuan fund bandwagon. Some have expressed concerns about  how Chinese investors, who are less familiar with private equity, will  deal with capital calls and years-long commitment. China has a lot of  capital, but not a large group of experienced investors.

In addition, many funds are raising funds with  government bodies, which then want funds invested in a particular  province or industry, these insiders say. Even when there aren’t any  officials restrictions on where or what funds should invest in,  private-equity fund managers have expressed concern about pressure from  powerful government investors. Limited partners in China tend to be more  active than those elsewhere.

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