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.Back to News