Buyout Firms Queue Up To Go Local in China

HONG KONG/SHANGHAI (Reuters) – Global buyout firms are racing to launch yuan-based funds in an effort to do deals more quickly and easily in China, where approvals for major foreign investments aren’t easy to come by.

Anticipation of an economic recovery and an appreciating local currency are pushing Blackstone Group (BX.N) and its rivals to launch yuan-denominated private equity funds.

U.S. private equity firms Kohlberg Kravis Roberts & Co (KKR) and the Carlyle Group are now in talks with the local government in Shanghai, China’s financial capital, for launching a fund each of not more than 5 billion yuan, sources with knowledge of the negotiations told Reuters. KKR and Carlyle declined to comment.

Their plans come after Blackstone earlier this month announced a 5 billion yuan ($732 million) fund, making it one of the first Shanghai-registered yuan private equity funds to be launched by a foreign investor.

“The need for speed during the direct investment process, combined with the strength of the RMB (renminbi) and the robust (Chinese) A-share market as a viable exit created immense foreign interest in RMB funds,” said Maurice Hoo, a lawyer specialising in private equity fund business at law firm Paul Hastings.

“After the financial crisis, however, an additional reason for the foreign fund manager interest in RMB funds has emerged – the liquidity in China and the need for professional management of such capital,” said Hoo.

The yuan is also known as the renminbi, which literally means “people’s money”.

Other international firms that won recent approval to launch yuan funds this month include Prax Capital ($220 million), CLSA ($1.46 billion) and First Eastern ($878 million).

CHANGE OF ATTITUDE

Blackstone and other global private equity firms can raise yuan funds from super-rich Chinese individuals, Chinese pension funds or domestic enterprises but these funds are off limits to non-Chinese investors due to China’s strict foreign exchange controls.

Beijing, which has historically viewed private equity firms as speculators, is becoming more welcoming of foreign funds setting up local units and raising yuan funds to boost their investments in China, thereby creating more jobs.

Beijing began to approve yuan funds of foreign firms on a case-by-case basis as early as 2003, but failed to attract interest from top names like Blackstone, mainly because of a long approval process and opaque rules.

Early this year, Beijing said it planned to build Shanghai into a global financial centre by 2020 through friendlier policy measures, including allowing foreign firms to raise yuan funds in Shanghai more quickly and easily.

“For China and Shanghai, it is a very sensible and strategic move to bring international private equity expertise into the domestic market and also people who are willing to commit long-term,” said Victor Chu, chairman of First Eastern Group.

Local funds managed by the likes of Blackstone could also tap China’s new policy for merger and acquisition loans backed by state lenders, while global dollar funds were not allowed to, said Hoo of Paul Hastings.

FRICTION

As foreign investors in private equity firms like Blackstone, known as limited partners (LPs), are not allowed to put money into the new Shanghai-registered yuan funds, friction between the LPs and the managers of their U.S. dollar funds is growing. The LPs don’t want to miss the hot investment opportunities in China.

“Investors in offshore funds want transparency,” said John Fadely, a Clifford Chance lawyer focusing on fund formation, referring to concerns of the LPs.

“Specifically, they want to know whether the sponsor, after establishing an RMB fund for Chinese investors, will give the offshore fund equal access to investment opportunities that fall within the investment scope of both funds,” Fadely said. ($1=6.830 Yuan)

By George Chen and Samuel Shen
(Additional reporting by Megan Davies in New York) (Editing by Michael Flaherty, Chris Lewis and Muralikumar Anantharaman)