Buyout Funds Face Dilemma in Raising RMB in China

HONG KONG (Reuters) – The allure of raising a Chinese currency fund is strong for private equity firms.

But setting up a yuan fund risks alienating private equity’s most prized stakeholders: U.S., European, and Middle Eastern pension funds and fund-of-funds, which have committed billions of dollars to the buyout industry over the last decade.

These investors expect exposure to China deals. Yet they won’t get it through a yuan fund because only Chinese investors are allowed access under current Chinese rules.

While this issue is in its early phases, and may well be smoothed over, it is surfacing with certain investors, including such names as the Blackstone Group (BX.N) and Microsoft’s (MSFT.O) Bill Gates.

The development may complicate China’s moves to draw foreign private equity investors, an effort that has included tax incentives for fund managers who set up in Shanghai, which aims to catch up with Hong Kong, New York and London as a new global financial centre before 2020.

Private equity executives have promised their investors, known as limited partners (LPs), a slice of China’s red-hot economy, either through global funds or Asia-focused funds.

A yuan fund is seen as allowing easier access to Chinese deals and faster closure, but Beijing forbids non-China investors from taking part.

So if you’re The Blackstone Group, which has a global buyout fund active in Asia and is raising a yuan fund, it’s possible for a non-Chinese LP to wonder: Are you going to use my money to invest in China or will you use Chinese money?

Partly to help internationalise its financial centres, Beijing is encouraging global funds such as Blackstone and The Carlyle Group [CYL.UL] to launch yuan funds and set up offices in Shanghai and Tianjin. Neither the LPs nor the private equity fund managers, known as general partners (GPs), want to miss the hot investment opportunities in China.

“Usually the most convincing way to deal with conflicts of interest between RMB and offshore funds is to align their investment scopes and target returns,” said John Fadely, a partner specializing in fund formation at Clifford Chance.

“So that they always invest together, pro rata to their capital commitments, unless that wouldn’t be feasible for some objective, readily understandable reason,” said Fadely.

Fadely acknowledged that China’s regulatory hurdles make this difficult today.

The yuan is also known as Renminbi, or RMB, and was introduced by the Communists and literally means “people’s money”.

In August, Blackstone said it aimed to launch a 5 billion yuan ($732.3 million) fund, one of the first Shanghai-registered yuan private equity funds by a foreign investor. [ID:nN14292761]

An LP source close to Blackstone told Reuters that some investors in the United States had raised concerns about Blackstone’s plan to launch the yuan fund.

The LP source declined to be identified as the source was not authorised to speak to the media.


Blackstone Senior Managing Director Ben Jenkins addressed the issue when asked about it by Reuters at the AVCJ conference in Hong Kong last month.

“First of all, to clarify, we don’t have it (the yuan fund) yet. We are in the process of raising it. We view it very much as additive and complementary to what we are already doing in Asia and China specifically,” Jenkins said.

Foreign limited partners in other dollar funds face the same issue.

The Bill & Melinda Gates Foundation Trust, part of the Gates foundation, decided not to invest in a newer Hony Capital fund partly due to concerns about Hony’s plan to raise money domestically for a yuan fund, according to sources familiar with the situation.

Hony is an influential China fund backed by Legend Holdings, the world’s No.4 PC maker. Despite efforts by its founder John Zhao to clarify that Hony’s yuan fund and its dollar fund would focus on different industries in China, the Gates foundation decided to walk away from Hony’s second dollar fund, said the sources, who were not authorised to speak to the media.

“The foundation doesn’t have information about specific investments as our focus is on grantmaking,” said a Gates foundation spokeswoman, in an emailed response to Reuters inquiries on Hony Capital.

The Gates foundation was a major LP in Hony’s first fund.

For Blackstone, Jenkins’ explanation was on similar lines — different focuses for its dollar fund and yuan fund in terms of deal size.

“The fund, if we are successful, will be 5 billion renminbi, roughly $750 million equivalent, so that is a relatively small fund compared to our current $20 billion global fund,” Jenkins said. “The RMB fund will be making investments in the $25 million to $50 million range, so those are really too small for us to pursue out of the main fund,” he said.

Jenkins also said that for deals worth over $75 million in the mainland and for overseas deals, Blackstone’s dollar and yuan funds would look to invest jointly.

For the first time, the amount of yuan funds exceeds that of dollar funds raised this year for investment firms focused on China, according to the Centre for Asia Private Equity Research (CAPER) in Hong Kong.

Of the money raised so far this year for investing in China, nearly 60 percent were yuan funds, worth nearly 20.4 billion yuan ($3 billion), according to CAPER.

“I think it is a mixed feeling,” said Kathleen Ng, managing director at CAPER, referring to the yuan, U.S. dollar fund dilemma.

“As time goes by, most LPs have come to terms with this reality and accept the fact that an RMB fund is part of the landscape in China’s private equity,” she added. ($1=6.828 Yuan)

By George Chen and Michael Flaherty
(Additional reporting by Farah Master; Editing by Don Durfee and Muralikumar Anantharaman)