Talking RMB Funds With C.P. Eaton’s Asia Head

Placement agent C.P. Eaton today announced the hiring of Eric Gu to lead an exploratory effort toward placing RMB funds. Gu is based on Shanghai. I spoke with David Love, head of C.P. Eaton’s Asia operations, about the developing rules and regulations, the potential for middle market RMB funds and the demand for private equity from Chinese investors.

Tell me more about the new effort. It appears you’re getting ready to place RMB funds.

It’s really an exploratory effort. We were the first placement agent to form an office there when we put one in Shanghai. It gave us a first mover advantage. One market that is developing is the whole RMB market, which is moving to be accessed by western GPs and China-based GPs, so we wanted to dedicate enough resources to it so we understood the regulations and rules of the market. We want to have knowledge of the development of the market, and so we could advise both western and local GPs as to strategies for accessing the market.

Down the road, we will have the ability to help western GPs access the market. And we’ll also have the ability to work with local GPs in a fundraising effort. I’d have to say it’s probably a three-to-five year program. So you shouldn’t look for announcements from us in terms of specific mandates in the near term, because it’s so nascent in terms of its development.

So it’s very early stage.

Yes, we just want to understand when we see Blackstone and KKR and Carlyle and Goldman Sachs announcing they’re raising RMB funds-none of them have done it yet, they’ve just announced they’re going to do it-we want to be sure as a China-based placement agent that we understand the market and the potential. We do things very cautiously. It’s worthwhile for us to dedicate the resources to understanding.

I think I saw that Blackstone had at least gathered a few commitments, so that’s encouraging.

I hadn’t seen that, but one of the largest funds that has been raised to my knowledge in the market was CITIC Capital Partners’ $1.3 billion equivalent RMB fund. Local GPs are raising significant sized funds. It will take time for the brand-name western GPs to raise theirs, but I think they will. It requires a lot of work and patience and interlinking with strategic partners in China. Slow though it may be, they’re probably smart to position themselves as such.

Do you expect many more players will be announcing RMB funds, or will they wait and see how KKR and Blackstone do with theirs?

Everyone is going to watch and see how Blackstone and KKR fare. If there is a strategy that merits a demand and it has the right partner, you could see more GPs progress on their own. I want to stress that this is really formative.

Will RMB funds trickle down to the middle market or will it remain a strictly mega-firm endeavor?

I think it’ll trickle down, but that also will be slow. It will also have to be a very specialized manager that has specific niche that interests that the Chinese investor is interested in.

Are these RMB funds required to invest exclusively in China, or can they be invested elsewhere?

It’s still one of the variables that has to be decided. I’m not sure if they are allowed to invest wherever their stated strategies allow if they must invest in the regional companies.

Is there a demand?

With CITIC raising a $1.3 billion equivalent fund, it shows there’s demand there. I’m not sure who their LP base was exactly but I believe it was supported by the larger Chinese LPs in order to accumulate to that size. So there is demand there.

What are the biggest barriers now to raising an RMB fund?

One thing for a western GP is currency conversion and repatriation, and that needs to be explored by us as well. Repatriation is basically, “how do you get your money back out?” The guys at the large GPs are probably deep in understanding of that, but what has yet to be developed is the biggest barrier: the rules and regulations that are going to dictate this market and affect the over all growth of it.