US private equity firm The Carlyle Group has signed a memorandum of understanding with the Beijing Municipal Bureau of Financial Work to set up an RMB fund in the Chinese capital.
In doing so, it looks to be the first foreign firm to act on pilot measures introduced by the Beijing government at the beginning of this year to attract foreign private equity firms to Beijing’s Zhong Guan Cun area, often referred to as China’s Silicon Valley. The measures rival those put in place last June by the Shanghai government to attract foreign private equity firms to Shanghai’s Pudong New Area.
Carlyle's fund is a pure RMB fund and will raise capital from domestic LPs in China. Though no details on the size of the fund have been disclosed, a report carried by Bloomberg cited Chinese media reports that the firm was seeking to raise RMB5 billion ($732 million).
According to a Carlyle spokeswoman, the fund will have an average investment size of $75 million and will be managed by Carlyle Asia Partners, the firm's buyout team, as it will deploy more capital per deal than the firm’s Asia growth capital team.
“The Carlyle Asia Partners RMB Fund will help expand our investment capabilities in Beijing and across China, further Carlyle’s strategy of localising our franchise in China and contribute to the healthy development of the local private equity industry,” Daniel D’Aniello, co-founder and managing director at the firm, said in the statement.
Carlyle partners have been outspoken in recent times about the importance of the Chinese market to the firm's investment strategy. Speaking at the annual Beijing Global Private Equity Forum in November, the firm’s co-founder David Rubenstein said China was “now at the epicenter of the private equity world”.
The Beijing fund will be in fact be Carlyle’s second RMB fund. In early 2009, Carlyle set up another smaller RMB fund to make growth capital investments, a source told PEI Asia in August 2009. No further details of that fund have been disclosed.
In May 2008, Carlyle also signed a memorandum of understanding with the Shandong Provincal Government. The MOU said that Carlyle would “dedicate resources, capital and expertise to the region to promote and develop sustainable, long-term commercial enterprises” in return for proactive government recommendations on investment opportunities, according to a statement at the time.
This focus on regional tie-ups is typical of the way private equity is developing in China. As the asset class has taken root in the country, various cities have introduced incentive programs designed to promote the formation of private equity funds and fund management companies in their local jurisdictions, as they jockey to become the country’s private equity centre.
The most popular so far has been the Shanghai Pudong New Area initative which allows foreign private equity firms operating in Shanghai’s Pudong New Area district to set up wholly-owned Chinese entities. The policy has attracted firms including The Blackstone Group, which launched its first RMB fund targetting RMB5 billion in mid-2009; First Eastern Investment Group; Abax Global Capital; Prax Capital; and CLSA Asia-Pacific Markets.
The new Beijing pilot policy reportedly goes a step further than Shanghai's, allowing firms to be structured as partnerships. This permits them to set up with less than the $2 million in registered capital needed to set up in Shanghai and potentially allows for more favourable tax treatment. Foreign firms registered in Shanghai will not have the same privileges until March, according to China’s Global Times.