China to draft rules for domestic LPs

The Chinese government is working on establishing rules and regulations that will govern the ability of institutions in China like banks to become limited partners in private equity funds.

The government also is discussing ways “to encourage foreign-based private equity and venture firms to establish investment funds in RMB”, said Cao Wenlian, deputy director general of the department of finance and fiscal affairs with the National Development and Reform Commission.

Wenlian spoke at the 2009 China Venture Capital & Private Equity Forum hosted by market research and financial advisory firm Zero2IPO. Private equity and venture capital professionals from around the world gathered in New York to discuss the investment climate in China in the wake of the financial downturn.

At the conference, Gavin Ni, founder and chief executive of Zero2IPO, released first quarter data showing that private equity and venture capital investment in China slowed significantly.

Venture firms struck 53 deals in the first quarter, compared to 153 in the same period last year, according to the report, and private equity transacted 19 deals, down from 41 in the same period last year. The value of the venture deals struck in the first quarter stood at $319 million, down from $820 million in the first quarter 2008. For private equity deals, the value in the first quarter was about $470 million, down from $2.7 billion in last year’s first quarter.

“It’s been very, very tough,” Ni said.

Fundraising numbers for venture and private equity were also down, with the exception of venture funds raised by local firms in RMB. According to the data, eight local venture firms raised nine RMB-denominated funds with a total value of $506 million, accounting for 90 percent of total new funds and 56.9 percent of the total amount raised in the first quarter.

Some of the investment professionals at the conference supported the idea of the establishment of more private equity funds denominated in RMB, rather than US dollars and other offshore currencies. Funds denominated in the home currency would drive the creation of more domestic limited partners, and ultimately the expansion of a domestic private equity industry.

One of the largest limited partners in China is the national social security fund, which stands at about $77.9 billion at the end of 2008, according to the Sovereign Wealth Fund Institute.

The fund, established in 2000, is looking to commit a portion of the fund in three to five private equity firms this year, Chairman Dai Xianglong announced at a separate conference in China earlier this month.