July saw both The Blackstone Group and The Carlyle Group reach the halfway point on fundraising for their debut RMB funds, making them the first of a crop of global investment managers to reach a close on RMB vehicles launched in the past year.
Blackstone launched the Blackstone Zhonghua Development Investment Fund with a RMB5 billion target last November under a pilot measure introduced in June 2009 by the Shanghai government. The policy allowed foreign private equity and venture capital firms to set up onshore private equity management entities in the Pudong New Area.
Under a similar measure introduced by the Beijing government in January to attract foreign private equity firms to its Zhong Guan Cun area, known as China’s Silicon Valley, Carlyle also set up a RMB5 billion fund to invest in large growth companies in Beijing and across China.
Other foreign firms raising RMB-denominated funds under these pilot initiatives include Abax Global Capital, Infinity I-China, Prax Capital, First Eastern Investment Group and CLSA Asia-Pacific Markets.
While Blackstone and Carlyle have proved there is local appetite for their vehicles in China, what has not yet been proven is how their funds will work in practice – especially when it comes to investment and divestment.
Although their RMB funds – like all RMB vehicles – are only able to raise money from domestic LPs, they will still – like all foreign investors – face restrictions on investment in certain industries including petrochemical and telecommunications, which are subject to approval by Chinese Ministry of Commerce (MOFCOM) and State Administration of Foreign Exchange (SAFE).
“The Blackstone RMB fund will still be considered a foreign fund,” an Asian fund of funds manager said. “It will still need approval from the government on investments and is likely to be at a disadvantage to local funds.”
“(The policy) in theory allows foreign sponsors to set up domestic limited partnerships, but laws on investment restriction still apply – all we have is a law and we don’t know how useful it is,” added an Asian fund lawyer.
Experimental they may in some regards, but these foreign-managed RMB funds nonetheless remain a big step in terms of gaining global firms access to Chinese deals, according to Hubert Tse, a senior partner at Shanghai-based legal service firm Boss & Young, who specialises in cross-border mergers and acquisitions, private equity, venture capital, and asset management.
Commenting on the fact USD-denominated vehicles need to seek approval from SAFE or MOFCOM approval on all their investments, Tse states: “If [the foreign private equity firms] invest in companies which are in permitted categories, which most of companies probably are, then they don’t need any approvals. So I think the RMB funds have given them some good advantages.”
This also makes them a more attractive to CEOs of Chinese target companies, Tse said, since any uncertainty over the conversion of foreign currency and approval on the investment has been removed.
However it pans out for Blackstone and Carlyle, it is certain that global firms will not stop pushing boundaries and testing new strategies in order to gain access – and more equal access – to China’s alluring private equity market.
Also testing a new strategy in China is Blackstone and Carlyle peer Kohlberg Kravis Roberts, which began fundraising for its maiden China-focused fund in July. Although it has not been confirmed whether any of this fund, which has a target of around $1 billion, is being raised in RMB from local investors, as KKR’s first ever country-focused fund it is a marked departure for the firm.
One source close to the firm acknowledged that when it comes to China, the firm had realised a different approach is needed.
“The China fund came on the back of the realization that you need to start with $30 million deals to break into China – you cannot jump straight to the $300 million level,” he said.
Looks like the globals will do whatever it takes to make it in China.