RMB funds set to become westernised

RMB-denominated fund terms may become more closely correlated with USD-denominated funds as the Chinese currency evolves, according to Craig Dauchy, partner at law firm Cooley.

He sees the evolution of the RMB fund driven mainly by the changing demands of a broadening LP base.
 
The local currency fund is a young product in China. The first RMB funds, established in 2005, have a relatively short investment period of around 3-8 years. As the first investment cycle ends, existing investors will likely review their terms based on the investment experience.

“A number of RMB funds will mature in 2012-2013,” Dauchy said. “The managers are going back to many of the same investors and [they will discover] there are going to be new terms negotiated.”

But the new terms they discuss could be quite different than terms negotiated for the first fund due to the increasing commitments from China’s institutional investors to private equity funds. For example, China’s National Social Security Fund said it will have room to increase private equity investment to 10 percent from 2.2 percent of its total assets. 

Onshore funds will need further sophistication of legal terms, he noted, adding that private equity in the US has over 20 pages of fund terms dedicated to institutional investors.   

By comparison, RMB funds tend to have brief legal documents, designed more for the high net worth individuals who make up the largest part of the domestic LP base.  

Another force driving change is foreign GPs who want to set up local currency funds in parallel with USD products. Having two currency funds would force the managers to look at incorporating USD fund terms into their local currency products to limit conflict and enable deal sharing between the funds, he noted.

Foreign interest in RMB funds has been strong. “Of the 25 fund manager groups that we serve, most of them have some RMB fund strategy, although not all of them have established RMB funds at this time,” added Jordan Silber, partner at Cooley.

“Managers we work with feel that if they don’t have both pools of capital, they won’t be able to take advantage of all the opportunities.”

Allan Liu, managing partner of Hong Kong-based private equity firm PAG Capital agreed. Foreign GPs are interested in adding RMB funds to increase investment opportunities in China, especially in sensitive sectors such as media and telecoms where foreign funds have limited access, said Liu. 

He also acknowledged that since RMB and USD fund terms are different, there will be an increasing need for GPs to adjust their fund terms to ensure compatibility between the two.

PAG Capital has a $2.2 billion USD-denominated fund, and it is raising a 1.9 billion RMB (€228 million; $300 million) fund this year, he said.  

In 2011, total RMB funds raised were the equivalent of $26.6 billion compared to $5.8 billion in 2008, according to PricewaterhouseCoopers.