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Foreign Buyout Firms in China Lag in Yuan-Raising Race
文章来源:The Wall Street Journal         更新日期: 2011-06-06 10:06

BEIJING—Chinese private equity firms are raising money for funds denominated in the country's currency far more quickly than foreign rivals, putting a cloud over a new strategy that international firms have adopted to overcome investment hurdles in the world's No. 2 economy.

Over the last year, global investment powerhouses including Blackstone Group LP, Carlyle Group LP and TPG have started funds denominated in yuan, or renminbi, that aim to tap China's growing ranks of cash-rich institutions and wealthy individuals. The yuan funds, which are required to be joint ventures with Chinese partners, are designed in part to help the international firms get past sensitivities over foreign ownership that have often complicated investments from their dollar funds into China.

But so far in the fund-raising race, these big names generally have been lagging behind a group of homegrown Chinese players, many of which have been around for no more than a few years and are largely invisible outside of Asia.

In the first quarter of 2011, Chinese private-equity firms closed 16 renminbi funds, raising a total of 164.5 billion yuan ($25.4 billion), according to Zero2IPO Research, a Beijing-based firm that tracks China's private-equity industry. Foreign firms raised the equivalent of about $3.2 billion in just seven yuan funds. In January, Citic Private Equity Funds Management Co.—a unit of Citic Securities, controlled by the largest state-owned financial conglomerate, Citic Group—raised nine billion yuan for China's largest yuan-denominated fund, nearly twice the five billion yuan of the biggest foreign funds. To be sure, many private-equity firms, both Chinese and foreign, are still seeking to raise dollar funds from overseas investors to invest in China.

But in the race to raise yuan funds, Beijing-based firms like Citic, Hony Capital Ltd., which is backed by a large Chinese conglomerate, and CDH Investments, a pioneer of China's private-equity industry, are benefiting not only from easier access to domestic investors like the country's gigantic pension fund, but also—at least for now—fewer regulatory limits on what they can invest in.

The earliest Chinese funds started out raising dollar funds, like their foreign counterparts. Many big Chinese institutions then were largely barred from investing in private equity, while overseas investors were eager for a toehold in China.

A local private-equity firm that started with dollar funds is Hony, founded in 2003 and sponsored by technology-and-investment conglomerate Legend Holdings Ltd., which is also the parent company of PC-maker Lenovo Group. Hony's first dollar fund, with $38 million in capital, had only one investor: Legend Holdings.

But the fund earned more than five times the capital invested, which attracted other investors. Hony has since raised three more dollar funds totaling more than $2 billion from investors like Goldman Sachs Group Inc., the Stanford University endowment, and Temasek Holdings Pte. Ltd., a Singaporean sovereign-wealth fund.

Hony's founder and chief executive, John Zhao, is dubbed the "Steve Schwarzman of China"—a reference to Blackstone's co-founder—by many of Hony's Western investors for his early success as a deal maker. A physics graduate from China's Nanjing University, he earned an M.B.A. at Northwestern University's Kellogg School of Management in Illinois and worked in the U.S. for 15 years at technology and venture-capital firms, before returning to China in 2002.

In 2008, Mr. Zhao, who also is known by his Chinese name, Zhao Linghuan, led Hony's effort to launch the country's first yuan-denominated private-equity fund, with five billion yuan in capital. Beijing at the time was seeking to develop such funds to provide financing to smaller Chinese companies.

The government has gradually loosened restrictions on Chinese entities investing in private-equity funds. Notably, China's National Social Security Fund, with almost 860 billion yuan in assets as of last year, received approval in 2008 to invest up to 10% of its assets in private equity. Last year, the country's giant insurance companies were given the green light to invest in riskier assets like private equity. By some estimates, Chinese insurers could eventually allocate as much as 100 billion yuan to private-equity funds.

Such institutions are "looking for general partners that have demonstrated their ability to invest in China," said Mr. Zhao. Hony counts the National Social Security Fund and China Development Bank Corp., a government policy lender, among the investors in its renminbi funds, which now total 15 billion yuan.

International private-equity firms say they have advantages over domestic players, especially the younger ones. Foreign firms generally have more experience in restructuring and buyouts, which could enable them to better handle complicated deals. And foreigners are more familiar with international markets, an advantage for Chinese companies seeking offshore listings.

But the foreign firms face hurdles to making investments with their renminbi funds. Foreign firms were first allowed to set up yuan funds last year, in partnership with Chinese entities. Several global firms have announced joint ventures, but most are still in the process of raising money. The foreign renminbi funds have made few investments, in part because of continued uncertainty over what investments they are allowed to make. 

Foreign private-equity firms had hoped the renminbi funds they sponsor could invest in sectors generally off-limits to foreign ownership, like media, financial services and natural resources. But industry executives say it is still unclear if those barriers have actually been lifted, even if the investors in the foreign-backed renminbi funds are Chinese. 

A recent report by the U.S. Trade Representative cited private equity as a sector subject to trade barriers in China. Some foreign private-equity executives have been lobbying China's State Council to give so-called national treatment to the renminbi funds they sponsor, in terms of the sectors they can invest in.

Global firms and their Chinese rivals share at least one challenge: the thorny issue of reconciling the interests of investors—known as limited partners, or LPs—in their new renminbi funds with those in their existing dollar funds. Who gets the best deal?

"I've found it very difficult to align the interests of the LPs," said Suyi Kim, a principal of CPP Investment Board, which manages the Canada Pension Plan, at a recent private-equity conference in Beijing.

Mr. Zhao recalled the reactions from Hony's existing investors when they learned of its plans for a yuan fund. "Oh my goodness. We opened up a can of worms," he said. "People were concerned and frustrated."

But Hony saw the renminbi fund as crucial to its survival in an increasingly competitive industry. In the end, Mr. Zhao worked out with investors a trio of what he called "golden principles" and, in turn, the investors decided to leave the deal-making decisions to the fund manager. "Be upfront, be transparent and deliver results," he said.