China rule change set to boost domestic secondaries market

Yuan-denominated funds have raised magnitudes more than dollar-denominated funds, though a lack of buyers has hindered the growth of a secondaries market.

The Chinese domestic secondaries market may finally have the regulatory conditions it needs to prosper, according to a Beijing-headquartered intermediary.

The qualified foreign limited partnership programme, which enables select foreign managers to invest onshore in yuan using capital raised offshore, should help increase liquidity across the private equity market, George Di, chief operating officer of Zerone, told sister publication Secondaries Investor.

“It will get easier for LPs to exit and a lot of approaches, like buyout [M&A transactions] and secondaries, will become more mature,” Di said. “The secondaries market is at a very early stage in China. Only a few LPs know they can use it as an exit approach.”

A majority of sales at the moment are by liquidity-constrained LPs, he added.

“The [secondaries] buy-side still has the power – there are a lot of heavily discounted assets.”

Yuan-denominated funds tend to have four-to-five-year terms, so vehicles are left with significant amounts of unrealised capital at the end of their lives, Private Equity International reported.

“There are people that seek liquidity which they didn’t get in the promised horizon and want to use that money elsewhere,” said head of private equity at Schroder Adveq Rainer Ender, whose firm was given QFLP status in the second quarter. “So, the secondary market has special appeal, and there’s not many buyers on the RMB side.”

The relative lack of institutions who can invest in yuan-denominated funds, buy businesses in yuan or carry out secondaries acquisitions in the currency has in part driven the yuan-to-dollar restructuring trend in the GP-led segment of the market. In September, Secondaries Investor reported that HarbourVest Partners and LGT Capital Partners had backed a $600 million deal involving Beijing-based IDG Capital. It was understood to be the first time a QFLP structure has been employed in a GP-led deal.

“Usually the underlying companies have to change their corporate structure in order to take US dollars and to be able to go into a US dollar fund and that is very difficult for a GP to orchestrate,” a source told Secondaries Investor at the time.

Yuan-denominated funds raised the equivalent of $163 billion last year, compared with only $22 billion for dollar-denominated funds, according to data from Schroder Adveq and research group Zero2IPO.