Currency coup

Hony Capital is once again setting records in China’s private equity industry, this time for becoming the first firm to use a US dollar-denominated fund to do a remnimbi deal.

Beijing-headquartered Hony started life as a captive private equity platform for Legend Holdings, the influential government-controlled conglomerate that is also the largest shareholder in computer manufacturer Lenovo.

Run by John Zhao, the seven-year-old firm has become a household name in international private equity and has emerged as one of a small group of go-to Chinese firms with the ability to source and deliver buyouts in China. It is the second-largest China-focused private equity firm in the world, according to the PE Asia 30 published in May, which based its rankings on capital raised in the preceding five-year period. Hony had raised just over $3.8 billion at the time.

Under Shanghail’s pilot measures, Hony recently converted an undisclosed amount of currency from its fourth USD-denominated fund, which closed in 2008 on $1.4 billion, to invest in Hongray Group, a Chinese PVC glove maker. It is unclear whether an investment was also made by one of the firm’s RMB funds – its first fund raised RMB 5.26 billion in 2008 and its second, targeting RMB 10 billion, held a first close in November last year on RMB 7 billion.

Hony’s Hongray deal was the first done through the conversion of US dollars to RMB since Shanghai officially released a detailed guide to its pilot programme in January. A number of firms were granted approval to convert a certain amount of currency from USD funds, including The Blackstone Group, The Carlyle Group and 3i.

Hony reportedly received the largest quota to date, $500 million. It is thought Shanghai will award a total of $3 billion under the scheme, also known as the Qualified Foreign LP (QFLP) programme.

Since the QFLP programme was first revealed, many market participants have been wondering whether a commingled fund raised from domestic and foreign LPs would continue to be treated as foreign capital and subject to the investment restrictions that status implies.

In October last year, information was circulated suggesting that QFLPs would be able to convert foreign currency for investment into an onshore RMB fund as long as the aggregate quota for foreign-originated capital did not exceed 50 percent of the total size of the fund.

However, the guidelines released in January did not specify the ratio of USD to RMB allowed in a single fund and industry insiders interpreted have interpreted the omission to imply commingled funds would not be allowed.