On the surface, managing an RMB fund might not seem attractive to most US dollar fund managers. The Chinese currency funds tend to be sub-$500 million, come with a shorter fund life than their US dollar counterparts and are burdened by the demands of domestic LPs, who often want unrealistically high returns, unrealistically fast.
The inherent conflict of interest that comes with managing onshore and offshore capital is also a challenge. Once a deal is found, from which fund does the GP invest and how is the decision justified to the broader LP base?
That may be why from 2009 to 2013 to date, only 47 GPs have raised both US dollar and RMB funds, according to data from Private Equity International’s Research & Analytics division (see chart). However, more firms are showing interest. The Carlyle Group, CITIC Capital and Primavera Capital are currently raising RMB funds, while FountainVest Partners has said it intends to this year.
Global firms are also keen. “Over the last eight months, some of the bigger international GPs have reengaged with the RMB fund environment,” according to a Hong Kong-based fund formation lawyer.
The cynic might say that the reason for a parallel RMB fund is to generate more management fees. But the fact is that managing a Chinese currency fund does have certain advantages.
If you don’t have both currencies, you actually get left out of a lot of opportunities. If there is a company that doesn’t want to restructure, wants to stay onshore and has A-share listing ambition – and yet you don’t have RMB – you’re pretty much left out of the game
Lawrence Wang, managing director, Primavera
For example, in August, CITIC Capital invested an undisclosed amount in S.F. Express, a Chinese delivery services firm, in one of the largest RMB transactions of the year (according to CITIC). The deal was made out of the firm’s first RMB-denominated fund, which expects to close on RMB 4 billion by the end of 2013, according to a source close to the firm.
The deal required an RMB investment, says Yichen Zhang, chairman and chief executive. “This lucrative industry is very restrictive to foreign players. Under the Chinese Postal Law of 2009, foreign companies may not invest in [businesses that provide] domestic express delivery of letters,” Zhang says.
Media, education, healthcare as well as telecommunications are other sectors that are more easily investable via RMB funds, adds Lawrence Wang, managing director at Primavera.
“If you don’t have both currencies, you actually get left out of a lot of opportunities,” he says. “If there is a company that doesn’t want to restructure, wants to stay onshore and has A-share listing ambition – and yet you don’t have RMB – you’re pretty much left out of the game.”
FountainVest Partners, which raised a $1.35 billion fund last year, plans to launch an RMB fund so it has the flexibility to move quickly on deals, says Frank Tang, chief executive and managing partner of the firm.
While gaining an edge on deals appears to be the driver for most RMB funds, some firms have a more longterm strategy in mind: building relationships with large, domestic LPs such as state-owned enterprises and insurers.
“What the foreign managers are doing in raising RMB funds is getting the experience of dealing with the Chinese investor base,” says Andrew Ostrognai, partner at Debevoise & Plimpton. As China’s regulations liberalise, domestic capital is expected to be allowed to invest in funds – at which point US dollar fund managers will be courting domestic LPs. This may give them a head-start.