Private equity in China: alternative no more

If recent developments in China are anything to go by, the asset class is bedding in nicely.

Private equity has been on the agenda of the Chinese government for a few years. However, several developments in April suggest the asset class is gaining in importance. 

The government is working on establishing rules and regulations that will allow Chinese financial institutions, like banks, to become limited partners in private equity funds, Cao Wenlian, deputy director general of the department of finance and fiscal affairs with the National Development and Reform Commission, said at a conference in New York in April. 

Such a move would help expand the limited LP base that has been holding back the establishment of a credible domestic private equity industry in China. In June 2007, the government amended the Partnership Enterprise Law, removing the double taxation burden on private equity returns and allowing domestic investors to establish limited partnerships. That opened the floodgates to the burgeoning RMB-denominated fund industry. However, many potential LPs, such as banks, have been unable to commit to funds due to separate regulation restricting this.

The Chinese government began to give domestic institutions the green light to invest in private equity last year when the RMB563 billion ($82 billion) National Social Security Fund (NSSF), the country’s largest pension fund, was allowed to invest up to 10 percent of its assets in domestic private equity.
NSSF, established in 2000, committed to RMB-denominated funds managed by leading Chinese firms Hony Capital and CDH Investments. It is also reported to have agreed to commit to funds being raised by Shenzhen Capital Group and Science and Merchants Investment Management, both domestic firms affiliated to provincial governments.

Most recently, the NSSF chairman, Dai Xianglong, said at a conference in Hainan, China in April that the pension fund is looking to commit capital with another three to five private equity firms in 2009.
Also seemingly opening the door even wider to private equity is China Investment Corporation (CIC), China’s $200 billion sovereign wealth fund, which reportedly reorganised its investment departments to improve corporate efficiency and investment performance at the end of April. 

In doing so, it established a new private equity department, headed by Hu Bing, who was previously responsible for CIC’s fixed income investment and trading activities. Prior to this, CIC’s private equity business was part of its alternative investments department, which included direct private equity and real estate investments as well.

“This shows CIC really cares about the private equity sector, as Hu, now as head of the new and separate department, has more power and confidence when talking to foreign funds for cooperation,” Reuters quoted a source close to CIC as saying.