Shanghai’s government is planning to launch a scheme that would make it easier for foreign investors to access local private equity funds, in a boon for buyout firms desperate to push into the largest emerging market.
The city’s government “is on the verge” of implementing a pilot scheme that would provide selected foreign investors with quotas of renminbi to invest in local funds, according to Andrew Ostrognai, chair of private equity in Asia at law firm Debevoise and Plimpton.
The move would be “by far the most important development to date for foreign investors in the Chinese private equity market,” Ostrognai said. That is because it would help overcome one of the main hurdles for overseas firms investing in China – the difficulty of converting foreign currency into RMB.
Ostrognai said: “If approved, the pilot programme would allow certain trusted investors, probably big private equity funds and institutional investors, to invest a pool of RMB without needing to go to the government to convert funds each time. Many commentators believe that China wants to open its markets to foreign investors, and this is likely a test case.”
Chris Rynning, chief executive of Beijing-based private equity firm Origo Partners, said: “I think this will happen because it is necessary and sensible, and supported by China’s macroeconomic backdrop.”
According to Rynning, local Chinese economies will need new funds to fill the gap left by the winding down of Beijing’s massive stimulus package, introduced to support China’s economy through the global downturn. Unlike the central government, local governments do not have access to the nation’s vast foreign currency reserves.
Rynning said: “Local governments are keen to fill that vacuum by facilitating investment by foreign LPs.”
Domestic private equity funds would also benefit from foreign capital because wealthy Chinese people prefer to invest in stock and property, and trust their own ability to invest in China, Rynning said.
Shanghai’s move “will not have an enormous impact on the inflow of funds to China in the short-term, but it will improve the landscape for investment,” Ostrognai said.
The news comes as private equity firms trip over themselves to invest in China and establish local private equity funds.
In February, Carlyle Group said it would launch a yuan-denominated fund seeded with $100m (€74m), in a joint venture with Chinese industrial and property company Fosun Group. Carlyle also plans to launch a domestic Chinese private-equity fund with the Beijing government, mimicking arch-rival Blackstone, which became the first global private equity firm to set up such a fund with the Shanghai government last August.
David Rubenstein, co-founder of Carlyle Group, has argued that more private equity firms will set up in China as emerging markets become more important. He said: “If I were 25, I would learn Mandarin and move to China because there is more upside.”
The share of private equity deals struck in the Asia-Pacific region more than doubled in January compared with January last year, and surged ten-fold from the same period just five years ago, according to Dealogic.
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