Global Private Equity Firms Look To Go Local In China Ellen Sheng, DOW JONES NEWSWIRES, 17 Oct 07 HONG KONG (Dow Jones)-- When Victoria Capital, a Hong Kong-based private equity firm, decided to launch a fund to invest in mainland China a couple of years back, they chose an unusual route.
Instead of establishing an offshore fund domiciled in the Cayman Islands, the usual practice by most funds, they set up shop in China with a fund denominated in renminbi, registered in Beijing and applied for approval from the central Chinese Ministry of Commerce.
"It took some time because we're a pioneer," Xiaoyang Yu of Victoria Capital said of the whole process.
But the payoff made the extra effort worthwhile, she said. The firm's fund, which attracted more than US$100 million from mostly foreign investors, has since made two minority investments in small to medium sized Chinese companies. For both of those investments, the fund got the government's green light fairly quickly just by filing documents with the local Ministry of Commerce. The fund is also free to do buyout deals, Yu said.
"It can take more time to set up the fund and get everything straightened but then there will be much less uncertainty in terms of timing in the future. That's a big enough advantage for many people," said Li Li, a partner at Debevoise & Plimpton LLP in Shanghai, which helped Victoria Capital set up the fund.
Victoria Capital is one of a small but growing number of foreign private equity firms setting up local currency funds in China. According to the Centre for Asia Private Equity Research, there are at least 16 yuan-denominated venture capital/private equity funds that have raised a total of RMB11.7 billion so far. Most of these funds are purely domestic affairs with only Chinese investors. Firms with such funds include Hony Capital, CITIC Capital Partners, Bank of China International and China-Singapore Suzhou Industrial Park China Council. Yet a handful of onshore RMB funds - industry insiders estimate nine or so - include foreign investors.
For all the promise China offers, private equity firms have found it difficult to get deals done. Industry insiders have complained about a bottleneck at the central Ministry of Commerce slowing or halting the approval process. It's also hard for private equity firms to buy controlling stakes - their preferred approach elsewhere in the world - because of regulations and the abundance of family-controlled businesses.
Some, like Victoria Capital, believe that having a local currency fund helps speed up the deal making process and allows them to tap domestic mainland investors. Firms, both large and small, are looking into setting up RMB funds and assessing the situation, industry insiders say. But it's not clear that these same benefits translate to big firms doing big deals.
"There's a big buzz about RMB funds and I expect to see a lot more of them than now, but there are a huge number of issues that haven't been worked out," said Phil Culhane, partner at Simpson Thacher & Bartlett LLP.
One partner at a large global private equity firm, who declined to be identified, looked into setting up an RMB fund but decided it wasn't worthwhile.
"Some people have suggested something like this to me, and I thought about it but don't see anything interesting," the person said.
The approval process for smaller deals under US$100 million is not as complicated, but for deals in the several hundred million dollar range, the approval process is necessarily more complicated and "it's not very clear if you can actually cut through red tape by labeling yourself to be domestic," the person added. Terms Not Defined For now, local currency funds tend to be set up by small or mid-market firms as it's far from clear whether having a local currency fund would facilitate the approval process for larger deals.
Moreover, new regulations encouraging local currency funds are meant to foster a domestic private equity industry.
"What people haven't figured out is can you have a Chinese domiciled fund that's managed by people offshore?" said Culhane.
Another concern that's been holding larger firms back are regulations stipulating that local currency funds must mainly focus on venture capital type investments in technology. That's not quite the market that large global private equity firms are pursuing though there appears to be some leeway.
"None of the terms are defined," said Debevoise's Li. "We asked the Ministry of Commerce what 'mainly' means and they don't have that definition. And we also asked 'what's high tech?' Nowadays people may even say they use high tech to raise pigs. But that's not defined either."
With so few examples to follow, firms are grappling with questions about everything from taxes t | 
