Private Equity Firm TPG To Create First Yuan-Denominated Fund In Shanghai

Firm Working With Shanghai Government On $735 Million RMB Fund

Once-in-a-lifetime opportunity or bubble in the making? (Image: Mergers & Acquisitions)

Once-in-a-lifetime opportunity or bubble in the making? (Image: Mergers & Acquisitions)

This week, TPG became the latest private equity giant to express interest in creating its first yuan-denominated fund in an attempt to capture more business from China’s newly wealthy, as well as international investors interested in the rapidly internationalizing Chinese currency. According to the New York Times, the new $735 million (5 billion yuan) fund — a partnership with the Shanghai government — is being encouraged by Beijing, which hopes that RMB-denominated investments “will help strengthen the nation’s capital markets and create a more efficient system for allocating capital to private Chinese companies.”

In recent months, we’ve seen similar moves by firms such as the Blackstone Group, Kohlberg Kravis Roberts, Fortress Investment Group and the Carlyle Group, making it clear that the RMB fund is the new “must-have” for any high-flying private equity firm. As of last week, the Carlyle Group’s RMB fund with the Beijing government has already received about 2.4 billion yuan (about $350 million), worth of commitments to begin investing. With so much hot money flying around, the apparent boom in RMB-denominated funds begs the question: are they a good idea?

Recently, Forbes contributor Rebecca Fannin examined just this question, observing that “no topic has managers of private equity funds more engaged and energized than RMB funds,” yet the trend has “the classic makings of a bubble.” From Fannin’s article:

Columbia business school professor Laura Resnikoff, speaking at a private equity event in New York, labeled the RMB phenomenon as a “little bit of the Wild West.”

At the recent AVCJ Forum in Beijing, Jean Salata, CEO-Asia of Baring Private Equity Partners, describe the concept of RMB funds as an “experiment.” Even while acknowledging the funds as “unproven,” Salata added that Baring may still add a RMB fund as an additional option to invest in China.

Same goes for Andy Yan, managing partner, at SAIF Partners, which is reportedly raising a RMB fund to go with the firm’s soon-to-be-closed $1 billion fund, its fourth. Yan said he’s skeptical about whether the majority of new RMB funds will make it and cited inexperience among “first-timers” in RMB private equity and venture funds. “I bet you can’t find one with more than five years’ experience,” he said, speaking at the forum. “It takes time to get over the learning curve.”

Time will tell if the RMB funds go the way of those in the late 1990s dotcom boom, with too much money rushing in and valuations rising before a crash. It’s an exciting chapter in the development of China’s private equity business. Already, it seems clear that it’s quickly becoming an onshore game for private equity investing in China, no longer driven by offshore dollar funds. As the trend becomes more pronounced, it is one more indicator of an economic power shift from the west to the east.

Whether it bodes ill or well for China’s economic internationalization, the emergence of the RMB fund is an important development, and will likely present great opportunities for firms looking to strategically invest in areas like underdeveloped, high-potential areas like healthcare, education or tourism. As always when dealing with investment in China, however, it pays to do one’s due diligence. Interestingly enough, despite the jury still being out on the possible performance of these funds, as Jing Daily suggested last year, this type of yuan-denominated fund is likely to benefit unexpected sectors like art and other portable assets. From our article:

As the RMB gains both value in relation to other global currencies, holders of Chinese assets (particularly the portable ones) stand to gain from measures currently starting out, from China’s call for a more flexible world currency, to China’s early experiments with currency swaps, to the growing Chinese buyer base for assets of all kinds. Although individual markets may look like a rollercoaster sometimes — and art is no exception — macro-level issues existing outside of the art world, taking place in the meeting rooms of the IMF and in economic negotiations between two countries’ finance ministries, will inevitably affect the price of all types of assets in coming years — Art is no exception.

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