Currency liberalisation to boost private equity

Hong Kong: The progressive liberalisation of the yuan by China is expected to increase yuan denominated private equity fund raising that will eventually become the key source of funding for general partners (GPs) managing assets in China, according to industry participants.

Speaking at the Asia Private Equity Forum last week, representatives from both GPs and Limited Partners (LPs) said the rising yuan liquidity will be a major driving force.

In 2010, 82 China-focused private equity funds were set up, raising 27.6 billion yuan (Dh15.37 billion). That was more than double the 12.96 billion yuan raised by 30 funds during the previous year, according to Beijing-based fund consultancy Zero2ipo.

Of the 82 funds, 71 were denominated in the Chinese currency, although they only raised a combined $10.7 billion, compared with $16.94 billion by generally much bigger hard-currency funds.

"With increasing number of Chinese financial institutions, government owned funds and high net worth individuals are set to enter private equity investments, GPs operating in the region have huge scope of tapping the newly emerging class of institutional funding sources from China," said Alvin Li, managing director of CCB International, a private equity firm operating in China.

Co-operation

Many Hong Kong-based GPs are hopeful the relationship with new LPs from the mainland will help them to get access to some of the sectors that were so fare restricted to foreign investors. "We do not see LPs as mere source of funding. Going forward there is ample scope for co-operation between these firms that could help in circumventing some of the restrictions imposed on foreign equity participation in some of the sectors in China," said Victor Chu, Founder and Chairman of First Eastern Investment.

"The scope for deal flows and high multiples has increased with new funding sources and the possibility of taking more companies public," said Gabriel Li, managing director, Orchid Asia Group.

Despite such optimism from GPs, some of the large LPs like Morgan Stanly Alternative Investment believe the new fund rush is going to result in excess liquidity and overheating of valuations. Most International LPs consider the emergence of yuan GPs and LPs will give a strong push to valuations but eventually driving down the returns from private equity investments. "Return expectations should be more rational in the context of the entry of new funds into the PE arena. It is certainly going to intensify competition in fund deployment," said Alice Chow, managing director of Squardon Capital.