Yuan funds heat up among intl PE investors

Maturer capital market, accelerated innovation seen as key factors drawing global firms' focus

Anticipating the continuous maturity of the Chinese capital market and the acceleration of technological innovation, leading international private equity firms have sped up to raise first-time yuan funds or made related preparations in the Chinese market, experts said.

U.S. private equity firm Warburg Pincus, a specialist in healthcare and technology investments, is raising 3 billion yuan ($435 million) for its maiden yuan-denominated fund, Reuters reported on Feb 21.

Private market investor Hamilton Lane announced on Feb 16 the official opening of its China office in Shanghai, a move that will lead to the firm's first RMB fund as expected by market insiders.

With assets of $832 million under management as of the end of 2022, Hamilton Lane was approved in May 2022 to join the qualified foreign limited partner pilot program in Shanghai, under which foreign investors can convert U.S. dollars into RMB and make investments in RMB private markets.

Noticing growing demand from domestic institutional and private wealth investors to allocate their capital to global assets, Xia Mingchen, Hamilton Lane's managing director and co-head of Asia investments, said that the Shanghai office will help to manage private market investment programs for investors of all sizes.

Affirma Capital, the independent PE owned and operated by Standard Chartered Private Equity, was reportedly targeting its first RMB fund of 2 billion yuan, according to Reuters. It reached the first close at 1.5 billion yuan by the end of 2022.

L Catterton, the PE firm backed by luxury conglomerate LVMH, said in October it had reached the first close of its debut yuan fund targeting 2 billion yuan, focusing on the consumer sector.

As explained by Qian Jun, head of Investments China at Schroders Capital, more mature investors have diverted to the RMB market for hedging purposes mainly due to the capital allocation slowdown in the U.S. dollar market.

Ni Zhengdong, founder of investment solutions provider Zero2IPO Group, said at a forum in late February that fundraising for U.S. dollar funds is met with much difficulty at present. The best timing was around April last year, as the U.S. Federal Reserve started aggressive interest rate spikes. The challenges in fundraising have resulted in more investment slowdown for these U.S.-dollar PEs, he said.

As for the heating up of yuan funds, Yan Hong, a professor from the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, said that it is largely related to the growing maturity of the Chinese capital market and wealth management market.

"The full implementation of the registration-based IPO mechanism throughout the A-share market is also conducive to the establishment of yuan funds. Apart from expanding exit channels for PEs, the mechanism also helps to form a maturer market-based pricing and risk identification system," he said.

With the fundraising process and capital management conducted in China, RMB funds face fewer limits in terms of investment scope if compared to U.S. dollar funds, said Zhang Hailiang, CEO of integrated business services provider Trico Group for China. More early-stage or technologically innovative projects are inclined toward yuan-denominated funds due to valuation, policy and listing concerns, he added.

China's continued efforts in advancing industrial transformation and technology innovation will breed paramount investment opportunities. Setting up RMB funds can help foreign investors participate in the early financing of Chinese startups and seek higher profits, said Li Yingting, a researcher at the BOC Research Institute.

The ongoing opening-up in China's financial industry will help strengthen international investors' confidence in holding and using RMB, which drives the development of yuan-denominated funds, she added.