The Rise of Renminbi Private Equity Funds

Posted on June 11, 2012 at 6:06 PM

With over $20 billion raised in 2011, renminbi private equity funds are the world’s fastest-growing major pool of discretionary investment funds. These funds play an increasingly vital role in allocating capital to China’s best entrepreneurial companies.

China has stepped-up efforts to develop homegrown firms, such as Beijing-based Hony Capital Ltd., as individuals and institutions pump money into a market that favors the renminbi over the dollar.

Renminbi fund managers have an advantage in terms of speed of execution as well as easier exit opportunities within China. As a result, deal flow is being diverted to renminbi funds as they are easier for managers to transact.

As the value of private-equity deals rise, increasing 19 percent to $28.5 billion last year and doubling since 2009, non-Chinese funds have responded by also raising renminbi funds. Domestic private-equity firms have an edge over global ones through their particular focus on a single country and are thus able to execute quicker decisions.

Stephanie Hui, a Hong Kong-based managing director at Goldman Sachs' private-equity unit, says that in order for the firm to remain competitive, it needs a local fund and a local team, and must deliver value on top of capital.

As an alternative, foreign and domestic private- equity funds have sought joint-ventures in China as a way for foreigners to gain market share through the local partner’s access to opportunities. There were $13 billion of such investments last year, more than double the $5.1 billion in 2010, proving that China is still rich with foreign investment opportunities—and the need for U.S. lawyers will surely follow.

Indeed, in 2012, Hong Kong, Beijing, and Shanghai were the hottest markets for U.S. firms, with the number of attorneys increasing by approximately 12 percent in Hong Kong, 10 percent in Beijing, and 3 percent in Shanghai. Baker & McKenzie has perhaps the largest presence in China, followed by firms Mayer Brown, DLA Piper, Hogan Lovells, and Reed Smith.

Firms such as Ropes & Gray were one of the earliest U.S. law firms to counsel investment funds in the establishment of RMB funds in China. U.S. firms are also increasingly representing domestic RMB-based Chinese fund managers in setting up their first USD funds. This continued growth and transformation of China’s market will yield the need for expertise by competitive foreign lawyers.

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