Fundraising in China

As Macquarie and Everbright tap Chinese sources for capital, will other infrastructure funds overcome Chinese regulatory challenges and follow their lead? Chris Josselyn investigates.

The fundraising potential for infrastructure funds in the Chinese market is undoubtedly huge. However, up to this point a number of hurdles have meant this source could not be fully tapped.

This could now be starting to change.

Earlier this week Macquarie Group and Chinese state-backed financial institution China Everbright revealed they are collaborating to raise two greater China-focused infrastructure funds.

The joint venture is a first in two respects: Macquarie's first venture in China, and Everbright's premier foray into the infrastructure space.

The two unlisted vehicles have a combined fundraising target of $1.5 billion with first close earmarked for 2010. Macquarie and Everbright are set to commit as much as $100 million to the funds between them. Spanning almost the full infrastructure spectrum including toll road, airport, renewable energy, water and wastewater, port and rail investments, the funds will be active in Hong Kong and Taiwan as well as China.

The first fund, denominated in dollars, will target international investors. More interestingly, the second will be a RMB fund targeting Chinese investors. If the campaign succeeds, Macquarie officials may soon need to spend significant amounts of time in Shanghai. 

The city's local government is currently engaged in an intense drive to entice funds to its Pudong financial district. It has relaxed its investment rules and lowered taxes, for example, as a means of encouraging international investors to opt for Shanghai over other Chinese regional centres.

The local government's efforts do appear to be working to some extent. Infrastructure funds aside, private equity firms Blackstone and Hong Kong-based First Eastern Financial are both setting up RMB funds in Pudong at the moment.

However, one potential pitfall which could scupper any budding foreign infrastructure funds from fundraising in China is ambiguity over fund structuring laws. This applies to any Chinese business centre, not just Shanghai.

Of the four ways currently available of raising RMB-denominated funds, it seems none allow foreign participation. Despite draft proposals being drawn up to allow foreign management of Chinese fund partnerships, these have never been formally ratified. This needs to be addressed before the Chinese fundraising market can really be unlocked.

Furthermore, the prospect of fundraising in China, or in a broader sense operating in the country at all, can be a daunting prospect to Western investors. Without strong local links it can often seem virtually impossible for foreign investors to establish any kind of footing in China. “China is tough. Unless you're Chinese, or extremely well connected, it's still very difficult to do business there,” one senior PPP specialist at a global construction group told Infrastructure Investor.

Despite these obstacles, the role private capital plays in Chinese infrastructure is becoming increasingly important. Everbright CEO Chen Shuang says the 60 listed infrastructure operators in China have a combined market capitalisation of over $150 billion. And with the doors to infrastructure fundraisers to China appearing to open, albeit slowly, all eyes will now be on how the regulatory challenges are tackled – and whether the doors will stay open for good.