Testing China's wall

News broke this week that TPG was launching not one, but two RMB funds – and thus entering China’s domestic fund industry with a bang.

In setting a (reported) RMB 5 billion target for both its Shanghai- and Chongqing-based vehicles, the firm follows the lead set by global peers, The Blackstone Group and The Carlyle Group. It also inducts it into the small group of foreign private equity investors who are test-driving these new – and still unproven – private equity vehicles.

The various local government-backed initiatives under which these foreign firms have set up their China-based entities, and therefore RMB funds, provide them with a passport to China’s growing and cash-rich LP base. They also – as domestically-funded vehicles – issue them a partial pass to skip the onerous Ministry of Commerce and State Administration of Foreign Exchange approval processes (i.e. delays and uncertainties) which USD-denominated funds must pass through on the investment side.

[The policies] in theory allow foreign sponsors to set up domestic limited partnerships, but laws on investment restriction still apply – all we have is a law and we don’t know how useful it is.

However, all RMB funds are not equal and foreign-managed RMB funds are still to some extent viewed and treated as foreign investors.

“(The policies) in theory allow foreign sponsors to set up domestic limited partnerships, but laws on investment restriction still apply – all we have is a law and we don’t know how useful it is,” commented one Asian fund lawyer recently.

As yet, little is known about any investments that have been made from foreign-managed RMB funds. Although Blackstone and Carlyle held first closes on their locally-denominated funds in July, both (reportedly) around the halfway mark, neither firm has said anything about any deals they have made.

One Asia-based LP, who describes foreign-managed RMB funds as “experimental”, pointed out there were many “subtle restrictions” and unanswered questions implicit in them. One such question is what happens if the firm wants to exit an investee company through an offshore listing? Would the FX approval be granted? Both Carlyle and Blackstone were likely busy, he mused, trying to figure out the best way to go about investing and then exiting these pioneering vehicles.

Perhaps it is the uncertain nature of these funds that explains why other global firms with a proven interest in China, like Bain Capital and Kolhberg Kravis Roberts, have held off for now.

In a recent interview, Jonathan Zhu, a Hong Kong-based managing director at Bain Capital, said the firm was still “evaluating” launching an RMB fund.

“[It] has its pros and cons, and we need to carefully weigh our options. At this point we have not taken any formal steps to launch an RMB-denominated fund,” he stated.

Likewise KRR, which itself launched a China-focused fund in July with a $1 billion target, has up to now avoided going down the RMB route. That’s not to say it’s not breaking the mould in its own way to access China – KKR’s China fund is its first ever country-specific vehicle and came off the back of a realisation that the firm needed to start with a smaller deal bite-size there in order to gain traction, according to a senior executive at the firm. Nonetheless, it’s still a world away from jumping on board the RMB bandwagon, with all the uncertainty that implies.

Whatever the outcome for Blackstone, Carlyle and now TPG, no one can say they were hesitant to test boundaries for their private equity investment funds. Will RMB-denominated real estate funds be next?