Boom in RMB private equity funds tipped to continue

Private equity fundraising in renminbi has rebounded strongly since 2015. There are good reasons for this trend, says Ian Kelly of PE fund administrator Augentius.
Boom in RMB private equity funds tipped to continue

There's been a strong rebound in renminbi-denominated private equity fundraising in Greater China since 2015, and it is set to continue, said Ian Kelly, chief executive of PE fund administrator Augentius.

Asset managers have raised Rmb61.9 billion ($9.4 billion) in such vehicles in 2017 as of September 18, compared with Rmb64.4 billion last year and Rmb44.7 billion in 2015, according to data provider Preqin. This is still well below the Rmb138.4 billion raised in RMB private equity funds in 2012.

Meanwhile, RMB funds accounted for 44% of total Greater China PE fundraising as of September this year, compared to 42% last year and 17% in 2015.  

Several factors have converged to drive this rebound, including restrictions on capital flowing offshore and greater participation in PE fund investment by Chinese institutions, London-based Kelly told AsianInvestor.

Rising foreign involvement

Firstly, he pointed to the steady opening up of the domestic funds market to international players as playing a key role. “It is much easier now for foreign asset managers to enter the domestic market than it was just a few years ago, and they are far less limited in their activity than they were previously.”

He cited measures designed to boost foreign investment into China, such as Stock Connect, the opening of the onshore interbank bond market and the widening of A-share access.

Hence foreign firms are lining up to get a slice of the pie, noted Kelly. The evidence suggests that even those firms that historically stuck to US dollar funds are getting involved, he added.

On the other side of the equation are China’s capital controls, said Kelly. These were brought in in the past couple of years to limit outward direct investment and encourage renminbi usage both domestically and abroad.

As a result, there is a large pool of money in the domestic market that simply has nowhere else to go, he noted, as well as a swathe of promising domestic businesses that are off-limits to foreign currency-denominated investment.

China is enjoying a boom in start-ups, with a raft of companies gearing up to go public, he explained. Overseas players can more easily tap such opportunities by raising funds in renminbi.

Growing institutional demand

The maturing of the Chinese domestic market is also playing a role in the renminbi PE boom. Kelly noted that funds denominated in renminbi used to mainly attract wealthy individuals, but now China’s institutional investors are becoming increasingly comfortable investing in PE funds too, adding to the flow of assets into this market segment.

The rise in renminbi PE fundraising has come amid a regulatory tightening around the private funds industry, which has removed many of the smaller managers from the market. As a result, noted Kelly, the growth in fund volumes is likely being driven by larger firms.

This would appear to be supported by the growth in size of funds. The $9.4 billion raised so far this year was spread across 25 funds, whereas $9.8 billion was raised in 2016 across 76 funds and $7.1 billion in 2015 across 114 funds, according to Preqin.

Asked whether foreign firms were concerned about being able to get capital out of China after raising it, Kelly conceded: “China’s regulatory authorities are notorious for making quick, sharp changes without the accompanying periods of consultation and preparation that investors are used to in the West, so there is there is the potential for hiccups."

However, he argued, the mid-to-long-term trend seems clear for renminbi private equity strategies to see a sustained growth in popularity.

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