Carlyle Group to form China renminbi fund

In the first agreement of its type for Carlyle, the US private equity firm will raise RMB-denominated capital to buy Chinese assets.

US private equity firm The Carlyle Group yesterday signed a memorandum of understanding with the Beijing Municipal Bureau of Financial Work to form a renminbi-denominated fund.

The Carlyle Asia Partners RMB Fund will be registered in Beijing, and the Beijing Municipal Government will provide it with full support. The fund is likely to be established this year and will raise RMB-denominated capital, invest alongside Carlyle Asia Partners and pursue independent investments in larger growth companies. Investments will include listed and unlisted corporates across all sectors.

Target investors include domestic pension funds and institutions, corporates, state agencies and sovereign wealth funds, says a Carlyle spokeswoman. The fund will complement Carlyle's existing US dollar funds that invest in China.

This is the first time the firm has made an agreement with the Beijing government to set up an RMB fund, she says, but there have not been any issues with regard to the deal. "The local government is welcoming foreign private equity investors with open arms," she adds.

As for the level of capital targeted, the spokeswoman declined to comment, but a source familiar with the deal says it would be in line with similar initiatives by other international private equity funds.

The fund will be entitled to preferential treatment from the Beijing municipal government, in accordance with its development policies for the city's finance and equity investment industry. To be registered in the city, the fund is expected to play an important role in the development of local enterprises, the structural transformation of local industry and the enhancement of the equity investment fund industry in Beijing and China.

Huo Xuewen, head of the Beijing Municipal Bureau of Financial Work, says: "With the help of the unique advantages Beijing enjoys as the capital city, the Carlyle Asia Partners RMB Fund and other local and international private equity funds will be able to achieve ideal development and play an active role in the steady and fast growth of Beijing's economy."

China has become one of most attractive investment destinations in the world for Carlyle because of its fast-growing economy. To date, the firm -- which has $87.6 billion in global assets under management -- has invested more than $2.5 billion in China in more than 40 deals.

The Carlyle deal follows similar initiatives last year, including a joint venture agreed in August by CLSA and Shanghai Guosheng Group and moves by both Blackstone and First Eastern Investment Group.

RMB onshore private equity funds have the benefit of access to Chinese capital and deal flow within the country, while avoiding regulatory approvals that offshore funds have to obtain. However, they do face certain challenges, such as over control of the fund. Will the offshore sponsor control the general partner of an onshore limited partnership and take carried interest onshore, or will the sponsor form only an onshore management company that earns a management fee? These issues will affect the economics of the fund.

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