The investor base for China’s private equity sector is becoming less institutionalised, as a growing number of renminbi funds increasingly draw in local high-net-worth individuals, according to Ernst & Young.  

Last year, $28.5 billion was raised for China private equity, down from $32 billion in 2010. However, the amount of capital raised locally via renminbi-denominated funds has risen dramatically as a proportion of total capital, accounting for 88% last year, up from 25% in 2010.

“To be an investor in [RMB] funds, you have to be a local Chinese qualified investor,” says Robert Partridge, transaction advisory services leader of Greater China at Ernst & Young. “With the rise of the renminbi fund, the capital available for private equity in China is increasingly shifting to Chinese investors.”

Part of the explosive growth is attributed to the increasing number of funds classified as private equity in China and “probably includes a lot of what we would traditionally not call private equity”, says Partridge. “It’s a pool of capital that someone is trying to invest for others.”

Estimates on the number of PE firms in China ranges widely, from 5,000 to 15,000, he notes.

While offshore capital has shrunk as a proportion of total money raised, the “limited partner appetite for China is very strong”, says Partridge.

“One trend we’ve seen is limited partners trying to engage more proactively and co-invest with the private equity firms” on deals, he notes, which is particularly popular among those seeking exposure to high-growth markets.

The increased co-investment activity has likely helped drive up the size of deals being transacted in China. The total value of China PE deals last year was $20 billion, a 48% increase from 2010, although the number of deals fell during the same period, to 640 from 687.

The mainland’s active private equity market is attracting mid-market firms from overseas, who are setting up offices in Hong Kong with a view to doing deals in China. They follow in the footsteps of global industry giants such as Blackstone, Carlyle Group and KKR, which have had a presence in the market since the 1990s.

"[They] continue to see China as a place they need to be to meet the needs of their limited partners and how they focus on growing their own businesses,” he says.  “Most of which has to have a China story.”