RMB private equity funds seen luring Western investors

Schroders aims to more than double its QFLP quota to help satisfy demand from Western institutional clients for access to domestic China growth and venture strategies.
RMB private equity funds seen luring Western investors

Foreign asset owners are increasingly looking to allocate money to renminbi-denominated private equity and venture capital funds as they seek to access Chinese assets via locally managed investment vehicles.

This appetite is leading foreign fund managers operating in China to request larger quotas under the qualified foreign limited partnership (QFLP) scheme, currently the only investment channel by which foreign investors can access the country's onshore private equity market. 

“One thing we saw in 2020 was much-increased [global] interest in Chinese private equity, and particularly renminbi-denominated strategies,” David Seex, global co-head of private asset sales at UK fund house Schroders, told AsianInvestor.

“This is partly because China came out of the pandemic crisis before Western countries, and before even most Asian nations,” he said. “But mostly [it’s] because it’s a huge market that’s opening up."

Domestic renminbi-denominated funds raise the equivalent of about $200 billion, while global PE funds raise about $600 billion per year, said Hong Kong-based Seex, citing data from Zero2IPO and Preqin, respectively.

David Seex, Schroders:
Seeking more QFLP quota

But only $20 billion to $30 billion is raised annually in US dollars for investing into China, he added, noting that overall fundraising levels also stuttered last year thanks to investors’ caution and restricted ability to do due diligence thanks to Covid.

The vast bulk of money raised for renminbi funds comes from domestic Chinese investors. The investment quotas granted to offshore institutions via QFLP remain relatively small, but foreign interest is steadily growing. 


Schroders got its first $50 million of QFLP quota in 2020, then obtained a $30 million extension. It is now seeking a quota for a second pool of at least double this combined amount.
International asset owners interested in this exposure range from small institutions to those with $100 billion-plus in balance sheet size, Seex added. They cover the spectrum from family offices to insurance firms, pension plans and sovereign wealth funds, and include both private and public entities.

QFLP quota applications typically start at a $50 million lot size, but the regulator may increase this quota once a manager meets its criteria. It took Schroders a year to obtain its first quota, “but we were able to extend it more quickly once we had established our qualifications”.

There will be six or seven investors in Schroders’ first QFLP pool, most of which are based in western countries, Seex said. The make-up of the client base for the second pool will be similar, although there is growing interest from Asia Pacific investors too, he added.

“A key motivation to invest in Chinese private equity is the local consumption story, the growth of mass affluence,” he said. And that is best captured through the domestically focused businesses – those that tend to be targeted largely by renminbi funds.

Schroders – which has a 19-strong PE team in China – aims to get in at a fairly early stage. The firm’s primary focus is venture and growth strategies investing in technology and healthcare, Seex said. It has so far allocated its QFLP quota to funds run by prominent mainland general partners.

Prospective international investors into China PE funds will no doubt be wary of new laws in the country that aim to prevent internet platforms from assuming a dominant market position or obstructing fair competition. Beijing demonstrated its intent to prevent such practices when it pulled the Ant Group IPO last year.

Such moves will hinder leading e-commerce majors in China and reduce their bargaining power with suppliers, while boosting competition. That should ensure a lower cost of entry for new firms and, as a result, a broader array of investment opportunities, said US think tank Global SWF in its annual report in January.


The overall level of growth and venture fundraising has fallen substantially in Asia since their respective peaks in 2017/2018, a trend that has been exacerbated by the Covid-19 pandemic.

According to Preqin, the combined amount raised for such strategies focused on Asia in 2017 fell to $36.9 billion as of last year from $152.5 billion in 2017. For China-focused strategies the drop was even sharper, from $18.6 billion to $126.5 billion.

However, Western asset owner interest in Chinese venture and growth PE strategies is rising over the longer term, alongside demand for mainland buyout opportunities. That is partly down to their desire to gain more exposure to China's huge economy, but it also reflects the evolution of Asia's PE industry as a whole – which is mirrored by growing demand from regional players.

Richard Surrency, Franklin
Templeton: Asia VC market
catching up with US 

The Asian Development Bank’s new venture arm, ADB Ventures, this week announced its first two investments, both in India: electric vehicle manufacturer Euler Motors and energy efficiency startup Smart Joules. Both fit into the consumption and tech theme.

VC has accelerated as an institutional investment theme in Asia in the past two years, to the point that the region is catching up with the US when it comes to monetisation opportunities for VC investors, said Richard Surrency, Asia head of alternative sales at Franklin Templeton Investments. 

Indeed, 42% of venture capital raising in 2019 took place in Asia, compared to 43% in the US and only 11% in Europe, according to a Mckinsey report published early last year.

Surrency believes the mounting deal flow is largely down to the growth in momentum of both initial public offerings and merger-and-acquisition activity in the region. In the past the US offered many more opportunities for investors to monetise investments via M&A and IPOs, but Asia is beginning to close the gap. 

“Asian venture capital has only recently begun to see similar monetisation opportunities,” he said. “For example, Asian corporate philosophy has tended to be focused on copy or build as opposed to strategic M&A, but this is changing as Asian corporates transition towards a digitised future.”

He cited the proposed merger of Indonesian startups Gojek and Tokopedia as a case in point. 

In addition, China's equity markets, including Hong Kong, accounted for 43% of the world’s IPOs in 2020, noted Surrency.
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