Banking & Finance

Let a hundred funds bloom

Can domestic private equity funds flourish?

Let a hundred funds bloom

Mao: Not a big fan of private equity

China’s investment in Blackstone’s IPO may not have been the most profitable experience, but that has not sated the government’s appetite for private equity.

After years of watching Western private equity firms reap huge returns in China, the government is eager to give a helping hand to mainland-run private equity firms.

In an effort to jumpstart the domestic private equity market, it recently allowed brokerages, insurance companies, and asset management institutions to invest in new private equity funds. The number of funds quickly increased in 2008 by 51, up 34% from 2007. According to China Daily they raised over $61 billion in capital. Of these 20 are renminbi-denominated funds, accounting for an equivalent of $21 billion.

Quick to capitalise on the opportunity, Ping An, the country’s second largest life insurer, has just filed for approval to set up its own independent private equity fund. In a report published by 21CN Business Herald, Ping An has set aside Rmb10 billion ($1.5 billion) for its private equity investment vehicle. More insurers look certain to follow in its wake.

In another newsmaking fillip for the industry, enter Fang Fenglei. The savvy ex-banker last year raised $2.5 billion to found Hopu. His fund’s prominence was raised a notch in January when Bloomberg reported that Hopu had snapped up 30% of the shares RBS was selling in Bank of China – spending around $700 million on the stake.

This is a positive sign for China’s domestic private equity industry – in large part because it has seen so little in the way of meaningful deal flow. Among the few high profile deals to be announced, two were executed by Bohai, one of the first funds to be established. In late 2007 it paid $200 million for a 20% stake in China’s biggest maker of pipes for oil pipelines, Tianjin Pipe. A few months later it spent $135 million for a 10% stake in Chengdu City Commercial Bank, branching out from its homebase of Tianjin to Sichuan Province in the country’s interior.

To be fair, China’s private equity industry got off to a rough start, thanks to bureaucratic infighting. But those disputes now look to be settled. And with the financial crisis getting worse, Beijing sees domestic private equity firms playing an important local role. It wants them to support small and medium-sized enterprises with much needed capital – both to get those firms through the current malaise, and prepare them for a future listing.

As part of this push, the National Social Security Fund has pumped Rmb2 billion into two local private equity funds: Hony Capital (an investment unit of Legend Group) and CDH Investments (which was founded by ex-CICC bankers). According to Reuters, the nation’s pension fund plans to invest about 10% of its assets ($7.5 billion) in local private equity firms.

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