Banking & Finance

Foreign affairs

How the city of Shanghai is teaming up with foreign private equity funds

Leung: outrunning his rivals

There’s a Chinese proverb that states: “When you’re being chased by a tiger, you don’t have to outrun the tiger, you just have to outrun the other guy.”

Blackstone’s China boss, Antony Leung is no doubt aware of the saying. And when it comes to the China marketplace, Blackstone seems to be outrunning its rivals – at least for now.

In fact, it looks like becoming the first foreign firm to launch an onshore private equity fund in the country. The new venture will allow Blackstone to raise funds from domestic investors and in renminbi. Rivals like Kohlberg Kravis & Roberts (KKR), TPG, and Carlyle Group are yet to establish domestic funds.

“The Blackstone deal represents China’s willingness to use private equity to shake up the economy,” says Vincent Chan, co-founder of private equity fund Spring Capital Asia. “China’s future economy will be driven by its private enterprises. Many first-time chief executives will need help on matters from boosting corporate governance to acquisitions.”

The Blackstone Zhonghua Development Investment Fund (‘Zhonghua’ means Chinese) will be created with the newly formed government of Shanghai Pudong Area, which already has stakes in several domestic companies. The new venture plans to raise as much as Rmb5 billion ($732 million) and will target investments in Shanghai and neighbouring areas.

Teaming up with a Chinese partner should give Blackstone an advantage in securing local deals (CIC, the country’s sovereign-wealth fund, already owns a stake in the US-based buyout firm).

Despite having operated in China for a while, foreign firms have been frustrated by the relative lack of deal flow. Recent data from Zero2IPO, a Beijing-based research house, shows that local funds notched three new deals for every foreign one in the second quarter of this year.

Insiders complain of a government preference for locally-led transactions. Being regarded more as a ‘local fund’ may help Blackstone access a wider range of opportunities.

Shanghai, home to the nation’s largest stock exchange, seems more eager to give a helping hand to non-Chinese participants. The country’s financial hub has been playing catch-up with Hong Kong, and even Tianjin, to become a private equity centre.

Tianjin was the first to allow buyout firms to set up in 2006 and the Bohai Industrial Investment Fund, with shareholders including Bank of China and China’s Social Security Fund, was the first domestic yuan-denominated private-equity fund set up in the country.

In the days following news of the the Blackstone deal, other foreign buyout firms and banks confirmed their intention to follow a similar path – the announcements tallied up to an expected $4.5 billion or so of local investor funds in aggregate.

Why the urgency? “Private-equity firms are worried that if they don’t set up local entities now, they could be at a competitive disadvantage,” comments Lawrence Sussman, head of law firm O’Melveny & Myers LLP’s Beijing office.

Still, Sussman reckons that the number of yuan-denominated funds in China (with foreign participation) will more than double this year to about 100.

But not everyone shares the enthusiasm, and some are choosing to wait. Bain Capital is an example. The firm has been investing in China for close to five years and recently made an investment in electronic goods retailer GOME Electrical Appliances. “We are not actively pursuing that right now,” Paul Edgerley, managing director of Bain told the Wall Street Journal. “We will let it play out a little bit and see how it evolves over time.”


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