* Foreign LPs not allowed to invest in local RMB funds
* Blackstone says RMB and global funds have different focus
* Bill Gates' foundation gave 2nd Hony dollar fund a pass
(For more Reuters Dealtalks, click [DEALTALK/])
By George Chen and Michael Flaherty
HONG KONG, Dec 10 The allure of raising a
Chinese currency fund is strong for private equity firms.
But setting up a yuan fund risks alienating private
equity's most prized stakeholders: U.S., European, and Middle
Eastern pension funds and fund-of-funds, which have committed
billions of dollars to the buyout industry over the last
These investors expect exposure to China deals. Yet they
won't get it through a yuan fund because only Chinese investors
are allowed access under current Chinese rules.
While this issue is in its early phases, and may well be
smoothed over, it is surfacing with certain investors,
including such names as the Blackstone Group (BX.N) and
Microsoft's (MSFT.O) Bill Gates.
The development may complicate China's moves to draw
foreign private equity investors, an effort that has included
tax incentives for fund managers who set up in Shanghai, which
aims to catch up with Hong Kong, New York and London as a new
global financial centre before 2020.
Private equity executives have promised their investors,
known as limited partners (LPs), a slice of China's red-hot
economy, either through global funds or Asia-focused funds.
A yuan fund is seen as allowing easier access to Chinese
deals and faster closure, but Beijing forbids non-China
investors from taking part.
So if you're The Blackstone Group, which has a global
buyout fund active in Asia and is raising a yuan fund, it's
possible for a non-Chinese LP to wonder: Are you going to use
my money to invest in China or will you use Chinese money?
Partly to help internationalise its financial centres,
Beijing is encouraging global funds such as Blackstone and The
Carlyle Group [CYL.UL] to launch yuan funds and set up offices
in Shanghai and Tianjin. Neither the LPs nor the private equity
fund managers, known as general partners (GPs), want to miss
the hot investment opportunities in China.
"Usually the most convincing way to deal with conflicts of
interest between RMB and offshore funds is to align their
investment scopes and target returns," said John Fadely, a
partner specializing in fund formation at Clifford Chance.
"So that they always invest together, pro rata to their
capital commitments, unless that wouldn't be feasible for some
objective, readily understandable reason," said Fadely.
Fadely acknowledged that China's regulatory hurdles make
this difficult today.
The yuan is also known as Renminbi, or RMB, and was
introduced by the Communists and literally means "people's
In August, Blackstone said it aimed to launch a 5 billion
yuan ($732.3 million) fund, one of the first
Shanghai-registered yuan private equity funds by a foreign
An LP source close to Blackstone told Reuters that some
investors in the United States had raised concerns about
Blackstone's plan to launch the yuan fund.
The LP source declined to be identified as the source was
not authorised to speak to the media.
Blackstone Senior Managing Director Ben Jenkins addressed
the issue when asked about it by Reuters at the AVCJ conference
in Hong Kong last month.
"First of all, to clarify, we don't have it (the yuan fund)
yet. We are in the process of raising it. We view it very much
as additive and complementary to what we are already doing in
Asia and China specifically," Jenkins said.
Foreign limited partners in other dollar funds face the
The Bill & Melinda Gates Foundation Trust, part of the
Gates foundation, decided not to invest in a newer Hony Capital
fund partly due to concerns about Hony's plan to raise money
domestically for a yuan fund, according to sources familiar
with the situation.
Hony is an influential China fund backed by Legend
Holdings, the world's No.4 PC maker. Despite efforts by its
founder John Zhao to clarify that Hony's yuan fund and its
dollar fund would focus on different industries in China, the
Gates foundation decided to walk away from Hony's second dollar
fund, said the sources, who were not authorised to speak to the
"The foundation doesn't have information about specific
investments as our focus is on grantmaking," said a Gates
foundation spokeswoman, in an emailed response to Reuters
inquiries on Hony Capital.
The Gates foundation was a major LP in Hony's first fund.
For Blackstone, Jenkins' explanation was on similar lines
-- different focuses for its dollar fund and yuan fund in terms
of deal size.
"The fund, if we are successful, will be 5 billion
renminbi, roughly $750 million equivalent, so that is a
relatively small fund compared to our current $20 billion
global fund," Jenkins said. "The RMB fund will be making
investments in the $25 million to $50 million range, so those
are really too small for us to pursue out of the main fund," he
Jenkins also said that for deals worth over $75 million in
the mainland and for overseas deals, Blackstone's dollar and
yuan funds would look to invest jointly.
For the first time, the amount of yuan funds exceeds that
of dollar funds raised this year for investment firms focused
on China, according to the Centre for Asia Private Equity
Research (CAPER) in Hong Kong. (Click here for a graphic:
Of the money raised so far this year for investing in
China, nearly 60 percent were yuan funds, worth nearly 20.4
billion yuan ($3 billion), according to CAPER.
"I think it is a mixed feeling," said Kathleen Ng, managing
director at CAPER, referring to the yuan, U.S. dollar fund
"As time goes by, most LPs have come to terms with this
reality and accept the fact that an RMB fund is part of the
landscape in China's private equity," she added.
(Additional reporting by Farah Master; Editing by Don Durfee
and Muralikumar Anantharaman)