China takes on private equity at their own game

By Alison Tudor - Analysis

TOKYO (Reuters) - Beijing is encouraging domestic equity funds to supplant global private equity titans such as Carlyle CYL.UL on Chinese turf, but their small size and lack of experience mean it will be years before they threaten their international rivals.

The government has stepped up its efforts to bolster home-grown private equity by allowing yuan currency fund-raising, erecting hurdles for foreign rivals and encouraging IPOs on domestic markets.

Foreign private equity funds, while not quaking in their boots, see the writing on the wall.

"Our greatest competition will not be from one another but will be the indigenous Chinese private equity firms," David Rubenstein, co-founder and managing director of The Carlyle Group told a recent conference in Hong Kong.

A pilot for Beijing's private equity ambitions is Bohai Industrial Investment Fund, controlled by Bank of China (601988.SS: Quote, Profile, Research, Stock Buzz)(3988.HK: Quote, Profile, Research, Stock Buzz), which is amassing a war chest of 20 billion yuan ($2.7 billion).

Bohai is run by Au Ngai, a former dealmaker at U.S. fund TPG TPG.UL which has $40 billion under management. His new fund recently bought a stake in Tianjin Pipe Group and is expected to buy 10 percent of Chengdu City Commercial Bank, sources have said.

Other funds will follow. Last month China gave the go ahead for five new Chinese industrial investment funds to raise 56 billion yuan ($7.5 billion).

There are already a proliferation of hybrid firms; founded by Chinese nationals, head-quartered in China but with foreign investors, such as the up and coming CDH China Management and Hony Capital.