The world may worry that China’s finance sector is headed for a fall, but Fort Worth, Texas-based TPG, which entered China in 1994 and has invested more than $2 billion in 25 investments, is making the opposite bet.
Last December, TPG and fellow private equity giant KKR, along with Government of Singapore Investment Corp. and The Great Eastern Life Insurance Co. of Singapore received regulatory approval for their $1 billion purchase of Morgan Stanley’s 34 percent stake in China International Capital Corp., the nation’s leading global investment bank. CICC is preparing for a public listing and no doubt TPG and KKR — which each took a 10 percent stake — likely will profit handsomely when that happens.
Last September, TPG completed the sale of a stake in Shenzhen Development Bank to Ping An Insurance Group, raising $2.4 billion, 16 times its original investment of $150 million in 2004, making the PE firm the most successful in Chinese history.
“The market is growing bigger year by year,” says Stephen Peel, partner and head of Asia and Russia at TPG Capital. “In China, as the economy grows, the opportunity for private equity will continue to grow with it.” Peel cites the Chinese government’s committment to allocate capital to banking and the development of public markets okay?as creating “a big wide space for private equity.”
Nevertheless, a 2006 regulatory change that restricts Chinese companies’ ability to set up offshore vehicles and take U.S. dollar investments has forced global players to rush to find Chinese partners to set up RMB funds. TPG, for example, is in the process of raising two 5 billion yuan funds, one with the development organization of the city of Chongqing in central China and the other with Shanghai, Peel says.
Together, TPG and the cities are raising the money from Chinese banks, life insurers, institutional investors, state-owned companies and high net-worth individuals.
Other foreign private equity players are also scrambling to do the same, now that Chinese authorities have clarified the ground rules okay?for foreign PE in China.
The Carlyle Group also was among a handful of foreign private equity firms to receive government approval to participate in the new Qualified Foreign Limited Partner program (QFLP), which allows those approved to convert foreign dollars into yuan without regulatory approval, which in the past was needed for every transaction.
Though the QFLP clears the way for private equity deals between foreign investors and domestic targets, the scheme aids domestic entrepreneurial efforts, as its requirements favor foreign applicants with connections to government-backed funds and homegrown Chinese enterprises.
Asia’s largest hedge-fund, Value Partners Ltd., with more than $8.9 billion in assets under management, for instance, recently set up a joint venture with Yunnan Industrial Development Holdings to establish a private equity-focused RMB fund. Both sides are putting in a combined 150 million yuan in seed capital and aim to raise up to 550 million yuan in the coming months from Chinese institutional investors and high net worth individuals.
Local partner Yunnan Industrial is a state-owned conglomerate in southwest China, far away from China’s booming coastal regions where most foreign PE firms concentrate. The interior is where Value Partners see faster growth and lower pricing of companies for private equity investments. “The pricing of companies would be more reasonable in interior China, which is important for a value investor like us,” says Jimmy Chan, chief executive officer of Value Partners.
Carlyle, however, is still focusing on partners in major cities along the coast. The Washington, D.C.-based asset manager with $150 billion in AUM globally and $5 billion in AUM in Asia, much of it in China, last year set up a RMB fund with Shanghai’s Fosun Group. Each partner is putting in the equivalent of $50 million into the Fosun-Carlyle (Shanghai) Equity Investment Fund. In addition, Carlyle also set up with the city of Beijing the Beijing Carlyle Investment Center LP with the target of raising 5 billion yuan. So far, the partners have completed a second closing, raising of 3.2 billion yuan, and made a first investment in the consumer-retail sector, says Wayne Tsou, managing director and head of Carlyle Asia Partners.
Carlyle has no complaints about the new rules. “We are pleased to be among the first group to be included in this QFLP policy and expect that it will help expand our investment capabilities in China,” Tsou says.