Who said private equity and China don’t mix? Senior executives from Goldman Sachs and Temasek last week quit their existing roles to set up independent, China-focused private equity funds.
The moves underscore rising interest in renminbi-denominated funds. According to the Centre for Asia Private Equity Research, since 2006 Beijing has approved the creation of 11 local currency funds with a combined war chest of $10.6bn. The politics are sound. Nationalists will rejoice that deeper-pocketed local private equity firms can compete for domestic assets against global giants. And renminbi-denominated private equity funds will help to soak up domestic liquidity. Foreign firms using the greenback will find it more difficult to source deals and secure approvals. The likes of Carlyle and Texas Pacific Group will have to work harder to define their niche.
But the pool of capital approved by Beijing could prove to be yet another misallocation of resources. In the near term, it is likely that far too many renminbi will be chasing too few private equity deals. This will inflate valuations for funds that scramble to make investments and force the more cautious to sit on their cash piles. The industry still awaits the maiden deal of the Bohai Industrial Fund, a private equity fund set up late last year by a subsidiary of Bank of China. And – Goldman and Temasek executives aside – there may be a lack of competent fund managers who understand disciplined private equity investing over the industry’s typical three-year to five-year investment horizons. It is also unclear whether state-owned enterprises, fingered as cornerstone backers of many of the new renminbi funds, are seeking superior returns or political credit for providing development financing.
Exits, though, are another matter. Mainland venture capital firms have listed several portfolio companies this year – all of which at least doubled in price on the first day.