Yuan-backed funds revved up with PE firms

Industry leaders bullish on capital market, move to grab high-quality opportunities

Private equity industry leaders have revved up on yuan-denominated funds to seize opportunities from China's economic recovery and offset headwinds in fundraising for U.S. dollar-denominated funds, said experts.

London-based Coller Capital, one of the world's leading investors in the secondary market for private assets, announced on April 6 the first close of Coller Capital Secondaries RMB I Fund, a fund with a target size of 1.5 billion yuan ($217.03 million) mainly focused on the medical sector.

CCSRMB I is the first RMB secondaries fund in China raised by a foreign-invested private capital secondaries manager with support from local institutional investors and the first of its kind to be filed with the Asset Management Association of China.

Providing liquidity solutions for investors and general partners in the yuan-denominated private capital market in China, the fund will enable Coller Capital to make high-quality investments in the yuan-denominated market in China, said Peter Kim, the company's partner and head of Asia.

Other industry giants are making similar moves in China. U.S. private equity firm Warburg Pincus, a specialist in healthcare and technology investments, is raising 3 billion yuan for its maiden yuan-denominated fund, Reuters reported on Feb 21.

Private market investor Hamilton Lane announced on Feb 16 the official opening of its China office in Shanghai, a move that will lead to the firm's first RMB fund as expected by market insiders.

With assets of $832 million under management as of the end of 2022, Hamilton Lane received approval in May 2022 to join the qualified foreign limited partner pilot program in Shanghai, under which foreign investors can convert U.S. dollars into RMB and make investments in RMB private markets.

Yan Hong, a professor from the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, said: "The heating up of RMB funds is largely related to the growing maturity of the Chinese capital and wealth management markets."

"The full implementation of the registration-based IPO mechanism throughout the A-share market is conducive to the establishment of yuan funds. Apart from expanding exit channels for PEs, the mechanism helps to form maturer market-based pricing and a risk identification system," he said.

Advanced manufacturing, healthcare and biomedicine attracted the most PE investment in China last year, according to market consultancy Bain &Co.

The rise in RMB funds started to take shape in 2022. A China PE investment report released by technology and innovation media outlet TMTPost in mid-February described 2022 as the "first year of the RMB fund era". The large number of RMB funds is one reason, as it recorded 9,624 RMB fundraising cases last year, while only 1,003 cases of foreign currency funds were made in the Chinese market.

Affirma Capital, the independent PE owned and operated by Standard Chartered Private Equity, was reportedly targeting its first RMB fund of 2 billion yuan, according to Reuters. It reached its first close at 1.5 billion yuan by the end of 2022.

L Catterton, the PE firm backed by luxury conglomerate LVMH, said in October it had reached the first close of its debut yuan fund targeting 2 billion yuan, focusing on the consumer sector.

The total funds raised by PE firms focusing on investment in China was slashed by 80 percent year-on-year in 2022 to drop below $23 billion, which was the lowest level since 2010, according to alternative assets research company Preqin Ltd.

The plunge in Chinese companies' initial public offerings in the United States was one cause, according to experts from VC/PE market consulting firm CVSource. Only 14 Chinese companies completed their IPOs in the U.S. stock market last year, down 62.16 percent from a year earlier. Total financing also plummeted 90.41 percent year-on-year to 8.5 billion yuan.

Qian Jun, head of Investments China at Schroders Capital, said that more mature investors have diverted to the RMB market for hedging purposes mainly due to the capital allocation slowdown in the U.S. dollar market.

Ni Zhengdong, founder of investment solutions provider Zero2IPO Group, said at a forum in late February that fundraising for U.S. dollar funds is difficult at present, even for leading institutions. The exit channel for U.S. dollar funds is overcast with complexities, as it is still unsure whether an exit via IPO in the U.S. or floating on the Hong Kong stock market is a better choice, he said.

But Zhou Hao, partner of market consultancy Bain &Co, explained that deals were largely held up last year due to the impacts of the pandemic and less convenient transportation. This holds true for both U.S. dollar funds and RMB funds. Recovery can be seen since the beginning of the year. Investors' interest in the Chinese market will continue to pick up, he said.

"While only differing in fundraising ways, U.S. dollar funds and RMB funds share the same target — China assets," he said.