US-Linked Yuan-Based Private Equity Funds Exploding

TPG, one of the world’s biggest private equity firms, will be teaming up with the municipal governments of two of China’s biggest cities

to raise nearly $1.5 billion and create its first funds denominated entirely in Chinese currency.

By making deals with the two cities — Shanghai and Chongqing — TPG, which will be the sole manager of each fund,

is in a position to be one of the biggest investment firms in the Chinese market.

TPG, one of the world’s biggest private equity firms, will be teaming up with the municipal governments of two of China’s biggest cities

to raise nearly $1.5 billion and create its first funds denominated entirely in Chinese currency.

By making deals with the two cities — Shanghai and Chongqing — TPG, which will be the sole manager of each fund,

is in a position to be one of the biggest investment firms in the Chinese market.

TPG, formerly known as the Texas Pacific Group, has a long track record of investing in China.

The company has invested in Lenovo, the Shenzhen Development Bank and China Grand Auto, a huge auto dealership.

If TPG raises $1.5 billion in local currency funds, it will become the biggest global private equity firm in China’s local currency market.

Shanghai, on China’s east coast, and Chongqing, a sprawling city in western China,

are both working aggressively to lure global financial services companies to the financial districts they are now developing.

Shanghai is already a financial powerhouse, and Chongqing aspires to be something like Chicago,

a centerpiece of China’s ambitious “go west” program.

“This is the new model,” said Lawrence Sussman, a Beijing-based lawyer who specializes in local currency funds for O’Melveny & Myers.

“And fund raising is a driving force. Some governments are even asking them to bid to manage government funds.”

Many of the big global firms have opened a local currency fund.

Indeed, the announcement comes as some of the world’s biggest private equity firms,

including the Blackstone Group and the Carlyle Group,

have already scrambled to raise huge funds denominated in the renminbi.

The Blackstone Group signed a joint venture in November with the Shanghai government to create a $732 million local currency fund.

Earlier this year, the Carlyle Group signed its own deals with the Beijing government and the Fosun Group in Shanghai;

and CDH Investments and the Hony Fund, which is controlled by the parent company of the Chinese computer maker, Lenovo,

won approval in 2008 to invest money for China’s huge government pension fund.

Analysts say the moves are a reflection of the growing importance of the Chinese currency,

but also a sign that global funds are eager to tap the enormous pools of wealth now forming in the fast-growing Chinese economy.

China’s central government is encouraging the shift,

hoping the renminbi investments will help strengthen the nation’s capital markets and

create a more efficient system for allocating capital to private Chinese companies.

This is part of China’s plan to strengthen its financial services industry

and transform cities like Beijing and Shanghai into global financial centers

that can some day compete with New York, London, Tokyo and Hong Kong.

TPG, which has about $57 billion in assets under management worldwide, said that

it was time to move into China’s currency, the renminbi, and that it was drawn by the prospect of working with the Chinese government.

“Private equity is now a global business,” Jim Coulter, a co-founder of San Francisco-based TPG, said.

“And this is our commitment to China.”

For years, big private equity funds have financed start-ups here with United States dollar-denominated funds and complex offshore structures.

The method often meant listing Chinese companies on overseas stock markets, beyond the reach of Chinese regulators.

But China now wants to keep more stock listings on shore,

which could improve the quality of the companies listed in the domestic stock market

and help create a vibrant private equity industry here.

Analysts say a growing number of Chinese companies no longer want to go through the trouble of creating offshore structures

when there are more and more renminbi funds willing to invest.

With the central government’s approval, big Chinese cities like Shanghai are now offering incentives, including tax breaks and assistance navigating regulations,

to attract private equity firms to establish funds in their regions.

But there are other inducements.

By teaming up with the government, private equity firms believe they stand a better chance of getting speedier investment approvals and gaining access to huge pools of state capital.

TPG executives say the new renminbi funds — each of which aims to raise about 5 billion renminbi, or the equivalent of about $735 million —

would be able to invest in areas previously restricted by the government.

And because regulators recently agreed to allow insurance companies to invest a portion of their money in private equity,

the incentives for creating a local currency fund were now incredibly attractive, TPG said in this article from the New York Times.

“This creates a different set of investing opportunities,” said Stephen Peel, managing partner of TPG Asia.