Renminbi funds will soon be the favored fundraising and investment option in the Chinese venture capital and private equity market, according to a recent report from market researcher Zero2IPO Group.

The report showed that 24 renminbi funds were set up in the first half of the year and raised US$1.13 billion worth of capital. The renminbi funds once again surpassed offshore funds in terms of the number of new funds, and accounted for 70.6 percent of the new funds raised in the first half.

According to Zero2IPO, the renminbi funds have started gaining ground since 2006. In 2008, the renminbi funds enjoyed an explosive surge, with 108 new funds set up in a year, surpassing offshore funds in terms of number for the first time. Renminbi funds raised about US$23.7 billion in 2008, seven times more than it raised in 2007.

"In China, the era of yuan-dominated funds has finally arrived. We are expecting a batch of prestigious renminbi funds in the next three to five years," said Duan Ningning, analyst at Zero2IPO Group.

The report said the rise of yuan-denominated domestic funds has been largely fueled by the recent approval for China's Social Security Fund to invest in domestic private equity funds. Managers of offshore funds have also started to raise yuan-denominated domestic funds.

In addition, the country's multi-level capital market can also offer a healthy exit environment for the renminbi funds with the new Shenzhen-based growth enterprise board (GEB) due to launch soon, the report said.

While the emergence of domestic funds is a sign that the market has started to mature, domestic funds also have some inherent benefits over offshore funds.

"A domestic fund is not restricted to the type of industries it can invest in and the portfolio companies of a domestic fund can be more easily listed on the local stock exchanges," Wu Changgen, chairman of CLSA China, said in a telephone interview.

Blackstone Group LP, First Eastern Financial Investment Group and the Hong Kong-based brokerage CLSA set up yuan-dominated funds in Shanghai this month. Private equity fund KKR and Carlyle are also toying with plans to set up such funds soon.

"I strongly believe Shanghai can become an international financial center like New York and London, especially after the State Council announced its plans to make the city a major international financial center by 2020," said Wu.

Since May, the Shanghai government has come out with favorable proposals to encourage foreign institutions to establish renminbi funds, Wu said.

"The joint efforts could see more foreign institutions establishing renminbi funds in Shanghai. There will be huge opportunities for private equity firms in the next 10 to 20 years," Wu said.

China also represents a significant component and a growth driver of the Asian economy, and this is reflected in the country's share of private equity activity in Asia.

According to Adveq Management AG, a leading Asian fund of funds, China's share of the Asian private equity market has grown three-fold from 8 percent in 2005 to 29 percent in 2008. In 2009, China could represent one-third of the total funds raised for private equity investments in Asia, and this trend might continue into the first half of 2010.

(China Daily August 26, 2009)