A local face(2)

Western GPs seeking access to China are pondering how the growth of locally denominated funds might work to their advantage.

It's ironic – and undoubtedly a source of deep frustration for many – that, at a time when Asia's allure is at its most potent, actually putting serious money to work there today can be every bit as torturous as trying to obtain financing for a Western LBO.

Asia is being examined with greater scrutiny than ever before by Western GPs as a possible investment destination. This partly reflects the pressure created by the credit crunch. Ultimately, no private equity firm wants to sit on its capital forever and, if the deal pipeline in markets close to home is blocked, it makes sense to look further afield to where the effects of the liquidity crisis may be more muted. Asia appears to fit the bill.

There's more to it than this, however. The rapid migration of funds and capital to the East that is currently taking place cannot feasibly be explained with reference to the credit squeeze alone – no matter how much more severe it turns out to be than originally envisaged. The reality is, of course, that the scale of opportunity opening up in the huge growth markets of China and India is of far more import in investors' minds when looking to the long term than the ephemeral trials and tribulations being experienced by the banking sector.

It's ironic, therefore – and undoubtedly a source of deep frustration for many – that, at a time when Asia's allure is at its most potent, actually putting serious money to work there today can be every bit as torturous as trying to obtain financing for a Western LBO. The difference is that, in Asia, the tormentor is more likely to take on the form of a regulator than a banker.

The obstacles that have been placed in the way of foreign buyout firms seeking to buy controlling stakes in Chinese assets have been well documented. For instance, the meandering sequence of events by which Washington DC-based The Carlyle Group ended up with a 45 percent interest in construction firm Xugong – having initially eyed 85 percent – is as vivid an illustration of caveat emptor as one could perhaps imagine.

When the Chinese authorities then began talking of their determination to bolster the domestic private equity industry and also set about creating a regulatory environment that would allow local renminbi currency funds to prosper, international GPs might well have entertained fears about the creation of a decidedly un-level playing field.

Nor are these anxieties likely to prove entirely without foundation. Experts close to developments say local funds should benefit from less red tape, including a swifter approval process for new deals. In addition, local GPs are able to tap into an ever expanding local liquidity pool and there is every indication that renminbi denominated funds will provide a fairly substantial increase in competition for the already hard-pressed international funds.

There is, however, a potentially benign solution for Western players and it is to be found in the old adage “if you can't beat them, join them”. Specifically, a number of international private equity firms active in Asia are said to be looking into the prospect of forming partnerships with local GPs in order to launch reniminbi-denominated joint ventures.

Being a partner in a renminbi fund would give foreign investors a “local face” that could prove extremely useful in tapping that burgeoning domestic investor base, never mind the user-friendly regulations that promise to make executing transactions a less onerous prospect.

A recent Financial Times article referred to banking sources who had indicated that The Carlyle Group and TPG were among those “examining the prospect” of local currency funds “albeit in a preliminary way” – though Carlyle and TPG had declined to comment on the reports. One thing is for sure: while gaining access to Asia has never been a more pressing issue, how you go about doing so could make or break your long-term ambitions.