China: An Evolving and Maturing Fund Market

Until 2007, Renminbi-denominated funds accounted for only 12 percent of the funds in the Chinese market. USD-denominated funds were the long-standing norm when it came to fundraising.

Today, the tables have turned and Renminbi (“RMB”) funds have taken the top spot, accounting for 80 percent of all funds raised in China and leaving many asking the question: Why such a dramatic shift?

In the past, both foreign and domestic GPs in China were primarily raising funds in USD as a means to attract foreign investors and facilitate overseas listings in places like the US and Hong Kong. But as the Chinese government took note of the capital being made in China by offshore dollar-investing entities, they took measures to further increase the appeal of funds backed by their own domestic denomination. This, coupled with foreign firms’ growing interest in China’s attractive private equity market, fostered RMB funds’ rise to the top.

RMB-denominated funds provide several undeniable benefits. There are no restrictions on where GPs can make investments and by eliminating the laborious process of seeking official Chinese government approval to convert currency, deals are often closed more quickly and with greater profitability.

Ming Bi, Alter Domus’ Head of China, believes that the face of the RMB fund market is changing. “The market is maturing much quicker than anyone expected. Increasing regulation and evolving investor demands are creating a massive shift.

“In the past, Chinese GPs were very traditional in the sense that they kept all of their back-office work in-house and private, but that is no longer the case. We’ve observed increasing numbers of RMB fund investors demanding greater diligence from their fund managers. As a result, there is an identifiable outsourcing trend as Chinese GPs work to calm LPs apprehensions when it comes to the governance and compliance of their funds.”

In addition to domestic fund managers creating shifts in the RMB market, foreign GPs are having their own impact as well. 

“We’ve increasingly observed many of our international clients—who already have USD funds—stepping into the RMB world for the first time. They come into the RMB sphere with certain expectations, such as the high reporting standards that they’re accustomed to. They expect equivalency and are actually pushing the standard level of reporting for RMB funds much higher, which is excellent for the industry.”

As further regulations are established, private equity investments through RMB-denominated funds continue to increase in appeal to both domestic and foreign institutions. The Asset Management Association of China (“AMAC”) is leading the way by requiring all RMB GPs to be registered and has set guidelines around compliance, manager education and experience levels, which are steps that further legitimize investments in the market.

Alexander Traub, Regional Executive for Asia Pacific, explains how Alter Domus is ensuring clients maximize the potential presented by the changing RMB landscape. “We’re constantly expanding our presence to help clients take advantage of these types of rapidly-changing markets. We now nearly 250 employees and seven offices in the APAC region—four of which are in China. Our local teams are administering RMB funds for seasoned, domestic GPs and look forward to assisting our foreign GP clients fundraising in RMB for the very first time. We truly see this as an ongoing trend and expect the market to continue on its upward trajectory, and we’re doing everything we can to make sure our clients take full advantage.”