Asia private equity recovery continues

Enthusiasm for yuan-denominated private equity funds is tapering off in China because of regulatory uncertainty but the sector in Asia overall is recovering almost to pre-crisis levels, according to a McKinsey survey.

Last month, there were media reports that Beijing was formulating rules to classify all foreign-run yuan funds as non-Chinese. The National Development and Regulatory Commission (NDRC), the top economic planning agency, also said in late April that unless all the capital in a yuan fund originated from domestic investors, a fund would be classified as 'foreign' and subject to special rules.

'One of the main purposes of launching yuan funds is to receive local-investor treatment. Foreign firms are obviously keeping a close eye on this issue,' said Bruno Roy, partner and head of principal investors practice at McKinsey in China.

Roy added that while in the near term it would be harder to raise yuan funds, the regulatory stance should become clearer next year once the political transition is completed.

Yuan funds have risen in popularity the past few years, accounting for 81 per cent of the private equity (PE) funds raised last year, up from 21 per cent in 2005. There were some 80 yuan funds worth US$13.7 billion last year, according to McKinsey.

Despite the regulatory impasse, the Asia-Pacific region's total PE investment has returned to 2006 levels, reaching some US$65 billion, with China accounting for nearly 45 per cent of the new activity.

The region now accounted for 21 per cent of the global PE industry and has been the first to come out of the trough brought on by the global financial crisis, faster than the US and Europe, Roy said.