Foreign industry players face a new wave of competition from yuan-denominated funds in mainland

Private equity in the mainland is undergoing a paradigm shift and foreign firms are having to adapt by undergoing more rigorous approvals, taking smaller stakes in target companies, avoiding strategic investments and, like Victoria Capital, creating their own domestic yuan funds.

'For a long time in China, the foreign funds really had the trump card because they had the cash,' said Kathleen Ng, managing director of the Centre for Asia Private Equity Research. 'But the equation is starting to change. With approval of yuan-denominated funds, we're seeing the beginning of a new wave.'

At the front of the domestic wave is the Bohai Industrial Investment Fund, sponsored in part by the Tianjin municipal government. Bohai, scheduled to reach 20 billion yuan and other domestic funds like it have a key competitive advantage over foreign funds in getting deals. They are primarily industry funds that focus on particular sectors such as clean technology that the government wants to develop.

Fund executives are local, have a network of contacts and are already in sync with government policy. 'It's a healthy development that China has the capital and the structure to create these pools,' said Ms Ng. 'Now, if you're waiving dollars, you have to make sure you have other capabilities to provide. And as the Asian economy grows, it becomes more competitive, separating the men from the boys.'

Foreign private equity firms have never had an easy time of it on the mainland. The yuan is not easily convertible, making it difficult to repatriate profits. The legal structure is only now developing and the approval process is complex and opaque. Exit vehicles - initial public offerings, trade sales, recapitalisations - are limited.

Normal exit strategies also have been complicated by government restrictions on offshore or special purpose vehicles. Meanwhile, the mainland's booming stock exchanges have created a red-hot initial public offering market for local companies.

But the biggest barrier to foreign private equity has been political sensitivity. 'The main problem has been that the mainland does not like the prospect of control passing into foreign hands,' said Paul StJohn Mackintosh, managing editor of Asia Venture Capital Journal.