Across The Border

China’s private equity firms tap dollar funding in Silicon Valley asset acquisition drive

PUBLISHED : Wednesday, 30 August, 2017, 11:52am
UPDATED : Wednesday, 30 August, 2017, 10:27pm

Chinese private equity and venture capital funds are seeking to raise US dollar denominated funds

amid a push to build up equity in foreign start-ups and disruptive technologies.

A survey by the China Securities Journal showed that more than 40 per cent general partners – issuers and managers of funds – are seeking to raise dollar-denominated funds, a fresh sign that offshore funds will be actively sought amid tight foreign-exchange controls.

Last year, more than 90 per cent private equity and venture capital funds launched in China were yuan denominated.

They accounted for about 80 per cent of the total fundraising amount while the dollar funds took the remaining 20 per cent.

“Rising appetite for lucrative deals outside the country prompts general partners to make more fundraising plans for US dollar funds,” said Cao Hua, a partner at Unity Asset Management. “Dollar funds effectively help investors seal deals abroad.”

Beijing implemented “window guidance” – administrative measures, rather than rules and regulations – to contain rampant capital outflows, a move to keep the yuan stable since late 2016.

Cross-border investments are subject to strict reviews by the foreign-exchange regulator albeit with Chinese investors’ mounting interest in foreign assets.

Dollar funds are normally raised outside the mainland, which can be used to invest in overseas businesses with ease.

Yuan funds refer to those funds raised from limited partners, or cash-rich institutions and high-net-worth individuals on the mainland.

In the early 1990s, funds such as IDG Capital set up in China, seeking to deploy capital from their dollar-denominated funds.

The funds typically embarked on the variable interest entity (VIE) structure to conduct transactions.

Under a VIE structure, Chinese firms and foreign venture capital funds set up an offshore vehicle which, through one or more foreign investment subsidiaries in China, enters into contracts with the Chinese firms. The contracts give effective control of the Chinese firms to the offshore vehicle.

Most of the portfolio firms under the VIE structure sought to launch initial public offerings on foreign stock exchanges.

The Nasdaq-style ChiNext market and the New Third Board, a national over-the-counter equity trading system, made it easier for young companies to list, and enabled early-stage investors to exit their investments.

Since 2009, yuan denominated funds have grown in favour while dollar-denominated funds have become less popular.

According to the survey by the China Securities Journal, foreign-exchange policies were among the primary concerns of the general partners because they appear to be the major stumbling blocks to cross-border investments.

Last week, China Medical Devices (Cross-Border) Special Opportunity Fund, the country’s only PE fund focusing on cross-border medical devices, announced plans to raise a US$300 million dollar-denominated fund.

Shuang Rongqing, chairman of the cross-border fund, said it already had more than 150 reserved projects which are expected to draw a combined US$3 billion worth of investment.

“The Silicon Valley in the US is the strongest source of innovation in the world’s medical industry today,” he said. “China’s lack of innovations in the medical industry indeed drives demand for cross-border investments.”

A growing number of mainland institutional and corporate investors are eyeing the technological innovations in the Silicon Valley.

China’s national pension fund and China Jianyin Investment, a government investment conglomerate, are among mainland institutions establishing offshore private equity funds for asset purchases in Western markets.

In the first half, about US$121.8 billion was raised through these funds, according to ChinaVenture Investment Consulting.

Shanghai steps up efforts to attract technology businesses, boost innovation

The fundraising figure included both yuan and dollar funds.

General partners are also aiming to raise an additional US$282.3 billion, the consultancy said..

China’s overseas acquisitions totalled US$64.4 billion in the first half, a drop of 13 per cent from the year-earlier period, according to PwC.

The firm predicted that cross-border acquisitions by mainland investors would rebound in 2018 with dollar-denominated funds playing an important role in bolstering transactions.

The survey by the China Securities Journal also showed that the general partners were paying close attention to the mainland’s taxation policies related to the private equity and venture capital industry, as the government fine-tuned the tax mechanism to encourage investment in technology firms.