Renminbi GPs wary of government guidance funds as LPs

Xiaohui Shi, a managing director at China Merchants Capital, said that GPs should think carefully about taking full quotas from certain municipalities or provinces, citing the possibility that guidance funds will not make good on their commitments given the economic slowdown and lingering impact of COVID-19.

“There are national-level, provincial-level, county and district-level guidance funds. High-quality GPs can raise capital at all three levels, which may account for 30-50% of the fund corpus. But if a financial problem occurs at the county level, the municipal and provincial levels may not contribute either, because most guidance funds have an investment priority order,” Shi explained.

Fundraising has been tough on the US dollar side following regulatory crackdowns in technology-related industries and substantial corrections in listed markets globally. Having reached USD 14.3bn in the first half of 2021, commitments came to USD 5.8bn in the second half and USD 8.9bn in the first half of 2022.

Renminbi fundraising has also been volatile. The most recent peak was USD 29.9bn in the second half of 2020. The totals for the three subsequent six-month periods were USD 14.1bn, USD 18.4bn, and USD 13.8bn. 

Five of the six largest China-focused funds to achieve partial or final closes since 2019 were renminbi vehicles, and four of those five were raised by state-sponsored GPs, which underscores the significance of government guidance funds in the local LP universe.

However, taking guidance fund capital often comes with the proviso that a certain portion of the corpus must support local enterprises - or bring companies to the locality - while investments must comply with the government's strategic objectives.

Shi of China Merchants Capital noted that guidance funds increasingly want to make direct investments as well as back third-party funds, which means they lean on GPs to provide relevant opportunities. He added that their direct investment capabilities are becoming more market-oriented, suggesting that pursuing government objectives isn't contradictory to generating profit.

“My past experience is that they don't regard government direction as a constraint, rather it actually helps them focus on sectors with long-term benefits," Shi said. "They must adhere to marketisation. If the fund management team isn't market-orientated, then the fund cannot implement government strategies or realize returns."

Other panellists observed that renminbi and US dollar funds have begun to pursue increasingly diversgent paths in the last two years.

“In the past, Chinese companies could list in the US, and US dollar funds could invest in companies based offshore. Now internal and external circulation in China are relatively independent,” said Frankie Fang, founding managing partner of Starquest Capital.

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• Topics
• Greater China
• Fundraising
• Renminbi fund
• China
• regulation
• China Merchants Capital
• Starquest Capital
• HKVCA