What to do in China?

And aside from the response that the whole development is overhyped, many of the conversations are turning to the more irksome question of what foreign private equity players, GPs or LPs, can and should actually do in China.

For one thing, the large RMB funds launched with considerable publicity by major firms in China invite a few close questions. With management fees in many of them apparently driven well down on usual norms, most will look to make money primarily off investments. Fine, but what investments? China's fragmented and still-developing industrial base still does not allow for many really large several-hundred-million-dollar deals.

Even with friendly local partners and no currency hurdles, these foreign GPs may still struggle to find enough propositions to meet the requirements of funds in the $500 million+ range. China has not exactly seen many major transactions of late, and the RMB fund platforms so far announced carry worrisome implications that the local, often municipal, partners are going to push to ensure that the opportunities which the GP gets to see first are from related or connected entities. Hardly a recipe for objective and profit-driven private equity investing.

Furthermore, even with a friendly local partner and currency hurdles out of the way, domestic GPs are still likely to have strong competitive advantages over the foreign RMB players. Consider the investment arms of the major PRC business groups. Ping An Insurance, for example, apparently already has a private equity unit that is a highly active direct investor, working off the group's balance sheet. Leaving aside the question of how those commitments are budgeted and how they contribute to the group's overall performance, this kind of structure should already be familiar to Western GPs and LPs familiar with AXA Private Equity, PPI and similar. But international GPs could have a hard time competing against such units, which have deep local knowledge and connections, and even perhaps relevant operational experience.

Yet major global firms are likely to continue to float and support RMB funds, partly as – fairly expensive – government relations exercises, or pilot programs ahead of a hoped-for eventual full convertibility or liberalization of the Chinese market for corporate control, but also because, with investment activity in China still not dazzling, they are under great institutional pressure to show movement in the market. As Western markets continue to stagnate and core franchises in the US and Europe face smaller fund sizes, head offices are looking to do something in China, and at least an RMB fund is a start.

However, the major Western GPs may not be the only ones trying to assert their own relevance. SAFE's own position deserves some thought. Cliches about the capital glut in China confirm that the country has substantial capital reserves of its own, albeit poorly allocated. The golden age of FDI-driven growth in China, back in the 1980s and 1990s, is now well over. Money flows today are likely to be in the opposite direction, as Chinese companies and institutions seek to push outside the country's borders and internationalize their holdings. Therefore, SAFE's own standing versus the other power centers in the PRC governmental apparatus has declined, and faces further decline ahead as well as a big overarching question mark with the eventual onset of full RMB convertibility. Ironically, SAFE itself may be pushing the GFLP approach partly to help ensure its own ultimate survival.

All speculation, of course.

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• Topics
• Greater China
• Renminbi fund
• Regulation