The First Eastern Investment Group announced yesterday that it has become the first international private equity group to incorporate a Shanghai subsidiary. This follows an announcement by the Blackstone Group on Friday that it will establish its first regional, renminbi-denominated private equity fund in Shanghai Pudong.
The government of Shanghai launched an initiative earlier this year to attract global private equity firms to the city. First Eastern said it plans to manage Rmb6 billion ($850 million) of assets, and to invest in regional developments and local environment projects. First Eastern plans to raise up to three funds, said sources close to the development, which will all be managed from Shanghai.
First Eastern is a Hong Kong-based investment group that was founded by Victor Chu in 1988. It has invested in more than 100 projects in China including in infrastructure, real estate and financial services. In most instances First Eastern has sought minority stakes in its investee companies and this will be the focus of the renminbi funds as well.
First Eastern intends to raise money from regional financial institutions, institutional investors and local enterprises, said the sources.
Meanwhile, global private equity shop The Blackstone Group announced on Friday that it has signed a memorandum of understanding with the Government of Pudong New Area to establish its first regional, renminbi-denominated private equity fund in the Shanghai Pudong New Area. The Blackstone Zhonghua Development Investment Fund will raise approximately Rmb5 billion with which it will target investments in Shanghai and neighbouring areas.
"Blackstone's presence will both contribute to Pudong's effort in developing an international finance centre and shipping centre in Shanghai and play a significant role, as a financial service provider, in encouraging economic transformation in and upgrading industrial capabilities of Pudong," said Lin Xu, standing member of the Shanghai party committee and party secretary of Pudong New Area, in a written statement.
Antony Leung, Blackstone's chairman for Greater China, said Blackstone Zhonghua reflects the emphasis placed by Blackstone on the Chinese market. Last year Leung had said that despite the financial crisis Blackstone will not reduce focus on China. Blackstone hired Leung in 2007 when it set up its Hong Kong office and he has been closely involved in the firm's China plans.
Shanghai is following the lead set by another Chinese city, Tianjin. It is also behind Beijing in allowing renminbi private equity funds.
"There are already several hundred renminbi funds in existence," said a source. "However, the existing funds are mostly pure domestic investor funds, not launched by foreign investors like First Eastern and Blackstone."
Foreign investors are likely to be driven by a number of factors. They are hopeful that the renminbi funds they are launching will not have to go through as lengthy an approval process as foreign private equity investments, including the detailed Ministry of Commerce (Mofcom) approval, said specialists. It is not yet clear what approval process will be required for investments by the renminbi funds launched by foreign investors, however, it seems reasonable to expect that renminbi funds will be cut some slack. Foreign investors are also hoping that by raising renminbi funding they are able to invest in sectors and industries which are sensitive for foreign investment.
"The launch of renminbi funds by foreign investors is also being driven by the marriage of local capital and international expertise," said Maurice Hoo, Hong Kong-based partner in the private equity practice of law firm, Paul Hastings, Jaonfsky & Walker. Global private equity players are being attracted by the opportunity to tap into the resources of China's high-net-worth individuals. For the HNWIs, these funds represent an opportunity to gain access to the operating experience of global financial sponsors.
China has gone on record since 2005 saying that it is keen to develop a domestic fund industry and it recognises that bringing in foreign players will help it to achieve this goal. "The establishment of purely domestic as well as foreign-invested private equity funds fosters an ecosystem where local and international funds collaborate as well as compete, ultimately benefitting both constituencies," said Hoo. "This appears to be consistent with what the National Development and Reform Commission wanted to see when it issued its Notice Number 39 in October 2005."
