TPG plans $1.5 billion of investments in China

Private-equity firm TPG has made a major move into China this week with agreements to set up two separate renminbi-denominated funds that will seek to invest a combined Rmb10 billion ($1.5 billion) in Chinese growth companies. The funds, which will each have a targeted size of Rmb5 billion, will be established with the support of the municipal governments in Shanghai and Chongqing and the fundraising will start in the next couple of months.

TPG is not the first foreign private-equity firm to launch funds denominated in the Chinese currency – Carlyle, First Eastern and Blackstone made similar moves earlier this year – but in dollar terms its commitment is the largest to date and its plan of having one of the two funds focus specifically on Western China is unique so far.

TPG Western China Growth Partners I will be set up in the Liangjiang New Area of Chongqing, which was formally established in June this year and is China’s third economic development zone at the sub-provincial level after Pudong in Shanghai and Binhai in Tianjin. Liangjiang New Area will benefit from the same preferential policies (lower taxes, financial benefits etcetera) as Pudong and Binhai, as well as additional incentives under the development programmes targeted at China’s western region, and the plan is to build the area into the financial centre of the Yangtze River as well as the inland hub for private equity funds.

“While Shanghai is an important partner as a regional financial centre, Chongqing is a very different region with much faster growth, albeit from a low base,” said Stephen Peel, a managing partner of TPG Asia who heads the firm’s investing activities in Greater China, Southeast Asia, India and Russia. “This fund will allow us to participate in China’s development of its western regions, which is very exciting,” he told FinanceAsia in a phone interview.

The plan is for the fund to make onshore investments to support the growth and expansion of Chinese companies that are from or focusing on Western China. 

“I grew up in Western China and I am very excited to be here in Chongqing,” said Sing Wang, co-chairman of TPG China, in a written comment. “I believe the growth of Western China will be the defining story of the next 30 years, creating vast investment opportunities and we would like to be part of it.”

TPG on Tuesday signed agreements with the Chongqing Municipal Financial Services Office and the Chongqing Liangjiang New Area Development & Investment Group to establish the TPG Western China Growth Partners I fund in the city. The local government support will be important when it comes to navigating Chinese regulations, and will help in achieving certain tax benefits available to funds, Peel said. The Chongqing government will also make a financial investment in the fund as a limited partner in the firm, he added, but declined to comment on the size of the investment.

The set-up in Shanghai will be similar, although that fund, TPG China Partners I, will make onshore investments to support the growth of medium- and large-size Chinese companies not just in the Shanghai area, but nationwide. It will focus particularly on companies active in the financial services, consumer, retail and healthcare sectors as well as other modern services industries. An agreement was signed with the local government of Pudong New Area, which is part of the Shanghai Municipality, on Monday to set up the fund there. Again, the local government will make an undisclosed financial investment in the fund.

Both funds will be managed by TPG’s Greater China team and the aim, as stated in the announcements issued this week, is to add value to Chinese companies through the firm’s global scale and operational and investment expertise. Firm-wide, TPG has “significant global resources”, it said, including about 50 specialised operating partners with extensive professional and operational expertise to help its portfolio companies address issues such as revenue growth, cost optimisation and efficient capital allocation.

TPG is of course not a newcomer to China. In fact, along with its predecessor, Newbridge Capital, it has been investing in the country for more than 15 years and China is its second biggest market globally in terms of committed capital. The firm has more than 30 professionals on the ground in China and its investments to date include computer manufacturer Lenovo, shoe manufacturer and retailer Daphne, Shenzhen Development Bank, supermarket chain Wumart, China Grand Auto and China Red Winery to name but a few. All of these investments have been made through offshore dollar-denominated TPG funds.

The offshore approach has its limitations, however, and has enabled foreign private-equity firms either to invest in Chinese companies incorporated offshore or to invest onshore in certain sectors. In both cases the approvals process is very long and uncertain which, according to Peel, has resulted in “many failed large and mid-size deals in China”. “It could take anywhere between three and 18 months to get approvals and, faced with that uncertainty, the seller would always go for an onshore investor,” he said.

So, when China changed its regulations some 18 months ago to allow onshore funds to be managed by foreigners, several global private-equity firms not surprisingly jumped at the opportunity. The hope is that this will make it quicker to get the necessary regulatory approvals for acquisitions and that there will be no restrictions with regard to which companies they can invest in – essentially foreign private-equity firms should be able to invest on the same conditions as domestic firms. At the same time, China now also allows domestic insurance companies to invest in private equity, which increases the potential capital sources for the funds.

Details of the legislation targeted at private equity funds specifically, including tax treatment and clarification of the funds as domestic entities, have been developed over the past 12-15 months and Peel says TPG believes that this process is now “almost completed”, making this a good time to establish an onshore presence.

Set up in 1992, TPG has more than $57 billion of assets under management globally, including hedge funds, and offices around the world. In Asia-Pacific it has offices in Beijing, Hong Kong, Melbourne, Mumbai, Shanghai, Singapore and Tokyo.