China Homegrown Private Equity

There's a new article by Knowledge@Wharton on the emerging Chinese private equity funds, The Changing Private Equity Landscape in China: The Emergence of the Local RMB Fund. Though foreign private equity and venture capital has grown from US$500 million to US$15.5 billion in 2006, China has been implementing stricter regulations for foreign private equity firms. China's growing liquidity and regulation on foreigners is allowing homegrown Chinese private equity firms to grow.

The benefits to local firms include:

• "Less regulatory scrutiny"
• I suppose this is the insinuation that domestic firms can "get away" with bending more rules
• Also, offshore holding entities are required for freely convertible dollar returns to foreign investors, and "recent regulations in China have made it extremely difficult, if not impossible, to create offshore entities"
  
• "Fewer ownership restrictions"
• Foreign firms are limited in the industries they can invest in, but some argue that the sectors which are not overheated have more opportunities than money available
• Foreigner firms are only allowed to take minority positions in many industries
• "Better access" to transactions and deals
• Local governance
• Rather than having to rely on a home office in another country, the Chinese PE companies can respond quickly to deals because central management is located in China

The hurdles for local firms:

• Lack of Experience
  
• Foreign equity firms have been at their jobs for a long time, whereas "Only a few years ago, there were no local [Chinese] firms"
• Adverse Tax Implications on Exit
• Employee turnover
• "[T]heir incentive structure is not as sophisticated as the international funds so it’s hard to retain a professional team."

For all of the benefits, that last hurdle is a high hurdle, especially in an industry where your people seem to be of utmost importance.