Overseas venture capitalists with wads of renminbi have not been a familiar sight in China. Foreign-denominated funds contribute about 80% of China's venture capital funding and offshore-based US dollars tend to be the currency of choice.
The offshore structure has traditionally been more flexible and offered protection from laws and regulations unfriendly to venture activities. But this is changing.
Investors are shifting from US dollar-backed offshore vehicles and into onshore investments in renminbi, said York Chen, managing partner of ID TechVentures.
Driving the transition is the resurgence of the stock markets and an undervalued currency. "The renminbi space now generates more value and easier exits," said Rocky Lee, head of venture capital and private equity at DLA Piper China.
Many local venture capital funds are already seeing good returns by taking advantage of their fluency with renminbi investments and Chinese regulations.
"Renminbi is the currency investors didn't want four years ago and now they are coming to us at least once a month asking about it," said Lee.
The shifting tide has also been facilitated by lower entry barriers, streamlined application processes and stronger legal foundations for foreign funds.
Meanwhile, conditions have become more difficult for offshore funds. A slew of new regulations from the State Administration of Foreign Exchange has led to more paperwork, a more complex registration processes and complicated formalities to dissuade Chinese residents from investing offshore.
"In the long term, you will need companies with renminbi assets – so investors who haven't considered this option will be forced to weigh their options," said Lee
Although practical in the convoluted regulatory environment of the past, the standard offshore-holding investment structure, which keeps the legal structure of a fund as well as portfolio investment and divestment abroad, is not sustainable in the long term.
Meanwhile, China's bourses are no longer the crapshoot of old. Stronger regulation and rising investor interest mean an exit via a domestic listing is realistic.
Ultimately, as venture capitalists and private-equity players put more emphasis on locally based investment funds, domestic markets will gain even more momentum. With continued regulatory support, they should deliver the dynamic and sophisticated M&A market that all investors crave.