Domestic Chinese money is beginning to leave its footsteps on ground
first trod by structured private equity and venture capital investors.
Foreign generated and managed funds still account for the vast majority
of the private equity and venture capital investments in China but
domestic funds are starting to come into their own.
Figures from Thomson Financial say that in 2004 foreign funds made up
97.4% of private equity money in China. In 2005 the number declined to
Leading the domestic advance are home-grown players like Citic
Securities and CDH Investments. CDH, whose first fund came to around
US$100 million, kicked off fundraising for a US$310 million fund in
2005 and is currently targeting a new fund of more than US$1 billion.
"There is no reason why [country funds] can't compete with the global
players in the home market," said Gavin Geminder, a partner at
professional services firm KPMG in China and Hong Kong SAR.
The good news is that there is no shortage of cash in circulation. It
is difficult to figure out exactly how much money may be floating
around in China.
A Beijing-based private equity fund manager who asked not to be named
said deals have traditionally been funded through angels or other types
of informal lending that aren't officially recorded.
"Rich people will support companies they like the look of without
necessarily demanding that it goes through all the hoops that private
equity firms would want," he said, recalling how the head of a
manufacturing firm invested in a hotel simply so he could take his
clients and friends there.
"They are almost lifestyle assets rather than an investment in a business."
According to a recent study, US$91.42-100.79 billion made its way to
the nation's entrepreneurs in 2003 through such informal lending,
equivalent to 28% of total lending by formal financial institutions.
Chinese people are famously thrifty, with bank deposits said to total
US$4.15 trillion, or about 175% of GDP. As bank deposits generate poor
returns, this represents a sizeable pool of funds that could enter
high-return structured funds.
But even though the domestic funds are on the rise, foreign money is
still more attractive to Chinese businesses – it offers foreign
expertise, access to offshore markets and huge potential brand exposure.
For that reason, a lot of domestic firms keep a low profile, sticking
to early stage deals and using local knowledge to get a jump on their
foreign competitors. By contrast, foreign funds can become swamped when
the rumour mill gets to work.
"Management teams often want to work with foreign investment teams,"
said one foreign venture capitalist. "Once the word gets out, the
foreign investment teams find out its pretty easy for us to talk to the
management team and find a deal."