Public private equity

Chinese private equity funds have grown rapidly in number and size. Part of their growth can be attributed to a new model: government ‘guidance’ money handed out for investment in chosen sectors. But do Chinese PE funds come up to the mark?
By Robin Weir

China’s banks are rationing credit, but private equity is booming. According to figures from Zero2IPO, 146 RMB funds were raised in 2010, and a further 121 in the first three quarters of 2011. Of these, foreign institutions raised only a handful (11 in the third quarter). Zero2IPO records 3,500 fund management entities currently active in China, up from 500 in 2005.

With so many Chinese private equity funds still new and unproven, the question has to be asked: are they up to the mark? In A kinder, gentler approach to Chinese equity on page 36, Frank Marinaro, chief representative of Loeb & Loeb in Beijing, describes the unconventional use of ratchet provisions by PE funds in China, and the damaging effects this can have on the relations between the PE fund, its portfolio companies, management and other investors. Marinaro suggests that an “operational partner” approach would achieve better results. But whatever their deficiencies, Chinese private equity funds have found a new source of cash: the government.