Blackstone Said to Win Shanghai Approval for Yuan Investments
Blackstone Group LP (BX) was approved by Shanghai authorities for a program allowing it to invest money raised abroad in China without seeking permission from the foreign exchange regulator, two people with knowledge of the matter said.
Blackstone’s 5 billion yuan ($765 million) domestic fund was approved for the Qualified Foreign Limited Partner program, the two people said, declining to be named as the matter is private. The New York-based firm has raised about half the fund, some of it from overseas, one of the people said.
The permit removes a hurdle in China for Blackstone, which previously needed approval from the State Administration of Foreign Exchange for changing dollars into yuan for every deal it made. The Blackstone fund will still be treated as a foreign investor, the people said, keeping it at a potential disadvantage to local rivals because its acquisitions need Ministry of Commerce approval.
The QFLP rules “are not giving foreign fund managers and investors everything they want,” said Larry Sussman, a Beijing- based partner at O’Melveny & Myers LLP who advises private equity firms setting up domestic funds in China. “They’re certainly not the silver bullet that many people were hoping for, but it’s a sign that regulatory changes are going in the right direction.”
Blackstone in 2009 became the first global buyout firm to announce plans for a local-currency fund in China, where private-equity investments jumped 40 percent to $19.7 billion last year, according to the Asian Venture Capital Journal. TPG Inc. and Carlyle Group followed. Together, the three firms have announced plans to raise a combined 20 billion yuan for local- currency funds.
Homegrown Industry
China is stepping up efforts to expand its private-equity industry as the government seeks to foster corporate governance and strengthen capital markets. Still, foreign private-equity investors have been faced with restrictions on buying assets in China, which limits access to industries it designates as strategic and imposes capital controls.
The QFLP program in Shanghai encompasses funds that are partly or wholly backed by overseas investors, known as limited partners. China is expected to extend the pilot program to Beijing and Tianjin, said Hubert Tse, a partner at Chinese law firm Boss & Young who advises private equity firms on yuan funds.
“We won’t have any issues in the future with currency conversion,” said Benjamin Jenkins, a Hong Kong-based senior managing director at Blackstone, in an interview. The QFLP program “is an easier vehicle to use for domestic deals, and it gives us an opportunity to access a new investor base.”
$3 Billion Quotas
Jenkins said the firm’s local-currency fund will get a “majority” of its capital from Chinese investors. When Blackstone first announced plans to raise the yuan fund in August 2009, the QFLP program had not been unveiled, he said.
China’s currency regulator will grant Shanghai and Beijing a $3 billion quota each for the QFLP program, Caixin magazine reported in January, citing an unidentified person.
The QFLP program allows private equity firms to convert foreign currency into yuan, park it with a custodian bank and then invest it without applying for SAFE approval for each deal.
“Shanghai needs world class foreign LPs to make their program work,” said Sussman, referring to limited partners. “If Blackstone can deliver that, even though the fund does not work perfectly, it may open other doors to not only benefit Blackstone as a firm but indirectly their LP family.”
Local Disadvantage
Foreign-backed funds using the QFLP program for investments will not be considered as local pools of capital, said a government official who asked not to be identified. That means their acquisitions are subject to more scrutiny than local rivals, potentially hampering their ability to complete deals.
China accounted for 37 percent of private-equity deals in Asia last year, an increase from 29 percent in 2009, according to the Asian Venture Capital Journal.
Entrepreneurs in China are more inclined to accept capital from domestic private equity firms because it is subject to fewer regulatory restrictions, said Tse of Boss & Young. Getting local funding also allows them to escape being classified as foreign-invested enterprises, which can increase red tape, he said.
“I don’t think that’s an insurmountable hurdle,” said Jenkins. “In theory, we can compete with them with our global fund.”
To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
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