China's High-Stakes Race for PE 'Crown Jewel'

Shuttling between Shanghai, Chongqing and Beijing with his top Asian executives in tow, the founder and CEO of U.S.-based private equity fund TPG searched in earnest for business bases in China.

Competitors in the PE business such as Blackstone and Carlyle had followed paths similar to the trail cut through China recently by TPG chief James Coulter and his team of executives.

And wherever PE firms went, city officials opened their arms. Mayors shook hands with visiting fund managers scoping for office space, and then offered them tax breaks and other incentives. Bringing a PE firm to town would mean jobs, prestige and access to foreign investment funds for local projects.

Chongqing officials smiled August 24 after Coulter ended his road trip and picked the city for a new headquarters for its 5 billion yuan Western China Growth Fund. It's slated to be Chongqing's first PE fund launched by a foreign company.

Shanghai officials scored as well: Just a day before the Chongqing announcement, TPG had selected that city for its new TPG China Investment Fund.

TPG manages more than US$ 57 billion in assets, with branches worldwide. So far, it has gone no further than signing letters of intent to open funds in Chongqing and Shanghai. It has yet to launch management companies or begin actual fund-raising.

But the plan to operate two, large yuan-denominated funds simultaneously highlights TPG's ambitions in China – as well as the intensifying competitiveness among foreign funds and between major cities.

PE "is the crown jewel of the investment industry," declared the mayor of Chongqing, Huang Qifan, at the growth fund's inaugural ceremony.

Coulter said Huang's speech was the best appraisal of the PE industry he'd ever heard from a government official.

Price to Pay

Searching for high returns in China, TPG began negotiating with a few cities in China about a year ago. The firm has sought to capitalize on a scramble for investment funds now pitting Beijing, Shanghai, Tianjin and Chongqing.
Cities have been offering PE funds "dowries" that generally include fees for setting up funds, financial assistance and policy support. But not all offers have ended in deals.

A standard offer from many cities is a 10 million yuan "commission" for setting up a fund that has at least 1 billion yuan in registered capital. Competition can push offers higher.

Caixin learned few cities so far have actually made these kinds of payments to newly contracted PEs. And lately government officials at various department levels have been reviewing the calculations, sometimes with an eye on paying less than initially offered.

"It would be a very large sum if the setup funds are truly paid," explained one local government official. "Financial affairs offices and financial and taxation departments differ in their duties after all, and they have different considerations.