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

"Furthermore, if a company only injects funds but does not invest, would it be entitled to setup funding?" he asked. "I think this issue is open to question."

Meanwhile, investment firms are keeping close watch on the ways local governments are handling PE deals. Not all signs are positive.

"Regrettably, there have been some worrying signs in recent days," said an official working for an institutional investor. "By attracting so-called international giants, some local governments are pursuing nominal achievements.

"They also give a green light to tax reductions and other policies (while) using local finances and state-owned funds as limited partners to attract foreign management," he said. "In even more extreme cases, some advantageous bargaining positions were given up in negotiations with foreign management to meet contract-signing deadlines imposed by superiors."

These factors suggest that, despite all the hoopla and competitive spirit, the flurry of negotiations between cities and firms have failed to mask a start-up scene that "is not good for the new yuan-denominated fund market in China," the investment official said.

PE Support

PE firms have stirred controversy in the United States because their business generally involves high leverage levels and low tax rates. But Chinese officials have displayed controversy-free enthusiasm that impressed PE investors.

The Chongqing government has cut deals with 23 equity investment enterprises that plan to raise more than 20 billion yuan combined. So far, 14 have raised money and the funding raised in the initial stage is 4.95 billion yuan.
Investments so far have focused on fields such as information technology, equipment manufacturing and medical equipment, with total investment of 2.4 billion yuan.

Chinese cities seeking to emerge as financial industry centers are also keen to PE. They pin hopes on resolving equity financing issues through the funds.

The Chongqing government is giving full support to the TGP growth fund. And in addition to cutting a deal with the government's Financial Affairs Office, TPG signed a memorandum of understanding with Chongqing Liangjiang New Area Development & Investment Group, a government investor in charge of developing an industrial park with 10 billion yuan in registered capital. Caixin learned the group plans to invest about 500 million yuan as a limited partner in the fund.

Neither Shanghai nor TPG officials have disclosed the type of financial support offered by that city. Lawyers familiar with the deal, however, say the PE firm has started contacted local private and state-owned enterprises.

Coulter has only said his firm reached a consensus with the Shanghai government, as it did in Chongqing. He also said each of these new city funds will invest in growth enterprises within specific geographical regions. They may, however, invest jointly in large projects, he said.

Coulter added that TPG has retained management rights over each fund, and has absolute control over investment decisions.

TPG teams have kept mum about financing plans. They say they will accept individual investors as limited partners, but they've refused to publicize minimum requirements.

In a related move, TPG welcomed an August 5 decision by Chinese regulators that allows insurance companies to make private equity investments. More firms may follow its example.

"TPG may trigger a wave of foreign giants entering yuan-denominated funds," said an industry insider.

City officials such as Chongqing's Huang says there are many reasons why PE is so popular in Chinese cities.

"PE can provide enterprises with funds, asset restructuring and value-added programs, and services such as business management, technology, resources and consultancy," he said.

The industry source said governments of the four municipalities directly under central government control – Shanghai, Beijing, Chongqing and Tianjin – may have gone too far with concession offers.

Nevertheless, global investors are continuing to eye Chinese assets. Rates of return on investments have been high over the past decade among PE funds in China, and many see more investing in the country as a logical move.

1 yuan = 14 U.S. cents