Blackstone has one, Kohlberg Kravis Roberts wants one and Carlyle already has two. The talk of the town these days is all about having an RMB fund. Global buyout firms are racing to launch them in an effort to carry out deals more quickly and easily in China. And private equity giant Carlyle Group has recently launched its second RMB fund this year, this time in Beijing.

Having received RMB2.4bn in commitments from various sources, including the Beijing state-owned Capital Operation and Management Center (BSCOMC) and the Beijing Equity Investment Development Fund, the group has set up a joint venture holding an 80% stake with BSCOMC to help manage the fund. Through the JV, Carlyle and BSCOMC will work together to identify opportunities and share resources to tap growth opportunities in China.

The fund follows on from the establishment of the Fosun-Carlyle (Shanghai) Equity Investment Fund earlier this year. It is now ready to invest, mainly in large-scale companies with high growth prospects. But Carlyle is not the only PE giant boosting its investment strategies via RMB funds in China. According to Zero2IPO's recent PE report for China, there were 26 RMB funds set up (and six foreign invested funds) in H1 2010.

The new number marks a significant increase from 2009 H2's 15 new RMB funds and the trend towards localisation - using RMB to raise funds, make acquisitions and exit - has picked up momentum. The international status of China's currency has increased in the wake of the financial crisis. "We are seeing a significant rise in the number of RMB funds and these funds are of all different flavours," says Walker Wallace, a partner at O'Melveny & Myers.

Boom markets impetus for RMB funds
Why the upbeat pace now? Global PE players are hoping that RMB funds will offer a new way to be part of the growth of Chinese companies, at a time when changing regulations are choking the old channel of foreign currency investing. Meanwhile, RMB funds allow them to tap into a mounting pile of cash in China, a pile which is poised to grow.

David Roberts, a Beijing-based partner at O'Melveny & Myers, suggests that the impetus at this time
is fuelled by the idea of high returns in the country's booming capital markets, as an exit strategy. "Every deal now seems to be in the shadow of where the investors are eventually going to list. That is what everyone is thinking about nowadays when they are planning for investments into a company," says Roberts.

China holds special appeal in terms of exit strategies for private equity investors. It is hard to ignore the chance to make ten-times ROI offered by companies, at a time when getting such returns elsewhere in the world is very difficult. "Right now, the A-share market is doing extremely well. IPOs in the growth market are offering such a high price-to-earnings ratio," says Wayne Chen, a partner with Llinks. "If you look at the top 10% of companies in China's PE industry, their returns are more attractive than those found in other markets," he adds.

According to reports released by both PricewaterhouseCoopers (PwC) and Ernst & Young, domestic companies are expected to raise more funds via Shanghai and Shenzhen IPOs than those in Hong Kong this year. Most notably, in testimony released by the New York Stock Exchange Euronext Group, it was reported that in the first half of 2010 the Shenzhen Stock Exchange listed 161 companies raising US$22.6bn, becoming the number-one IPO venue in the world. The regional board took over previous IPO market leaders like the New York and Tokyo stock exchanges. Shanghai tagged closely behind in fourth place with a total value raised of US$8.2bn.

Also fuelling this interest is ChiNext, China's first NASDAQstyle start-up stock exchange, which was formally launched in Shenzhen in October 2009. The launch was received enthusiastically by fund managers and PE firms looking forward to having another avenue to exit investments at their disposal.

Demand increases despite regulatory challenges
"The PE market came back during the second half of 2009, and there is a steady pipeline of deals. The string of successful domestic IPOs has also helped boost the confidence of PE investors," says Terence Foo, a partner at Clifford Chance. "There has been a lot of interest among international PE funds in RMB funds, which are becoming prolific, increasing in number and in fund size," he adds.

Clifford Chance recently advised Affinity Equity Partners (AEP) on its US$200m acquisition of a 94% stake in Beijing Leader & Harvest Electric Technologies, one of the largest PE buyouts ever completed in China.
The firm also advised the HSBC NF China Real Estate Fund on its US$138m JV with Tesco, Britain's largest supermarket operator.

The minefield of regulations that offshore deals face has failed to dampen investor interest and the demand for advice in setting up RMB funds. "Despite the legal restrictions and uncertainties, there is high demand from our offshore clients, especially those based in the US and Hong Kong, wanting to set up RMB funds," says Tan Peng, a partner at Fenxun Partners. "A lot of them have proceeded and we have seen a lot of PE funds set up, because they realise that these structures are effective in terms of doing business in China."

According to lawyers, the advantages of RMB funds are clear: they can make investments without foreign exchange controls, and raise funds from local investors including high-net-worth individuals, onshore companies, government funds, insurance companies and social security funds. RMB funds can also speed up the transactions because they are not weighed down by the baggage of foreign investment approvals.

This also explains why more global PE players are turning into RMB funds. There are over 400 purelydomestic
RMB funds, and foreign invested venture capital funds, a type of RMB fund, has climbed from single figures to over 40 in the past two years, according to reports by O'Melveny & Myers.

PRC firms ride on waves of RMB funds
Global recently scored a US$389m engagement, advising furniture retailer Red Star Macalline on its US$389m investment by Warburg Pincus, CITIC Private Equity, Fosun Group and Bohai Industrial Investment. This significant interest in RMB funds has opened new doors for PE lawyers, especially domestic legal advisors.

"There are greater opportunities now for PRC firms because both RMB fund investors and target companies require PRC counsel," says Llinks' Chen. Over the past 12 months Chen has helped numerous clients establish RMB funds, in both Shanghai and the Jiangsu region.

FenXun's managing partner, Fred Chang, explains the increasing preference of using local firms over international ones. "PRC firms, especially those with foreign backgrounds, will find themselves playing larger roles in the transactions. While some major deals, like Carlyle's latest RMB fund, might choose to use dual counsel structures, more clients are gradually finding dual representations not costeffective."

While a cheaper cost structure might prove to be beneficial for local firms when being engaged, lawyers note as the nature of PE deals become increasingly local, PRC firms also get to play bigger roles. "There are going to be a lot of PRC PE deals being done in a very domestic way and increasingly without international lawyers," says Anthony Root, managing partner at Milbank Tweed's Beijing office.

Local knowledge has been cited as one of the top criteria that drives successful domestic transactions. "If you don't understand the country, it's going to be difficult. PRC firms understand the Chinese legal system, the people, networks, government relations and communication with local entrepreneurs," says Chen.

The increasingly domestic nature of deals plays to the strength of PRC firms. O'Melveny's
Wallace concurs with this. "PRC firms are definitely taking certain segments of the market, and it goes to where the value is at. Foreign firms will increasingly work with local law firms because they can provide advice that foreign law firms cannot. It is a natural evolution as the market gets bigger." ALB