Some international private-equity firms investing in China are choosing to denominate new funds in the country’s local currency, going against a wider slowdown in global demand for bets on Chinese startups.  The appetite for allocating capital to funds focused on China has waned over the past year, the result of factors including tensions between Beijing and Washington, higher U.S. interest rates and a prolonged crackdown on China’s once-hot internet sector.  

U.S. dollar capital raised by China-focused private-equity funds plunged more than 80% to just under $23 billion in 2022, the lowest amount raised since 2010, according to data from Preqin Pro. Yuan-denominated funds have held up much better. The equivalent of around $455 billion was raised by yuan funds in 2022, just 4% down on the year before.
These yuan funds are getting demand from a mix of local and international investors.
Many Chinese private investment firms that previously relied heavily on raising capital from the likes of U.S. pension and endowment funds have seen a drop in demand in the past year. Only about half of the investors in private-equity funds are committing to follow-on fundraising rounds. Another benefit from investing in Chinese consumer companies in yuan is that the majority of them end up seeking listings in the domestic A-share market, which is traded in yuan, he added.
The choice of the yuan does have challenges. Government-backed funds, a crucial source of capital, often demand that money managers push their portfolio companies to invest in the local economy—a practice known locally as “reverse investment.” It is typically agreed before any commitment to fundraising. They also often want to directly invest in companies alongside the private-equity funds, rather than accepting a role only as a passive investor in the funds.