中国风投基金转向人民币——这将如何影响风投基金表现？China’s VC industry has funds that are denominated in RMB as well as USD-denominated funds. The difference between RMB and USD is not only one of currency exposure – the currency denomination of Chinese VC funds has significant implications on how the VC fund is managed.
This editorial maps the rise of RMB denominated funds and outlines the differences between RMB and USD funds. In its second part, I will identify avenues for regulatory form to improve the governance of RMB-denominated funds.
It is important that Chinese regulators get this right: if China’s RMB funds are to act as a source of ‘smart money’ for its burgeoning high-technology sector, as VC funds do in Silicon Valley, they need to be well-managed, not only well-financed.
Rise of RMB funds
Historically, foreign VCs in China managed USD funds through offshore vehicles. Blackstone, KKR and Sequoia were some of the blue chip names to manage Chinese VC funds in dollars. Recently, there has been a meteoric rise in RMB-denominated funds (not least on the backs of the stock market liberalization and hugely successful IPOs of Baidu, Alibaba and Tencent)(Fuhrman, 2016). The rise of RMB funds come as “local raising, local investment and local exit” mode in China’s VC/PE market is on the rise.
In May 2009, there were already “over 400 purely-domestic RMB funds” (Wharton, 2009), which constituted most of the VC raised in China. Based upon Zero2IPO data, Pearson said that “of the 24 newly established VC/PE funds available for investment in Chinese mainland in Q3’09, 23 are the funds raised in RMB, representing 95.8% of the total.” It helped that “the Ministry of Commerce put its weight behind the local initiatives in March  by devolving authority for approving foreign-invested venture capital to its provincial branches (Wharton, 2009).”
Today – middle of 2016 – RMB funds outnumber USD funds in China in terms of number of funds, deals and money under management. In May 2016, for example, 96 VC funds were raised in RMB, only 2 in other currencies (presumably USD) (See PE Data June 2016.
RMB are not the same as USD funds
The LPs behind the Chinese RMB funds are often not the LPs behind USD funds in China, or elsewhere in the world. Instead, China’s RMB funds raise funding from governmental entities that use the RMB fund as a means of investing in social projects.
High-technology companies also use RMB fund structures, serving as both the LP and GP, in order to buy stakes in companies without having to use the company’s main balance sheet. RMB funds increasingly invest in high-technology, which reflects tech giants’ embrace of corporate VC in China.
It matters that RMB fund LPs are not ‘normal’ LPs. They do not operate according to the same best practices in due diligence and in investment management as the world’s best venture capitalists.
The CVCA’s best practices report in 2011 noted that generally, “the limited partnership agreements of RMB funds are less flexible and diversified than that of USD funds.” RMB and USD funds differ in their “investment decision-making mechanism, investment portfolio valuation, LP supervision and management.”
Fuhrman (in the second part of his excellent posts on the rise of RMB funds) explains that RMB funds are less stringent in their due diligence, offer start-ups higher valuations, offer term sheets quickly and lax post-deal monitoring. RMB funds are more likely to be ‘captive funds’ as they have a single LP. Their single LPs – interested in social or strategic returns rather than financial – do not push for exhausting screening, due diligence or robust risk management.
Effectively, RMB funds are less thorough in their due diligence, less rigorous in their valuation practices and less willing and able to partner with start-ups after they invest.
The managers of RMB funds – with the support of regulators who believe that more local VC will help China’s high-technology industry – are using the terms venture capital, the titles of LP, and the instruments of term sheets and equity stakes. But, they are not working tirelessly to identify the next Baidu, Tencent or Alibaba, or the next Google, Facebook or Cisco.
RMB funds in their current incarnation are not poised to be the ‘smart money’ that they have been for Silicon Valley entrepreneurs since the 1970s. I believe that regulatory reforms could help ensure that China’s RMB funds are a source of sustainable capital for China’s high-technology industry.
In the second part of this editorial I offer suggestions of regulatory reforms that can enhance the likelihood that China’s RMB funds are a force of good. The regulatory reforms will aim at pushing China’s RMB funds to embody best practices in corporate governance. If they are well run, they can help instil best practices in the management and operations of the high technology companies in which they invest.
If you are interested in China’s VC market, check out Coller Venture Review Issue 2 for Professor Mannie Liu’s “Growing the Venture Dragon” article. She chronicles five stages of Chinese VC policy and market developments. One of the themes arising in her article is that of RMB funds and the internationalization of the Chinese VC market.
Robyn Klingler-Vidra is a CIV Senior Research Fellow, Head of Policy Research Strand and Lecturer at King’s College, London. The above editorial includes references to her presentations Models for Government Support for Deep Innovation (CIV Deep Innovation Workshop) and Implementing Venture Policy(CIV2015HK); as well as Beyond Laissez-Faire in Hong Kong co-written by Robyn together with Yesha Sivan.