Multinational corporations (MNCs) are starting to deploy excess renminbi through their financial arm in the form of a fund, maximising the returns of the Chinese currency.
Siemens Financial Services – the financial arm of the electronics giant Siemens – launched a fund devoted to renminbi onshore deals on March 15 via its Siemens Venture Capital (VC) unit. It will be able to invest the local currency into pure domestic companies to further enhance Siemens’ capabilities in VC investment through onshore deals, in addition to the company’s existing US dollar investment capacity.
Other MNCs with activities in China have also set up similar funds, according to sources.
“These companies will identify a couple of technologies and they will use money coming from the fund that they have put together to incubate that technology, effectively all in house,” said Edward Epstein, Shanghai-based managing partner at Troutman Sanders to Asiamoney PLUS in a telephone interview on March 19. “It is performing the same economic function that a private equity or venture capital [fund] performs and it is encouraging the development of certain types of technology that are valuable.”
Larry Sussman, Beijing-based partner at O’Melveny & Myers agrees: “It’s more the technology related companies that have corporate capital arms because they usually invest in industries that are synergistic to their main businesses. They might invest in a supplier or R&D [research and development] that relates to their main businesses.
The VC unit of the German company – which established its presence onshore in 2006 – will look to invest in companies in their startup phase and provide established companies with additional capital for their growth during the expansion phase.
Local corporates operating in the energy, healthcare industry as well as China’s infrastructure and urban development projects will receive Siemens’ funding, according to Ralf Schnell, head of Siemens Financial Services’ VC business in a press release on March 15.
“A lot of the MNCs do this because they have a war chest of renminbi sitting around. That gives them the advantage to deploy these funds faster than a PE [private equity] firm can,” said Sussman. “They also have extensive corporate groups of operating companies in China which allows them to make these investments without the need for a MofCom [Ministry of Commerce] approval because the companies being used are already reinvested enterprises under Chinese law.”
Global PE firms have been struggling to increase their presence in the Chinese market only because they do not have the ability to grow organically unlike locally incorporated foreign companies.
The latter entities have accumulated a large amount of renminbi over the years from their business operations which they are able to deploy for investment purposes. PE firms, on the other hand, would have to find ways to grow their renminbi funds.
“There is a broader interest from PE firms in accessing or being able to invest in companies that are incorporated onshore that are actually Chinese companies as opposed to China offshore structures and JV structures [located elsewhere],” said Doug Coulter, head of private equity Asia Pacific at LGT Capital Partners to Asiamoney PLUS. “If you are an international firm and you want to invest in onshore private company via private capital, the only way to do it is via raising onshore renminbi capital and then in turn investing it into these Chinese companies.”
“China is the only market in the world that has two different PE universes that exist side-by-side,” he added. “Over the longer term as the renminbi becomes more like an international currency, the two universes [onshore and offshore] will become one. China is a bit of an outlier and that’s because of regulatory reasons.”
Additionally, it’s a norm for MNCs to establish capital arms for investment purposes across the globe. In Siemens’ case, the company sees opportunity in maximising the returns of the Chinese currency instead of merely placing them into bank deposits. This is another reason why it has established a renminbi fund.
“These companies have 20 or more operating entities in China, which gives them a huge advantage in because they not only do not have to do much in setting up a fund,” said Sussman. “These companies are not regulated like foreign invested enterprises. When they make investments, they are as pure as domestic investments.”
Foreign corporates can pool renminbi from all their subsidiaries located in other areas of China, via the usage of an entrustment loan, say experts.
Japanese firm CyberAgent Ventures – a venture arm of Tokyo-based internet media company – has plans to debut a renminbi-denominated fund this May to invest solely in Chinese companies, according to Joey Dai, the head of CyberAgent’s Beijing office.
“We have done some investments in China, Asean [Association of Southeast Asian Nations], Korea, Taiwan and the States, and are managing a global fund worth US$100 million,” said Dai to Asiamoney PLUS. “In China, we think the mobile internet industry is growing very fast. So we have a lot of opportunities here.”
Dai adds that many internet-related startup companies in China find it difficult in accepting US dollar-denominated investments due to the Variable Interest Enterprise (VIE) structures that they have to set up. This has prompted the Japanese company to establish a renminbi-denominated fund in China.
A VIE structure means that equity holders have somewhat indirect financial interest in the revenue and earnings stream and do not actually have claim on the assets of the company in question. These structures were explicitly designed to circumvent foreign investment in certain industries and companies, note experts.
CyberAgent Ventures is targeting Rmb100 million (US$16 million) for the maiden vehicle to be invested in mobile internet companies, such as businesses involved in social networking and games for smartphones. The fund will commit Rmb3 million to Rmb5 million per Chinese company, says Dai.