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Chinese city to launch two PE funds

Hangzhou, a picturesque historical city near Shanghai, is reportedly looking to raise RMB5 billion and RMB560 million for an industrial fund and a venture capital fund respectively.

The city of Hangzhou, located in the Yangtze River Delta and the capital of China’s Zhejiang province, plans to launch two private equity funds totaling RMB5.56 billion ($810 million; €517 million).

Reuters reported Cai Qi, the city’s mayor, as saying that the city will launch a RMB5 billion fund to invest in industrial projects in the area and will raise another RMB560 million for a venture capital fund that will invest in startups in the internet and other high tech sectors.

The mayor said that RMB5 billion will be raised for the first phase of the Qian Jiang Industrial Fund, and the government would continue to raise funds once the initial RMB5 billion was raised.

Details on how much the fund will ultimately target for its final close were not provided. Qi added that the city government has been in talks with more than 20 private equity firms that could be potential partners in the Qian Jiang Industrial Fund.

The city also plans to set up a RMB560 million venture capital fund for the promotion of internet and technology companies. Qi Said, “Hangzhou wants to be a haven for venture capital and private equity funds, and we are looking for the second and third Alibabas,” referring to the success of Alibaba.com, China’s largest e-commerce company, which is based in Hangzhou.

Hangzhou’s plans to launch the two funds are part of an increasing trend in China whereby provincial or municipal governments and bodies are venturing into private equity. Rocky Lee, partner and head of China Venture & Private Equity Practice at the law firm DLA Piper, told PEO that there are concerns regarding the growing inclination of such bodies to be involved in private equity activities.

“This leads us to a very interesting paradigm where provincial and municipal governments are competing with domestic institutional investors and foreign LPs to invest in businesses. It is arguably unfair because the governments are the regulators, and regulators enforce rules and regulations. And now, the referees [regulators] and the players [businesses] are together,” he said.
 
“It is an unusual development,” he added. “We have a scenario where provincial and small governments are beginning to carve out territories for themselves. I see a real conflict of interest concern.”