Yuan-denominated funds outperformed their foreign currency peers in China's venture capital/private equity (VC/PE) market during the first 11 months of 2009, when overseas investors found themselves on shaky ground with the global economic meltdown.

According to figures released by the market researcher Zero2IPO Group, of the 90 venture capital funds raised for investments in China from January to November, 82, or 91.9 percent, were yuan-denominated, up 15.2 percentage points from the entire 75.9 percent in 2008.

The local currency funds raised the equivalent of US$3.5 billion during the period, accounting for 69.4 percent of the total, compared with 32 percent in 2008.

The central government has backed the development of local currency funds by drawing up helpful laws and regulations, while the requirement for foreign VC/PE enterprises remains stringent.

Foreign VC/PE firms have to go through very complicated regulatory and legal procedures to do business in China, which hampers their growth in the country, said Andrew Y. Yan, managing partner of Hong Kong-based PE firm SAIF Partners, at a China Venture Capital and Private Equity Annual Forum in Shanghai yesterday.

Currently, foreign VC/PE firms have to set up their consulting companies or representative offices in China to source deals to be conducted through the General Partners' offshore vehicles, according to Hubert Tse, managing director at law firm Yuan Tai.

By comparison, the government's preferential policies targeting domestic VC/PE firms amid the debut of the NASDAQ-style board ChiNext in October, which offers an efficient exit channel for VC/PE investors, have beefed up the growth of the home-grown PE firms behind the yuan-denominated funds.

As such, international VC/PE funds facing intense competition for deals in China have to start adopting new investment strategies by raising local currency funds.

"We're raising 1 billion yuan for our renminbi-denominated fund that is planned to start operation by the end of this year," said Roman Shaw, founding partner of DT Capital Partners, a VC firm that manages more than US$500 million in assets.

But Shaw projected that, globally speaking, the local currency fund will not surpass the dollar-denominated fund in terms of the capital amount in three to five years unless institutional investors are allowed to enter the industry.

Some veteran venture capitalists have said the top authorities should ease the current stringent regulatory framework for VC/PE investments, as more foreign limited partners have considered raising yuan-denominated funds in what will inevitably become the future trend.

In June, the Shanghai municipal government issued a pilot measure to allow foreign PE/VC firms to operate in the Shanghai Pudong New District. The move attracted PE giant Blackstone to set up its first yuan-denominated fund in Shanghai by raising 5 billion yuan.

"As... the government looks to further strengthen the domestic private equity market, foreign General Partners can expect more favorable rules to come in the foreseeable future," said Tse.