An Analytical Comparison of RMB- and USD-denominated Chinese Private Equity Funds' Performance

Abstract

As the Chinese economy grows, the popularity of private equity funds that invest in Greater China (mainland China, Hong Kong, Macao, and Taiwan) has increased as well. The Chinese private equity industry has expanded from $14 billion assets under management in 2008 to $596 billion in 2018. These private equity funds are raised in many different currencies with the United States Dollar (USD) and the Chinese Renminbi (RMB) being the most popular. The popularity of USD-denominated and RMB-denominated Chinese private equity funds has shifted multiple times in the past twenty years. This fluctuating popularity has been attributed to the changing performance of the funds, as investors seek high performance that will return them the most money. However, there has never been rigorous research on the performance difference between USD-denominated and RMB-denominated funds.

This thesis examines the investment returns, specifically internal rate of return (IRR) and return on investment (ROI), over the 1983-2017 time period of USD-denominated and RMB-denominated Chinese private equity funds. We deploy versions of Hotelling's Two-Sample T-squared Test with modifications for our data set. During the 1983-2017 time period, there is a statistically significant difference in the IRR of the two funds with the RMB-denominated funds outperforming USD-denominated funds, but there is no statistically significant difference in the ROI of the two funds. After investigating the overall time period, we analyze specific time increments to see if these results differ from the overall trend of differing IRR but the same ROI. We find performance differences based on time periods and hypothesize their cause to be macro trends or government regulations but correlating them to specific policies using rigorous mathematical models is outside the scope of this thesis.

Through this thesis, individuals can examine the potential differences in Chinese private equity funds with two different base currencies. Investors in Chinese private equity can utilize this information to better allocate capital to various private equity funds. Additionally, policymakers may use this thesis as a guide to predict the impacts of certain regulations on the performance of USD-denominated and RMB-denominated Chinese private equity funds.