By Julie Zhu and Kane Wu

HONG KONG (Reuters) -Warburg Pincus is raising 3 billion yuan ($439 million) in its maiden yuan-denominated fund, two people with knowledge of the matter said, joining a growing list of private equity investors eyeing local currency investment opportunities in China.

China’s regulatory crackdown on private enterprises including in the tech sector, strict COVID-19 lockdowns and Sino-U.S. tensions have made many U.S. investors more cautious about deploying fresh capital in China, several investors and lawyers told Reuters.

Warburg has approached a number of Chinese investors including local government-backed entities and state-backed financial institutions for the new yuan fund, the people with knowledge of the matter said.

The U.S. private equity firm plans to primarily focus on the healthcare and industrial technology sectors in China with the yuan fund, one of the people said.

The people declined to be identified as the information is confidential. Warburg declined to comment.

Non-Chinese investment firms raised $2.5 billion in yuan-denominated funds for China deals in 2022, accounting for 20% of the year’s yuan fundraising, according to industry tracker Preqin. The proportion also jumped from just 4% one year earlier.

With yuan-denominated funds, investing in and exiting a local portfolio would be easier in the current macroeconomic environment, some investors said.

“There is uncertainty in whether Chinese companies can go public in the U.S., due to volatilities in U.S. dollar market,” said Mingchen Xia, managing director and co-head of Asia investments at asset management and private investment firm Hamilton Lane.

“RMB (yuan) funds are relatively independent and self-sustainable,” he said. “The bigger reason is geopolitics. Chinese companies welcome RMB funds to invest, especially in sectors such as semiconductor, high technology and national security.”

Hamilton Lane opened its Shanghai office last week after raising a yuan-denominated secondary fund for private markets through China’s Qualified Foreign Limited Partner (QFLP) structure.

The QFLP structure allows foreign investors to convert U.S. dollars to yuan for investments in China.

Fundraising in yuan, however, has its own challenges because it can be costly and requires a different set of skills from fund managers who are more used to dealing with U.S. dollar investors, lawyers and investors said.

“Unless you have a state-backed partner fund or a specific strategic direction, it would still be difficult to raise funds from the market,” said Hong Zhang, a Shanghai-based partner with law firm Baker McKenzie Fenxun.

Sensitive sectors will remain closed to global private equity groups even if they raise yuan funds, she added.

Other global private equity investors raising first-time yuan funds include luxury group LVMH-backed L Catterton, which said in October it had reached first close of its debut yuan fund targeting 2 billion yuan, focusing on the consumer sector.

Private equity funds typically begin investing after their first close, when they have received an initial round of commitments from investors.

Emerging markets-focused Affirma Capital is also targeting a 2 billion yuan raising in its debut fund and reached first close at 1.5 billion yuan by end-2022, a person close to the situation said. The firm declined to comment.

(Reporting by Julie Zhu and Kane Wu in Hong Kong; Additional reporting by Roxanne Liu in Beijing and Yantoultra Ngui in Singapore; Editing by Sumeet Chatterjee, Jamie Freed and Shounak Dasgupta)

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