By Cathy Chan

July 13 (Bloomberg) — Fang Fenglei, who founded China’s first investment bank more than a decade ago, now wants to open one of the country’s first independently run private equity funds, said two people with direct knowledge of the matter.

Fang, who now heads the Chinese securities venture of Goldman Sachs Group Inc., is gauging whether regulators will support his plan for a 6 billion-yuan ($790 million) buyout fund, said the people, who declined to be identified as the talks are private. He aims to take advantage of a partnership law that took effect in June to set up a fund and he has no plans to step down as chairman of Beijing-based Goldman Sachs Gao Hua Securities Co., they said.

Regulatory approval would let Fang, 55, tap demand for investment in a market where $910 million of buyouts have been announced this year, compared with $9.22 billion in Australia, an economy one-third the size of China’s, data compiled by Bloomberg show. He must win the support from officials who still direct about 150,000 state-owned companies and who control the bulk of funding for existing buyout firms.

Fang has a clear vision of what he wants to achieve,” said Vincent Chan, managing partner of Hong Kong-based venture capital firm Jafco Asia. The key question is whether he can diversify his funding as most domestic funds are raised from state-owned enterprises, which isn’t ideal.”

Edward Naylor, a Hong Kong-based spokesman for Goldman, and Fang declined to comment.

Independent Funds

Independent private-equity funds in China, such as CDH Investments and Capital Today, only raise funds offshore. The Bohai Industry Investment Fund became the first domestic, yuan- based private-equity fund established in China last year and is being managed by BOC International (Holdings) Ltd., a unit of China’s second-largest bank.

At least six companies are seeking regulatory approval to establish domestic funds, the people said.

Most domestic yuan funds are still are dominated by a single investor or organization, said Ludvig Nilsson, the managing partner of Jade Alternative Investment Advisors, a Shanghai-based investment and advisory firm focusing on private equity in China.

Setting up as a partnership enables the fund managers to take a greater share of any profits, which should help attract top-tier investment professionals, and will help prevent any single investor from directing strategy, he said.

The new partnership structure gives clearer separation of power” between investors and fund managers, he said. It “promotes stricter investment and exit timetable mandates.”

Track Record

Fang helped New York-based Goldman win an investment banking license for Goldman Sachs Gao Hua in December 2004, giving the firm a head start over global rivals in China, where a record $17.2 billion of stock has been sold this year. Fang has close ties to Wang Qishan, the mayor of Beijing, according to people who know him.

Born in Hunan Province and raised in Beijing, Fang attended Zhongshan University in southern Guangdong Province. He joined the Red Guard, a radical student group that rose during China’s Cultural Revolution, espousing teachings contained in Chairman Mao Zedong’s “Little Red Book” and attacking intellectuals and others who they regarded as bourgeois. Fang wasn’t a leader of the group, his secretary said in May 2002.

He served in the provincial government in Henan and later ran two state-owned enterprises, Central China International Trading Co. and Henan Food & Oil Import-Export Co.

While standing in front of the panda pen at Washington Zoo in 1994, Fang and then-World Bank China Chief Edwin Lim hatched a plan to start China’s first investment bank. The two formed China International Capital Corp. in August 1995.

Top Arranger

The company, 34 percent owned by Morgan Stanley, is the top arranger of share sales in China this year, data compiled by Bloomberg show.

Nine years later, Fang took a $100 million loan from Goldman to set up Gao Hua Securities, which the New York firm controls through undisclosed contractual arrangements. Gao Hua and New York-based Goldman formed the investment banking venture the same year, with Fang’s company owning 67 percent and Goldman holding the rest.

It’s unclear whether Goldman would be involved in any yuan- denominated fund raised by Fang, the people said. Goldman currently makes private equity investments in China with money raised from overseas.

Foreign firms that want to do private equity deals in China, including Goldman, have been hampered by stricter rules introduced last September that bar overseas purchases of companies deemed “strategic” or with well-known local brands.

By setting up a domestic fund, Fang would be able to side- step such restrictions.

China has made it clear that domestic private equity is a priority,” said Liu Jinrong, a partner at Global Law Office, which advises private equity firms.

Copyright Fund China 2009.

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