To M&A, add private equity as a growing sector of the Asian economy that is attracting foreign companies and law firms.

According to a new research report from Zero2IPO Research Center, a PE research institution located on the Chinese Mainland, the total amount of newly raised PE funds targeting Asian markets in Q3 ‘09 continuously rose.

Six PE funds were available for investment on the Chinese Mainland, fulfilling their fundraising for US $2.47 billion, according to the report. Q3 ‘09 also saw 20 enterprises on the Chinese Mainland garnering PE investment, 16 of which disclosed a total investment amount of US $982.92 million. In terms of exits, seven deals took place that quarter, among which four ended up with the listing of investees.

Two reasons were cited for recent growth in the PE industry: Investors have flocked to the private side of the market in China as the government continues to open the economy to private investing. And, due to the recession in 2008, funds raised that year didn’t fully make their investments; but second-round investing helped bump the 2009 numbers.

As the Chinese government continues its economic reforms, firms willing to invest in PE will see new opportunities as well as challenges, according to speakers at the Asia Private Equity Forum, held in September in Hong Kong. In 2008, Shanghai began allowing foreign private equity and venture capital funds to register legally as local equities investment firms.

Just a few days ago, the State Council in China announced that starting in March 2010, foreign firms and individuals will be allowed to set up limited partnership firms in China. How this will affect the PE industry is a bit unclear, since PE funds can be structured as limited partnerships only through complex offshore platforms and must be structured as corporations or unincorporated entities if they invest onshore through yuan-dominated funds.

But while there is some uncertainly surrounding new regulations in Asia, private equity firms still have a bright future there, according to Ben Jenkins, a senior managing director with the Blackstone Group’s Private Equity Group in Hong Kong, where he co-heads the office. Jenkins gave the keynote address at the Asia Private Equity Forum.

In June 2009, the Shanghai Financial Services Office announced that it will permit foreign private equity and growth capital firms to establish wholly owned subsidiaries or Sino-foreign joint ventures in the city. According to an analysis by Dechert PE lawyers in Hong Kong, the rules are expected to permit a combination of investment and asset management activities, which may be made with convertible currency or RMB. The new companies will be regulated as financial institutions and encouraged to locate in the Pudong New Area of Shanghai.

Pudong is merging with the Nanhui District, a move that is expected to allow private firms to play a more important role in the economic development of the area. In fact, Blackstone is taking a lead in investing there. In August 2009, the firm announced that it is partnering with the Shanghai Pudong New Area to establish a local-currency PE fund valued at around $732 million.

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