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Alibaba backer GGV Capital looking to raise first yuan fund

By Elzio Barreto and Julie Zhu

HONG KONG (Reuters) - Venture capital firm GGV Capital, an early backer of Chinese e-commerce giant Alibaba Group Holding Ltd, is looking to raise its first yuan fund to make it easier to invest in Chinese sectors restricted to foreigners such as the internet.

GGV, also an early investor in Chinese ride hailing firm Didi Chuxing and phone maker Xiaomi Inc [XTC.UL], raised $1.2 billion last year for global investment. It is now in discussion with investors for a yuan fund of undetermined size, managing partner Jixun Foo said in an interview.

A yuan fund would put GGV on equal footing with peers such as Qiming Venture Partners and Gobi Partners that have funds in both yuan and U.S. dollars. At present, GGV - based both in the United States and China - has yuan investments through affiliate Venture Star.

"Certain sectors will increasingly get sensitive," Foo said. "These are areas that we have to consider as an investor of venture capital, how the regulatory environment could shift a lot more in favor of RMB funds," he said, referring to renminbi, an alternative name for the yuan.

Sectors where foreign investors could face more scrutiny in future include media and content, culture, financial services and social networking, Foo said.

The government prohibits foreign ownership in sectors it considers sensitive for national security or other reasons - sectors such as the internet.

To circumvent restrictions, tech firms like Alibaba, Baidu Inc and Tencent Holdings Ltd use the costly variable interest entity (VIE) structure giving shareholders the rights to revenues while Chinese nationals retain ownership - though such firms are barred from domestic stock exchanges.

With a yuan fund, GGV would be able to invest more easily in Chinese firms without the complicated VIE structure.

Moreover, investing in a local firm would give GGV the opportunity to earn high returns from startups that go public in China's increasingly open stock markets where valuations are generally higher than overseas exchanges.

"The RMB fund would be making bets on the future liberalization of the markets. Liberalization is one factor" for raising a yuan fund, Foo said.

In searching for investors - or limited partners (LP), as private equity and venture capital investors are known - GGV would initially turn to the entrepreneurs it backed and who have become wealthy as their startups soared in value, Foo said.

He also said recent deregulation will prompt insurers, banks and state-owned enterprises to increasingly put money into venture capital funds with a focus on longer-term returns.

"The maturity of the LP base is one factor for us to consider because venture capital is long-term capital," Foo said. "You need patient capital, so in that sense we need patient LPs."

(Reporting by Elzio Barreto and Julie Zhu; Editing by Christopher Cushing)