HONG KONG - Chinese private equity firms are taking market share from foreign rivals and will be the main beneficiaries as money inflows from domestic investors surge, according to McKinsey & Co.

Local managers more than doubled their share of the total private equity deal value in China to 20 percent last year from 2007, the consulting firm said in a report released on Thursday.

McKinsey forecast domestic investors will boost commitments to buyout firms as much as five-fold by 2015.

Fundraising in China is benefiting from swelling assets of government investment arms, such as China Investment Corp, the State pension fund and the nation's foreign exchange regulator, said Bruno Roy, managing partner of McKinsey's Beijing office. Chinese insurers, recently approved by the government to make private equity investments, may allocate 3 percent of their assets to such funds in five years, he said.

"Over time, we expect Chinese limited partners to become increasingly present both in China and abroad," Roy said in an interview. "For the last two years, their commitments to local Chinese private equity funds have already exceeded those made by foreign limited partners. We expect that trend to continue."

Chinese limited partners - people or institutions that invest in private equity funds - had committed about $40 billion to the industry at the end of 2009, Roy said.

Carlyle Group, KKR & Co and Blackstone Group LP raised yuan-denominated funds last year as they sought to step up investments in China, whose economy overtook Japan's last year to become the world's second largest.

The $300 billion CIC, the nation's sovereign wealth fund, will seek more money from the government to expand investments, Executive Vice-President Jesse Wang said on Jan 15. The 856.8 billion yuan ($131 billion) National Social Security Fund, whose assets grew 10 percent last year, will expand private equity investments that currently total 12.7 billion yuan, it said on Mar 16.

With the exceptions of the State Administration of Foreign Exchange and CIC, other Chinese investors in private equity will probably focus on domestic funds in the next few years, making them the main beneficiaries of capital inflows, Roy said.

Private equity fundraising in China for the explicit purpose of investing domestically surged 82 percent last year, driven by a jump in yuan-denominated funds, according to the report. That outstripped the 22 percent growth in capital amassed by all Asia-focused funds by regional and global firms, McKinsey said.

Yuan-denominated funds accounted for 70 percent of the 83.7 billion yuan raised for China-focused private equity funds last year, according to the report.

"The macro economics of China remain very compelling" because of growth and the nation's appreciating currency, Roy said. Private equity firms may focus on investing in financial institutions, infrastructure, agriculture and renewable energy this year, he added.

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