HONG KONG - Dealmakers in China may well find a lot of the action this year in an unlikely place.

If the private equity industry's instincts are correct, that place will be the publishing and media industry in the Communist nation, where news and content are often censored.

More than a dozen private equity funds, including one backed by China Construction Bank (601939.SS) (0939.HK), are raising local currency yuan-denominated funds, likely worth over billions of dollars, to invest in media-related sectors.

Some influential China funds, for example, Hony Capital, backed by top PC maker Lenovo Group Ltd (0992.HK), have already raised a yuan fund which last year bought a minority stake in IPO-ready Phoenix Publishing & Media Group, a major publisher in the eastern Chinese province of Jiangsu near Shanghai.

The logic of the deal is very simple -- You invest ahead of its IPO and you believe the media market in China is going to have big potential in the next few years, said one private equity source close to Hony, which counts the Bill & Melinda Gates Foundation Trust as an investor in a dollar fund.

This source and other sources interviewed by Reuters for the story did not want to be named due to the sensitive nature of media-related topics in China.

Also, in December, a consortium led by U.S. venture capital giant Sequoia Capital invested over 100 million yuan in GreatDreams, a leading Chinese cartoon film maker and designer. Sequoia invested in the firm via its local yuan fund.

Officials at the General Administration of Press and Publication and the Propaganda Department, two main ministries with powers to regulate China's media industry, have said Beijing supported some major state-run media firms tapping capital markets for business expansion, according to state media reports.

However, under current Chinese rules, foreign investors are not allowed to invest in domestic mass media companies, making it difficult for many global U.S. dollar-denominated private equity funds to invest in the fast-expanding media industry in China.

On the other hand, yuan-denominated funds are allowed to invest in domestic media companies, providing a new path for foreign investors to tap the sensitive industry indirectly. For example, Blackstone Group (BX.N) is raising a Shanghai-registered yuan fund, worth around $750 million.

For the first time, the share of yuan funds exceeded that of dollar funds raised in 2009 for private equity firms focused on China, according to the Center for Asia Private Equity Research in Hong Kong.

DEALS IN THE MAKING

Unlike the troubles affecting the media industry in the West, China's media sector, in particular the financial and entertainment media, is on the rise, partly due to increasing demand from young Chinese readers who are keen to learn about the global economy as well as fashion trends.

An investment fund backed by Gree (000651.SZ), a major Chinese air-conditioner maker, recently sponsored more than 50 million yuan ($7.33 million) to help the official Xinhua news agency launch a new weekly magazine, Economy & Nation.

Some dealmakers also noted private equity funds would be especially interested in media and publishing companies in need of internal restructuring before their IPO plans.

Restructuring means opportunity to investors, said a private equity source in Beijing.

Particularly for a state-owned media company, you can only find a way to improve its management, business and operations via restructuring, he said.

But the source added that many state media firms operated at low efficiency levels and real shareholding structures were unclear, which often delayed private equity investments.

CITIC Private Equity Fund Management Co, an investment arm of China's top brokerage CITIC Securities (600030.SS), has been in talks to invest in state-owned China Business Network Co Ltd, a leading financial news provider with TV, radio, newspaper and Internet business for a few months, sources familiar with the plan told Reuters. But no deal has been inked yet.

The sources also said some private equity funds are looking at Enjoyoung Media Co Ltd, which runs a Shanghai-based TV channel whose programs are somewhat similar to well known international broadcaster FashionTV.

CITIC Private Equity, China Business Network and Enjoyoung Media declined to comment on potential investments.

($1=6.826 Yuan)

(Additional reporting by Yu Le in Beijing; Editing by Muralikumar Anantharaman)

China Investment