Foreign Investment in RMB Funds
- The Current State and Way Forward
Michael Chan
James Chen
Alan Xu
Copyright © 2010 by K&L Gates Solicitors. All rights reserved.
Outline
What are RMB funds
Why RMB funds
Key PRC legislations
Alternative fund models under the existing legal regime
The parallel fund structure
Recent developments
1
What Are RMB Funds
Key characteristics
-
RMB-denominated funds usually formed by private equities and venture
capitals
-
Formed under PRC law
-
Portfolio investment primarily in China
Two basic types of RMB funds
-
Purely domestic RMB funds (e.g., Bohai Industrial Investment Fund)
-
Foreign invested RMB funds (e.g., Blackstone Zhonghua Development
Investment Fund)
RMB funds can be managed by foreign fund managers through their
onshore affiliates
2
Why RMB Funds – from A Foreign Fund Manager’s Perspective
Current status
-
Skyrocketing number of RMB funds: 29 formed in 2007; 88 formed in 2008;
84 formed in 2009
-
Amount of funds raised: RMB25 billion raised in 2009
-
Value of deals closed: RMB20 billion closed in 2009
Voices of fund managers[1]
-
[1]
91.2% of the surveyed “believe the rise of RMB funds is an inevitable trend
and wish to prepare to set up RMB funds”
Based on the data provided by China Venture Capital Association.
3
Why RMB Funds – from A Foreign Fund Manager’s Perspective (Cont’d)
Main reasons for foreign investors to set up RMB funds
4
Why RMB Funds – from A Foreign Fund Manager’s Perspective (Cont’d)
Opportunities relating to clean technologies
-
Pursuant to the CVCA survey, RMB funds’ No. 1 target sector is —
ENVIRONMENTAL PROTECTION AND NEW ENERGY!
5
Key PRC Regulations Governing Foreign Invested RMB Funds
Stage one (pre-2003): absence of legal basis
-
No legal basis to form foreign invested RMB funds
Stage two (2003 – 2006): the inception and rise of FIVCIEs
-
Key legislation: The Regulations on the Administration of Foreign Invested
Venture Capital Enterprises (the "2003 FIVCIE Regulations")
-
An FIVCIE can take the form of an incorporated entity or a non-legal
person entity
-
Representative funds: SAIF – Tianjin VC Fund (formed in 2005; fund size:
around RMB150 million); Infinity – Suzhou VC Fund (formed in 2004, fund
size: around RMB75 million); Gobi – Tianjin HiTech (formed in 2007, fund
size: RMB150 million)
6
Key PRC Regulations Governing Foreign Invested RMB Funds (Cont’d)
Stage three (2007 – 2009): new doors opened by the Partnership Law
-
Key legislation: The PRC Partnership Law (the "2006 Partnership Law")
-
The 2006 Partnership Law made possible the establishment of a “limited
partnership” in China and introduced the concepts of “GP” and “LP”
-
Increasing number of local legislations to attract international PE/VC firms
to set up funds and fund management entities
-
Representative funds: Blackstone Zhonghua Development Investment
Fund (estimated fund size: RMB5 billion); Guosheng-CLSA Industrial
Investment Fund (estimated fund size: RMB10 billion)
Stage four (2010 onwards): foreign invested partnerships – a new world
on the horizon?
-
Key legislation: The Administrative Measures relating to the Establishment
of Partnerships in China by Foreign Enterprises or Individuals (the "2010
Foreign Invested Partnership Measures")
7
Alternative Foreign Invested RMB Fund Models under Existing Legal
Regime
Four common models for foreign investors to tap RMB funds market
-
Establishment of FIVCIEs
-
Establishment of onshore partnerships
-
Cooperation with trust companies
-
Establishment of a plain-vanilla company to make investments
8
Introduction of the FIVCIE Model
Key characteristics of the 2003 FIVCIE Regulations
-
2 to 50 investors, including at least one “Requisite Investor” (the equivalent
of GP)
-
Stringent qualification requirements of the “Requisite Investor”: at least
US$50 million already invested in the VC area; at least 3 VC professionals
and each with at least 3 years’ VC experience, etc.
-
Can take the form of an incorporated entity or a non-legal person entity
-
Minimum committed contributions (from investors) of US$10 million for the
non-legal person entity and US$5 million for the incorporated entity
9
Illustrative Chart of the FIVCIE Model
SAIF Tianjin Growth Fund (the 1st non-legal person FIVCIE)
(based on public information)
Cisco
Softbank
SAIF Partners
(requisite investor)
Offshore
Onshore
Tianjin Venture
Capital
y%
Commitment
x%
SAIF Tianjin
Advisory JV
Commitment
Fee
SAIF Tianjin
Growth Fund
(FIVCIE)
Management
Agreement
Portfolio
Companies
A
B
C
D
10
Key Facts of SAIF Tianjin Growth Fund[2]
Place of formation: Tianjin
Fund size: around RMB150 million
Investment targets: high technology enterprises
Current status: fund formed in January 2005 and already made several
investments
[2] Based on public information
.
11
Downside of the FIVCIE Model
Possible approval hurdles
-
Approvals from the Ministry of Commerce and Ministry of Science and
Technology
Investment restrictions
-
An FIVCIE’s investment is subject to foreign investment industry
restrictions
Stringent qualification requirements on the “Requisite Investor”
12
Introduction of the Domestic Partnership Model
Legislation
-
National level: 2006 Partnership Law
-
Selective local legislations:
Shanghai : The Tentative Measures for the Establishment of Foreign
Invested Equity Investment Enterprises in the Pudong
New District
Beijing
: Opinions for Promoting the Development of Equity
Investment Funds
Tianjin
: Opinions on the Registration of Private Equity Investment
Funds and Private Equity Investment Management
Enterprises
Chongqing : Opinions on Encouraging the Development of Equity
Investment Enterprises
13
Representative Benefits Offered under the Local Legislations
Reduced income tax and tax rebates
Tianjin: waiver of business tax for two years starting from
establishment
Financial subsidies
Tianjin: a one-off subsidy equal to 3% of the relevant entity’s
registered capital (capped at RMB5 million)
Chongqing: for properties purchased by the relevant entity, a one-off
subsidy of RMB1,000/square meter
Other types of benefits
Beijing: government to share its database of IPO candidate
companies
Tianjin: government to grant local residency to the staff of local
registered PE funds
14
Illustrative Chart of the Domestic Partnership Model
Blackstone Zhonghua Development Investment Fund
(based on public information)
Blackstone Group
Offshore
100%
Onshore
Payments
100%
Blackstone
Investment WFOE
(GP)
Blackstone
Advisory WFOE
Fee
Shanghai
Blackstone
Partnership
Management
Agreement
Chinese LPs
no commitment
Portfolio Companies
A
B
C
D
15
Key Facts of Blackstone Zhonghua Development Investment Fund[4]
Place of formation: Pudong New Area, Shanghai
Fund size: RMB5 billion
Investment targets: enterprises located in Shanghai and the neighboring
areas in the Yangtze River Delta
Current status: fund management company established in October 2009
and reportedly fundraising completed in July 2010
[4] Based on public information.
16
Downside of the Domestic Partnership Model
Government and judicial authorities’ lack of experience in dealing with
partnerships
-
Relatively new legislation: 2006 Partnership Law
-
Relevant agreements seldom tested in courts, so uncertainty over
the validity and enforceability of certain arrangements
Difficulties in making offshore investments
Investment restriction
-
The fund potentially regarded as a foreign invested fund due to the
GP’s foreign background
-
Accordingly the fund’s investment is subject to foreign investment
industry restrictions and may trigger onshore approval requirements
17
A Variation of the Domestic Partnership Model: the Nominee GP Structure
Foreign Investors
Offshore
Contractual arrangements
Onshore
Chinese Individual(s)
100%
Payments
100%
Chinese GP
Commitment
Fee
Advisory WFOE
Commitment
RMB Fund
Management Agreement
Chinese LPs
no commitment
Portfolio Companies
A
B
C
D
18
Recent Development on Structuring RMB Funds: the Parallel Structure
Based on the Domestic Partnership Model
Offshore structure
Offshore Fund LPs
Offshore Fund GP
Affiliate
Offshore Fund
Offshore Advisor
Offshore
control
Onshore
Investment WFOE
Affiliate
Co-investment
(GP)
Commitment
Fee
Advisory WFOE
Commitment
RMB Fund
Management Agreement
Chinese LPs
no commitment
Portfolio Companies
A
B
C
D
19
Recent Developments
Key legislations
-
The 2010 Foreign Invested Partnership Measures
-
SAIC’s implementing rules
Breakthroughs under the legislations
-
Foreign investors acting as GP and LP on the horizon
-
Possibility for a PRC individual to be a partner
-
No government approvals required
20
For more information, please contact
Michael Chan
Partner, Hong Kong
Tel: +852 2230 3581
Email: michael.chan@klgates.com
James Chen
Partner, Taipei
Tel: +886 2 2326 5155
Email: james.chen@klgates.com
Alan Xu
Foreign legal consultant, Hong Kong
Tel: +852 2230 3547
Email: alan.xu@klgates.com
21