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![Page 1: Copyright © 2010 by K&L Gates Solicitors. All rights reserved. Michael Chan James Chen Alan Xu Foreign Investment in RMB Funds - The Current State and.](https://reader035.fdocuments.in/reader035/viewer/2022062320/56649ca15503460f949603e1/html5/thumbnails/1.jpg)
Copyright © 2010 by K&L Gates Solicitors. All rights reserved.
Michael ChanJames ChenAlan Xu
Foreign Investment in RMB Funds- The Current State and Way Forward
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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
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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
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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]
- 91.2% of the surveyed “believe the rise of RMB funds is an inevitable trend and wish to prepare to set up RMB funds”
[1] Based on the data provided by China Venture Capital Association.
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Why RMB Funds – from A Foreign Fund Manager’s Perspective (Cont’d)
Main reasons for foreign investors to set up RMB funds
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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!
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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)
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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")
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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
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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
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Illustrative Chart of the FIVCIE Model SAIF Tianjin Growth Fund (the 1st non-legal person FIVCIE)
(based on public information)
Cisco
SAIF Partners
(requisite investor)
SAIF Tianjin Growth Fund
(FIVCIE)
A B C D
Portfolio Companies
SAIF Tianjin
Advisory JV Management Agreement
Fee
Commitment
Offshore
Onshore
Tianjin Venture
Capital
x% Commitment
Softbank
y%
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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.
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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”
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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
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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
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Illustrative Chart of the Domestic Partnership Model
Blackstone Zhonghua Development Investment Fund(based on public information)
Blackstone Group
Blackstone Investment WFOE
(GP)
Shanghai Blackstone Partnership
A B C DPortfolio Companies
Blackstone Advisory WFOE Chinese LPs
Management Agreement
no commitment
Fee
100%
Offshore
Onshore100%
Payments
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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.
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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
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A Variation of the Domestic Partnership Model: the Nominee GP Structure
Foreign Investors
Chinese GP
RMB Fund
A B C DPortfolio Companies
Advisory WFOE Chinese LPsManagement Agreement
no commitment
FeeCommitment
Commitment
100%
Offshore
OnshoreContractual arrangements
Payments
Chinese Individual(s)
100%
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Recent Development on Structuring RMB Funds: the Parallel Structure Based on the Domestic Partnership Model
Offshore Advisor
Investment WFOE(GP)
RMB Fund
A B C DPortfolio Companies
Advisory WFOE Chinese LPsManagement Agreement
no commitment
FeeCommitment
Commitment
Offshore
Onshorecontrol
Offshore Fund GPAffiliate
Offshore Fund
Offshore structure
Affiliate
Offshore Fund LPs
Co-investment
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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
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For more information, please contact
Michael ChanPartner, Hong KongTel: +852 2230 3581 Email: [email protected]
James ChenPartner, TaipeiTel: +886 2 2326 5155 Email: [email protected]
Alan XuForeign legal consultant, Hong KongTel: +852 2230 3547Email: [email protected]