structuringrmbfundinchinaapr2011-110701205752-phpapp01.ppt

1、Steven Wei SU ,Structuring RMB-denominated Private Equity Funds in China and Recent Regulatory Development,Hong Kong May 2011,Guo Lian PRC Lawyers 国联律师事务所,What is a RMB-denominated Private Equity Fund?,A RMB-denominated private equity fund (RMB Fund) is an onshore fund raised in RMB for private equi

2、ty investment in China. This is a concept as opposed to the China-focused fund established overseas and denominated in a foreign currency. In general, a RMB fund can be a pure domestic fund without participation of foreign investment, or such a fund with foreign investment. This seminar focuses on t

3、he RMB fund with foreign investment.,Guo Lian PRC Lawyers 国联律师事务所,Increasing Interest in RMB Fund,Attracted by rapidly growing economy, global PE firms view China as their primary market. According to EMPEA, US$38.1 b have been raised globally by PE firms targeting China investment from 2005 to 2010

4、. In 2010, China-targeted PE firms raised about US$7.1 b globally for China investment, an increase of over 16.1% on 2009, recovering to almost half of the peak level in 2008. The figure in India is only US$ 2.4 b, down 30% from 2009. Before 2008, raising of China-targeted fund was dominated by inte

5、rnational firms with dollar-denominated funds. China-targeted transactions involving international funds were done mainly through offshore deals. Typically, offshore funds acquire directly China assets through complicated structures and exit mainly through offshore listing or sale. From 2006, the in

6、terest in RMB funds rises fast. In the recent two-three years, the fundraising market has witnessed a drastic shift from global US$ fund to onshore RMB fund. Currently, many international PE firms are setting up onshore entities and raising local capital to invest in China.,Guo Lian PRC Lawyers 国联律师

7、事务所,Increasing Interest in RMB Fund (Cont),In China, the number of RMB fundraising cases has been climbing up fast since 2006, contrasting the down trend of the number of US$ fundraising. In 2010, for example, 217 RMB funds have completed fundraising, whilst only 23 foreign currency funds raised fun

8、d. In terms of the volumes, the VC fund in RMB grows fast, overtaking foreign currency fund in 2009. The PE funds fluctuate, but the RMB fund (VC and PE funds) recovers quicker from the global financial crisis than the foreign currency fund does and it is catching up. The trend continues in Q1 2011

9、and the dominant position of RMB fund is further enhanced. 29 funds completed fundraising in Q1 2011, of which 26 or 89.7% are RMB funds. RMB funds totally raised US$3.99 b which is 92.3% of the total raised fund.,Guo Lian PRC Lawyers 国联律师事务所,Increasing Interest in RMB Fund (Cont),Guo Lian PRC Lawye

10、rs 国联律师事务所,Source: Zero2IPO,VC Fundraising in RMB and US$ for 2006 - 2010,Increasing Interest in RMB Fund (Cont),Guo Lian PRC Lawyers 国联律师事务所,Source: Zero2IPO,PE Fundraising in RMB and US$ for 2006 - 2010,Increasing Interest in RMB Fund (Cont),Guo Lian PRC Lawyers 国联律师事务所,Source: Zero2IPO,PE/VC Fund

11、raising in RMB and US$ for 2006-2010,Increasing Interest in RMB Fund (Cont),Guo Lian PRC Lawyers 国联律师事务所,Source: Zero2IPO,2011Q1 PE/VC Fundraising Cases and Volumes in RMB and Foreign Currency,Increasing Interest in RMB Fund (Cont),Guo Lian PRC Lawyers 国联律师事务所,Source: Zero2IPO,China: 2008Q1-2011Q1 P

12、E/VC Fundraising Cases and Volumes,Increasing Interest in RMB Fund (Cont),Guo Lian PRC Lawyers 国联律师事务所,Source: Zero2IPO,2008Q1-2011Q1 Investment Cases and Volumes,Why RMB Fund?,Driving forces behind the interest in RMB Fund: - The difficulties in implementing company inversion transactions caused by

13、 PRC regulatory restrictions. This is a common structure that enables offshore funds to acquire offshore entities established by the company founders for holding and operating domestic assets. From 8 September 2006, the Chinese regulators tightened control on roundtrip investment, which made it diff

14、icult to implement the company inversion transaction. The difficulties have put the structure under great uncertainties, and make some offshore funds move onshore. - Intensive competition from domestic funds. A large number of domestic funds and government-sponsored funds have been established by we

15、ll-trained local PE professionals. These funds enjoy significant advantages over the “offshore funds”, because of their legal status, culture closeness, connection, etc. They have become strong competitors to the international funds in the China market. - Access to domestic LPs. One of the most impo

16、rtant reasons for establishing a RMB Fund is that it can raise local capital. Currently, NSSF, insurance fund, government guidance funds, fund of funds, enterprise funds, high-net value individuals and industrial funds are the main LP groups, creating huge pool of capital seeking high-return investm

17、ent. Potentially, local social security funds, commercial banks, security companies and enterprise annuity funds will join. NSSF has over RMB800 b to invest in PE. Regulators approved allocations of as much as 5% of insurance companies assets to PE investments, creating a potential pool of US$30b ca

18、pital.,Guo Lian PRC Lawyers 国联律师事务所,Why RMB Fund? (Cont),- Closer to deal sources. China hosts attractive deal flow. In 2010, 817 PE investments of the total value of US$ 5.4 b were reported in China. Q1 2011 sees 232 PE investment cases with the total value of US$1.93 b, making the 8th consecutive

19、growth quarter since 2009. Amid the strong performance of the domestic IPO market and the competition from domestic funds, high quality enterprises gain strength in selecting investors. They prefer onshore funds and local teams as it makes domestic listing relatively easier, if they plan to list in

20、China. In practice, a domestic exit plan often gives onshore fund a better chance to invest, and those planning to exit overseas tend to seek offshore fund investment. In Q1 2011, for instance, 20 PE exits through NYSE and NASDAQ listings are all offshore funds, and the rest 90 PE exits from domesti

21、c markets are all onshore funds. - Development of domestic capital markets In 2010, among the total 476 Chinese enterprise IPOs which raised US$105.4 b, 221IPOs or 46.1% were backed by PE/VC investors. Among the 221 IPOs, 72 were listed overseas and 149 were listed in China. ChiNext, launched in lat

22、e 2009, and SMEB together hosted 54% of the 221 PE/VC- backed IPOs in 2010. ChiNext led the ROI list in 2010, making an average ROI of 12.13X. The higher P/E ratios traded in domestic markets also offer the onshore PE investors higher return; - Government encouragement policies, etc.,Guo Lian PRC La

23、wyers 国联律师事务所,Why RMB Funds? (Cont),Guo Lian PRC Lawyers 国联律师事务所,PE/VC-backed Chinese Enterprises IPOs (2006-2010) Source: Zero2IPO,Why RMB Funds? (Cont),Average ROI of VC/PE-backed Chinese Enterprises in 2010 by Listing Markets _ Markets Listing Markets ROI (X) _ Domestic Markets Shanghai Stock Exc

24、hange 7.08 ChiNext 12.13 Shenzhen SMEB 9.38 Average 10.40 _ Overseas Markets HK Main Board 1.64 NASDAQ 2.81 NYSE 5.17 Average 3.50 Note: ROI= (Number of Pre-IPO shareholding*IPO price-amount of total investment)/amount of total investment Source: CVSources,Guo Lian PRC Lawyers 国联律师事务所,Who Have Estab

25、lished RMB Funds in 2010?,Some RMB Funds Launched by International PE/VC Firms in 2010 _ Foreign Investors Fund Name Date Scale Location (RMB100M) _ Carlyle Carlyle-Fosun RMB Fund 2010.2 6.60 Shanghai IDG Capital Harmony Edge 2010.4 35.00 Beijing Investment Centre DT Capital DT Venture Capital 2010.

26、4 2.50 Chongqing Centre Sequoia China Sequoia Venture 2010.4 1.00 Zhuhai Capital Centre Prax Capital Prax Tianjin RMB Fund 2010.5 6.00 Tianjin TBG TBG Growth Fund 2010.6 5.00 Dalian Carlyle Beijing RMB Fund 2010.7 24 Beijing TPG TPG China Partner 2010.8 50 Shanghai TPG TPG China West Development 201

27、0.8 50 Chongqing CLSA CLSA Guosheng RMB Fund 2010.6 100 Shanghai First Eastern China-UK Fund 2010.11 33 Beijing Source: Zero2IPO,Guo Lian PRC Lawyers 国联律师事务所,Evolving Regulatory Landscape,China is lack of a national-level legal framework governing PE fund, which have slowed down the development of r

28、egulations, making it the top market barrier to international investors. PRC Securities Law (2005) - The law prohibits public offering of securities unless approved by CSRC; - “Public offering” is defined as (i) offering to non-specific offerees; (ii) issuance to over 200 specific persons; (iii) any

29、 other issuance as specified by laws or regulations. PRC Partnership Enterprise Law (2006) - The law applies to foreign-invested partnerships. Together with the special regulations on foreign-invested partnerships, it offers the basic legal framework for limited liability partnerships (LLP), a popul

30、ar form to organize a fund; - Enterprises or individuals are permitted to set up LLP with partners between 2 and 50 with at least 1 GP.,Guo Lian PRC Lawyers 国联律师事务所,Evolving Regulatory Landscape (Cont),Provisional Measures on Administration of Foreign-invested Venture Capital Investment Enterprises

31、(MOFCOM and 4 other regulators 2003) - Foreign investors are allowed to set up venture capital investment enterprises (FIVCIE) in the form of non-legal person cooperative joint venture or limited liability company, and investment management enterprises in the form of limited liability company or LLP

32、; Provisional Measures on Administration of Venture Capital Investment Enterprises (NDRC and 9 other regulators, 2005) - The Measures apply to venture capital investment enterprises in China. Qualified VC firms are required to file for recordation on a voluntary basis with the NDRC after the establi

33、shment. Administrative Measures for Foreign Enterprises and Individuals to Establish Partnership Enterprises(the State Council, December 2009),Guo Lian PRC Lawyers 国联律师事务所,Evolving Regulatory Landscape (Cont),- foreign investors are allowed to directly establish foreign-invested limited liability pa

34、rtnerships (FILP); Administrative Provisions of Registration of Foreign-Invested Partnership Enterprises (the SAIC, January 2010) - rules on how to establish, change and deregister a FILP; Local regulations in Beijing, Shanghai, Tianjin, Chongqing and other cities - local legislations or policies on

35、 establishment of equity investment fund (EIF) and equity investment management enterprises (EIME), and encouraging policies; Details on Implementing the Pilot Program of Foreign-invested Equity Investment Enterprises (Shanghai Financial Service Office, 2010),Guo Lian PRC Lawyers 国联律师事务所,Evolving Re

36、gulatory Landscape (Cont),- requirements and procedures for setting up private equity investment enterprises and private equity investment management enterprises, and provisions related to a qualified pilot program in Shanghai; Tax clarification for FIVCIE (SAT 2011 Announcement 2) - flow-through ta

37、x treatment previously granted under Guoshuifa2003 No.61 to non-legal person FIVCIE seems no longer available; Rules Punishing Illegal Public Fundraising Activities (SPC, 2010) - certain activities of illegally raising capital targeting non-specific members of public are criminalized and punitive;,G

38、uo Lian PRC Lawyers 国联律师事务所,Evolving Regulatory Landscape (Cont),Circular on Further Regulating the Development and Filings of Equity Investment Enterprises in Pilot Regions (NDRC, 2011) - the Circular, among other issues, requires qualified equity investment enterprises (EIE) and some equity invest

39、ment management enterprises (EIME) in six pilot regions be filed with the NDRC or a locally designated authority. On 21 March 2011, the NDRC issued 11 guidelines to guide the filing.,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund - FIVCIE,Foreign-invested Venture Capital Investment Enterprises (F

40、IVCIE) - It is the earliest form of onshore foreign-invested private equity fund; - A FIVCIE is allowed to invest in the equity of unlisted high-or-new-tech enterprises established in China. - A FIVCIE can be organized in either incorporated or unincorporated form. The unincorporated FIVCIE is of no

41、 legal-person status. It is often an onshore Sino-foreign cooperative joint venture (CJV) set up by foreign GP/LP and domestic LPs based on contractual arrangements. CJV is generally considered as a preferred form of FIVCIE as it offers greater flexibilities for arrangements among investors comparin

42、g to the incorporated form.,Guo Lian PRC Lawyers 国联律师事务所,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund FIVCIE (Cont),Offshore,Onshore,FIVCIE Management Co/Partnership,PortCo A,Investment in ForEx,Typical FIVCIE Structure,GP,PortCo N,SPVs,LPs,RMB Fund (CJV),PortCo B,.,Domestic LPs,Offshore Fund,M

43、anagement Agreement,Investment in RMB,Investment in RMB,Dividends in RMB,Dividend in ForEx,Fund Manager,Investment in ForEx,Return + Carried interest in ForEx,Return in RMB,SPVs,Investment in ForEx,Return in ForEx,Options for RMB Fund - FIVCIE (Cont),Key requirements - Main business is to invest in

44、equity of unlisted “high or new tech enterprises” and provision of related services; - To form a FIVCIE, investors must apply for approval from MOFCOM (who will consult with MOST) before registering the FIVCIE with SAIC; - Minimum capital requirements are US$5 m for incorporated and US$10 m for unin

45、corporated; - FIVCIE must have at least 1 qualified mandatory investor undertaking to contribute no less than 1% of the capital of an unincorporated FIVCIE and assuming joint liabilities with the FIVCIE, or at least 30% of the registered capital of an incorporated FIVCIE; - At least 3 professionals

46、each with at least 3 years experience in venture capital investment, unless the FIVCIE engages a management enterprise for its management; - Business operation term for FIVCIE: maximal12 years in principle.,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund - FIVCIE (Cont),Qualifications for the mand

47、atory investor - Main business must be venture capital investment; - Managing assets of the value of at least US$100 m and US$50 m already invested in the most recent 3 years; - Having no less than 3 professionals with at least 3 years experience related to venture capital investment; - No history o

48、f suspension from venture capital investment or being punished for fraud; - No less than 1% capital contribution to an unincorporated FIVCIE or 30% contribution to an incorporated FIVCIE;,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund - FIVCIE (Cont),FIVCIE Management Enterprise - Foreign investo

49、rs are also permitted to set up a FIVCIE Management Enterprise in the form of a company or a limited partnership; Key requirements for a FIVCIE Management Enterprise include: at least 3 professionals with minimum 3 years experience in venture capital investment business; having capital of no less th

50、an RMB1 m or in equivalent foreign exchange; having adopted a sound internal control system; main business of a FIVCIE Management Enterprise is managing a FIVCIE and providing consulting services.,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund FIVCIE (Cont),A FIVCIE can - invest with its own fund

51、; - raise both domestic and foreign fund; - provide management or consultancy services to portfolio companies; and - provide investment consultancy services to other funds. A FIVCIE cannot - lend fund or guarantee any lending (except investing in bond or convertible loan issued by the portfolio comp

52、anies); - invest in the business prohibited for foreign investment; - invest in listed corporate stocks or bonds; and - invest in real estate not for self-use.,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund FIVCIE (Cont),Issues commonly seen as pros and cons of a FIVCIE Pros - relatively establis

53、hed regulatory framework; - an onshore entity that can raise both domestic and foreign fund; - conversion of foreign exchange capital into RMB for equity investment is permitted; - injection of capital into FIVCIE may be made in accordance with the progress of the investment plan within 5 years from

54、 the registration date, longer than other types of FIEs; - MOFCOM approval power is delegated to its provincial counterparts for establishing FIVCIE with total capital under US$300 m; - investment by FIVCIE needs to file only with MOFCOM office at the location of the portfolio company, provided the

55、investment projects fall into the “encouraged” or “permitted” industry categories. Otherwise, portfolio investment has to be approved by provincial-level MOFCOM. Processing of the filing will be shorter than direct inbound investment.,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund - FIVCIE (Cont)

56、,- FIVCIE may be qualified for deduction against its taxable income at 70% of its equity investment amount on the third year after holding the equity of qualified portfolio companies; - FIVCIE Management Enterprises are allowed to establish either in the form of a LLP or a company to manage multiple

57、 FIVCIEs, which may help foreign investors to diversify revenue streams; - FIVCIE Management Enterprises organized as a LLP may still be tax transparent, etc.,Guo Lian PRC Lawyers 国联律师事务所,Options for RMB Fund - FIVCIE (Cont),Cons - FIVCIEs portfolio investments are limited to high or new tech enterprises; - establishing FIVCIE needs approvals from both MOFCO