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New Renminbi fund announcements lead headlines

January 1, 0001

Approval of Foreign-invested Partnership Rules

 

On August 19, 2009, China’s State Council approved, in principle but subject to further clarifying amendments, the Administrative Measures for the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (Draft) [1] (the “Foreign Partnership Rules”).  While the content of the draft Foreign Partnership Rules has not been made public, foreign fund sponsors looking to set up partnership entities in China should be aware that there may soon be a formal legal basis upon which they can potentially own and control domestic partnerships in connection with the establishment of an onshore Renminbi-denominated private equity fund (“RMB Funds”) and/or special partnership-based deal vehicles, which would allow for terms and provisions similar to those available to offshore funds.

 

NDRC Framework for Equity Investment Funds

 

The announcement of the in-principle approval for the Foreign Partnership Rules comes on the heels of news reported on August 18 that China’s National Development and Reform Commission (the “NDRC”) has, after nearly two years of deliberations and revisions, submitted for approval the Provisional Measures for the Management of Equity Investment Funds [2] (the “EIF Rules”).  The EIF Rules, once approved, is expected to be a national-level regulation over the establishment process and governance of equity investment funds (“股权投资基金”), including certain fundraising procedures for entities in China with “equity investment” in their business scope.  At present, there is not a nationwide legal framework governing the formation of private equity funds.     

 

RMB Fund Establishments by Blackstone and Other Foreign Sponsors

 

Last week also featured a series of RMB Fund establishment announcements.  The Blackstone Group signed a memorandum of understanding with the government of the Shanghai Pudong New Area to establish their first RMB Fund in China.  The fund has a target size of RMB 5 billion (USD 732 million) and will give priority to investments in Shanghai and surrounding environs.  Other RMB Fund announcements during the week include plans to establish similar onshore RMB Funds by First Eastern Financial Investment Group, CLSA, Macquarie Group, and Prax Capital.

 

The recent RMB Fund announcements by such foreign sponsors come amidst an overt push by the State Council and the Shanghai municipal government to shape Shanghai into a global financial center, as evidenced by the several opinions, regulations, and implementation measures since April aimed at enhancing Shanghai’s financial markets and provide further policy supports (including by developing Shanghai’s private fund industry).  Blackstone’s and other recently announced RMB Funds in Shanghai demonstrate the push by Shanghai to compete with other cities in China (including Beijing, Tianjin, Suzhou, Chongqing, and Suzhou) in becoming a hub for onshore private equity funds. 

 

For such foreign fund sponsors, the establishment of a RMB Fund can potentially bring a foreign sponsor a host of beneficial treatment under Chinese law, including the ability to fundraise with Chinese investors, easier currency conversion procedures, faster investment approvals, greater control over the business of their portfolio companies and favorable tax treatments.  We emphasize that these are potential advantages only, and realizing them is dependent on the specifics of the funds’ objectives and how they are structured. 

 

Quickly Evolving Landscape

 

The above developments in connection with the Foreign Partnership Rules, EIF Rules, and the establishment of RMB Funds by foreign fund sponsors all happening together gives credibility to the view that the Chinese private equity fund environment is reaching an increased level of sophistication.  To stay competitive, foreign sponsors that are interested in investing into Chinese companies should stay current with regulatory and market developments. 

 

In June, O’Melveny & Myers LLP hosted a workshop in Beijing on RMB Fund vehicles and investment techniques.  Discussion leaders included officials from the city of Tianjin, foreign and domestic fund sponsors, and partners from O’Melveny & Myers’ RMB fund formation team.  The workshop discussion covered the basics of how to establish a RMB Fund and the operational issues that may be encountered along the way, as well as a brief discussion on the current trends in the RMB fund movement and fund raising.  This month, O’Melveny's RMB Funds Team published  Topics in Chinese Law - RMB Funds:  Update and Trends, an article that outlines the advantages and potential pitfalls of establishing a RMB Fund. 



[1]外国企业或者个人在中国境内设立合伙企业管理办法(草案)

[2]股权投资基金管理暂行办法