Originally published May 12, 2011

Keywords: RMB Funds, Shanghai, QFLP Pilot Program

Shanghai's regulatory authorities officially launched the foreign invested private equity investment enterprise pilot program (the Pilot Program) with the issuance of the Implementing Measures on the Pilot Program of Foreign Invested Private Equity Investment Enterprises on 11 January 2011 (for more information, see ( Legal Update: New Measures to Facilitate Foreign Investment in Funds and Fund Managers Registered in Shanghai).

The Pilot Programme permits qualified foreign invested private equity investment fund and fund management company pilot enterprises (pilot enterprises) to convert their foreign currency capital into RMB as capital contributions to RMB funds.

Recently, the Shanghai Financial Services Office (SHFSO), together with the Shanghai Branch of the State Administration of Foreign Exchange (SAFE) and Shanghai Administration of Industry and Commerce, have clarified certain issues with respect to the application procedure and provided a general update about the Pilot Program.

Since launching the Pilot Program in January 2011, the Shanghai authorities have received a number of pilot enterprise applications. Carlyle, Blackstone and DT Capital have been approved as pilot enterprises, with Carlyle and Blackstone each obtaining a foreign exchange quota of US$100 million.

The Shanghai authorities are reviewing a number of additional applications and they plan to expand and diversify the composition of pilot enterprises beyond large buy-out funds to include funds with an investment focus on technology, new tech industries, and entrepreneurial-based small and medium-sized companies.

Officials from SHFSO have indicated that the review process focuses on factors such as:

  1. whether the fund has identified investors and obtained firm commitments from such investors;
  2. whether there is a management team in place with sufficient, relevant and successful PRC investment experience;
  3. whether the fund has PRC investors, in particular, government guidance funds, SOEs and other non-state-owned enterprises (funds with such investors will be viewed upon favourably);
  4. whether such enterprise has established an organisation and governance structure, investment plans, and capital contribution, distribution and incentive allocation mechanism.

Officials from SAFE have clarified that, contrary to earlier speculation by some, the Pilot Program is not subject to a US$3 billion, in aggregate, foreign exchange quota. SHFSO has also confirmed that there is no mandatory cap on the proportion of foreign capital in a pilot enterprise (previously rumoured to be 50% of capital commitments/contributions), but preference will be given to funds with meaningful domestic capital participation.

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