2009 proved to be a pivotal year in China's regulatory
development of its nascent private equity market. The Chinese
central government, as well as several municipal authorities,
enacted a number of rules and regulations to enable RMB funds
(investment funds whose capital commitments and contributions are
denominated in China's domestic currency) to become the fund
platform of choice for China's private equity market.
These new rules and regulations were released to encourage and
facilitate the formation and operation of RMB funds, culminating
with the State Council's November 2009 issuance of the
"Measures for the Administration on the Establishment of
Partnership Business by Foreign Enterprises or Individuals in
China" (the "Measures"). Various municipalities also
promulgated administrative measures to motivate foreign fund
managers to set up operations in their municipality to manage RMB
The momentum continued in the first quarter of 2010. The State
Administration for Industry and Commerce has recently issued Decree
47, Administrative Measures for the Registration of
Foreign-invested Partnership Enterprises ("Decree 47"),
setting forth rules and procedures for the registration and
operation of foreign-invested partnerships. With effect from March
1, 2010, foreign-invested partnership enterprises may be formed
under PRC law pursuant to the Measures and Decree 47. These
enterprises permit participation in RMB funds by non-PRC entities
as general partners and also as limited partners.
The advantages of RMB funds include: the ability to raise funds
from Chinese local investors, including high net worth individuals,
onshore companies, government fund of funds, insurance companies
and social security funds and the possibility of making investments
without foreign exchange controls or foreign investment approval
However, a number of aspects remain unresolved for foreign
private equity investors. For example, it is unclear whether
international norms on fund flows can apply to RMB funds in
relation to the conversion of foreign-currency denominated capital
contributions and repatriations to foreign investors. It is
expected that such aspects will be clarified in 2010.
2009 also saw capital raised for an array of new funds in China,
including state-owned and industrial funds targeting a wide breadth
of industrial sectors and further development of China's
securities market, including the launch of the growth enterprise
board (ChiNext) in 2009, which provides an additional domestic exit
opportunity for private equity investors in China.
Foreign fund managers are reviewing the possibility of setting
up RMB funds in China as a result of China's economic growth
and the development of RMB funds. These foreign fund managers will
nonetheless have to compete, for deals and capital, with the ever
increasing number of domestic fund managers. Some foreign fund
managers have abstained from launching RMB funds while seeking
clarifications, sounding out joint venture partners and taking time
to evaluate the implications. Others have established fund
management enterprises in China in order to raise and manage RMB
funds, while a few, such as Prax Capital Management Co., Ltd.,
received a green light to proceed with managing RMB funds. Indeed,
two of Prax's RMB funds were launched and fully subscribed by
Chinese domestic investors in 2009, indicating a keen level of
interest in investing in private equity among Chinese
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and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a
global legal services organization comprising legal practices that
are separate entities ("Mayer Brown Practices"). The
Mayer Brown Practices are: JSM, a Hong Kong partnership, and its
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limited liability partnership incorporated in England and Wales;
and Mayer Brown LLP, a limited liability partnership established in
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Brown JSM in Asia.
This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications Disclaimer.
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