Opening up to foreign PE fund managers

(4) A Fund Management FIE may be eligible for the same policy support as is available for a domestic private equity fund in Beijing. The relevant provisions specified in the Opinion on Promoting the Development of the Equity Investment Fund Industry (issued by several local authorities in Beijing in January 2009) shall also apply to a Fund Management FIE and to private equity funds sponsored by the Fund Management FIE.

(5) A Fund Management FIE may have access to capital support from the Beijing Municipal Private Equity Development Fund, provided that the Fund Management FIE satisfies the industry policies of the State and Beijing Municipality, has an outstanding management term, and falls under the areas supported by the Beijing fund. Sponsored by the Beijing Government and established at the end of 2009, the fund's main business goals are to guide, cultivate, and invest in industrial investment funds, venture capital investment funds and Sino-foreign co-operative funds incorporated in Beijing.

(6) The Beijing Interim Measures will be applied only within Zhongguancun National Innovation Model Park and are effective for three years starting from January 1 2010.

The Beijing Interim Measures were issued in the wake of the issuance by Shanghai governmental entities in June 2009 of some pilot measures regarding the establishment of foreign-invested private equity investment management enterprises in the Pudong New Area. One obvious difference in the Beijing Interim Measures is that Beijing does not require a foreign investor to have engaged in private equity investments or fund management business.

Beijing's new rules indicate that Beijing does not want to lag behind in attracting foreign private equity fund firms to settle down and launch private equity funds in Beijing. Shortly after the issuance of the Beijing Interim Measures, the Beijing Finance Bureau reported concluded a memorandum of understanding with the Carlyle Group with respect to Carlyle's establishment of a private equity renminbi fund in Beijing. According to certain industry statistics, by the end of 2009, 31 private equity investment funds were newly incorporated in Beijing and 42 other funds were going through the incorporation process, with the planned committed fund capital totalling Rmb220 billion.

In the past few years, local governmental authorities have issued varied policies and regulations to attract foreign PE fund managers. However, it is noteworthy that there are not yet uniform laws promulgated or accepted practices at the national governmental level concerning the administration of Fund Management FIEs or foreign-invested PE funds. Thus, a foreign PE fund manager should proactively consider fundamental legal and practical issues in the PE sector in China, such as the limited number of partners in China, legal restrictions on a foreign investor making its own capital contribution in an onshore renminbi fund, special legal limitations on the industries that may be invested in by foreign-invested private equity renminbi funds, foreign exchange conversion issues, and/or possible tax effects. A foreign private equity fund manager is advised to carefully review and assess these important strategic planning issues before setting foot in the mainland domestic PE sector. While the prospects may be bright, the road has twists and turns.

Lawrence Linjun Guo, partner, Broad & Bright Law Firm