Shanghai welcomes foreign private equity investment
January 24, 2011 | BY
Janice QuQualified institutional investors given easier access to onshore markets
Foreign private equity (PE) investors should be aware of restrictions, governing laws and statutory requirements now that they are able to access onshore capital markets and are privy to relaxed foreign exchange controls, say counsel.
On January 11, three Shanghai governmental agencies jointly introduced a pilot programme that allows qualified foreign PE firms to raise funds denominated in renminbi (Rmb) and enjoy limited currency conversion rights.
Effective on January 22, the Implementing Measures for the Launch of a Pilot Foreign-invested Equity Investment Enterprise Project in the Municipality (上海市关于本市开展外商投资股权投资企业试点工作的实施办法) enables foreign PE fund managers to set up equity investment enterprises and to contribute foreign capital not exceeding 5% of the total amount of the fund. These capital contributions are made in the form of freely convertible currency and will not affect the nature of the enterprise.
Those eligible to invest would typically be large-scale institutional limited partnerships (LPs) that fall within the categories listed in Article 19, such as sovereign wealth funds and pension funds. The qualifying offshore institutional investors will be known as Qualified Foreign Limited Partners (QFLPs).
The managing partner of O'Melveny & Myers' Beijing office, Larry Sussman, notes that Article 24 of the new rules confirms that under the programme, QFLPs will not be “tainted” by normal foreign restrictions. “More foreign PE firms can access deal flow for investees targeting the onshore Chinese capital markets for exit,” he said.
One advantage of the programme is that a qualified onshore PE fund with a qualified foreign sponsor and no other non-Chinese investors will generally not be required to obtain foreign investment approvals for its investments, at least for investments made in Shanghai. Shanghai-based Kirkland & Ellis partner Chuan Li comments: “This would allow those qualified foreign sponsors to have a better access to Chinese domestic deal flow, as their onshore funds will be able to invest directly in domestic companies in non-prohibited or non-restricted sectors without going through lengthy approval processes.”
Although exit options appear to be improved now, Li reminds investors to bear in mind certain restrictions. “If the exit for an investment is through an onshore IPO [initial public offering] in one of China's domestic stock exchanges, your investment would be subject to a longer statutory lock-up, compared to other offshore markets such as Hong Kong and New York,” he said. “It is at least one year post-IPO, and in some cases could be as long as three years.”
Li noticed a long-term trend of onshore IPOs. “Nowdays valuations on Chinese Mainland exchanges tend to be higher than in other offshore markets, which makes an onshore IPO an attractive option to founders and PE investors as it generates higher returns,” he said.
Many market commentators have deemed the pilot programme a positive move. “Shanghai has advanced further than other jurisdiction in China, and it will be more competitive as more attention is given at the national level to push through some of the more daring developments,” said Sussman. “Local general partnerships (GPs) may benefit from greater exposure to professional foreign LPs.”
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