Private equity gets room to grow

This article is from the Private Equity chapter of the 2015 Annual Review and is available for download here.


Hai Huang of Global Law Office highlights the hottest sectors for PE investment, the challenges for foreign PE firms and the evolution of deal structures, acquisition financing and foreign exchange

1. What are the latest regulatory developments affecting the private equity market in China?

A number of rules and regulations issued by relevant Chinese government authorities since the beginning of 2015 may have a large impact on private equity (PE) investment. In terms of fund raising and management, the China Securities Regulatory Commission (CSRC) issued the Tentative Measures for the Regulation of Private Investment Funds, the objective of which is to regulate aspects of PE investment funds such as record filing, fundraising and investment operation.

In terms of market entry, the Chinese government amended the Foreign Investment Industrial Guidance Catalogue, further relaxing the sectors that are open to foreign investment. Among those drawing the greatest attention is the e-commerce sector, with the government breaking through the restriction that the percentage of foreign investment in the value-added telecommunications industry could not exceed 50%, and now permitting wholly foreign-owned e-commerce companies. Furthermore, the Ministry of Commerce (MOFCOM) issued the Measures for the Administration of Overseas Investment to simplify the approval system for overseas investment activities. This move should lower the threshold when many Chinese PE investors make cross-border investments. Moreover, a number of documents on the reform of state-owned enterprises (SOEs) have been issued. These new policies and measures will make SOE assets more market-oriented, presenting enormous commercial opportunities for PE investors.

MOFCOM also issued the PRC Foreign Investment Law (Draft for Comments) at the beginning of the year with the objective of integrating the relatively dispersed foreign investment laws and regulations. The attitude toward variable interest entity (VIE) structures particularly drew the attention of a wide swathe of PE investors. Given that the Draft will have a broad impact on the current foreign investment legal regime, a long period of preparation and discussion will be required before it ultimately becomes law.

2. What are the hottest sectors in China that are attracting PE investors?

According to publicly available figures for the first half of 2015, telecommunications, media and technology (TMT) remain the sectors most favoured for PE investment and venture capital (VC). The mobile internet is quickly making deep inroads into people's lives and changing their lifestyles, such that, driven by “Internet+” and related favourable policies, the mobile internet sector is most attractive to PE and VC.

Another thing worth noting is that, with the gradual relaxation of access to the financial market, a lot of PE capital is concentrating in the financial sector. In terms of invested amount, although the financial industry slightly trails the internet industry in second place, its average financing amount far exceeds that of the latter, with the internet finance sector, in particular, attracting significant funds. This demonstrates the huge boost that the internet industry is providing to the development of the financial industry.

3. How are PE transactions financed? Are deal structures evolving?

Traditionally, Chinese internet companies attracted foreign-invested PE funds investing in US dollars. To circumvent Chinese market access rules, this type of investment usually took the form of VIE structures in China. With the gradual progress in the Chinese capital markets and the maturing of the domestic investment industry, this type of investment is increasingly taking the form of domestic PE fund investment in renminbi in China. A number of traditional foreign-invested funds are also establishing renminbi funds in China in response to this new development.

4. The US-listed Chinese companies that have decided to go private and list on Chinese exchanges are now in an awkward situation. What is the next move (is backdoor listing an option)?

Systemic reasons compelled many excellent Chinese companies to list abroad. However, with Chinese capital markets now able to provide various policy advantages and higher valuations, it is understandable why certain China concept stocks would consider returning home. Accordingly, notwithstanding the fact that IPOs are currently on hold, the major trend of China concept stocks returning home is not changing. For enterprises with relatively strict return timing requirements, they can now opt for a listing on the New Third Board and ultimately realise a change of boards. They can also prepare for a landing on the imminently-established strategic emerging industries board. Although, legally, the conduit for backdoor listings to bring back A-shares remains unobstructed, the scarcity of shells and stringent approvals make it difficult for backdoor listings to enter the mainstream.

5. Current regulations make it difficult for overseas acquisition finance lenders to directly lend to onshore firms. How do companies get around this restriction?

Under the stringent restrictions of current regulations, it is relatively difficult for overseas acquisition lenders to directly lend funds to domestic companies. More specifically, while it is difficult for overseas lenders to obtain security when lending funds to domestic enterprises, there is also a certain quota limit on the funds that domestic enterprises can borrow from abroad, and before the conversion of the foreign exchange, they also require State Administration of Foreign Exchange (SAFE) approval. Furthermore, the use of offshore loans to repay domestic debts is even more stringently restricted. Accordingly, overseas acquisition lenders will usually lend funds to domestic companies through their domestic affiliates, so as to supplement their operating capital or repay their domestic loans.

6. What effect will the IPO suspension have on PE and when do you expect IPOs to resume?

The effect of the current IPO suspension on PE is multifaceted. On one hand, it is gradually bringing the unreasonably high valuations of enterprises under control, and may additionally result in certain enterprises experiencing a serious lack of funds – a situation that creates more acquisition opportunities and a more favourable investment environment for PE. On the other hand, if IPOs, the main divestment channel for PE, remains blocked for an extended period of time, more PE will turn to M&A as a means of divestment. Objectively, this promotes diversity in the divestment channels available to PE and helps mature the domestic capital markets and the M&A market. Historical data show that IPO suspensions typically last from half a year to a year. However, the specific time of resumption will have to wait until the market has achieved a stable transition and will depend on market trends.

7. What are some of the CSRC's challenges and upcoming tasks?

For the CSRC, implementation of the share offering registration system reform is without a doubt a major challenge and also a major breakthrough point in promoting the transformation of supervision. If IPOs are not resumed until completion of the amendment of the PRC Securities Law, that, together with the increase in the number of enterprises queued up to list, may result in greater market panic and psychological shock. The CSRC's next task should then be to quickly resume IPOs once the market achieves stability and relax pricing controls.

8. Are there any tax updates that PE firms or funds should be aware of?

Since the beginning of 2015, a number of tax policies may have an impact on the PE industry. In terms of tax on acquisitions, Document No.109 issued by the Ministry of Finance and the State Administration of Taxation (SAT) at the end of 2014 specifies that, in equity and asset acquisitions subject to special tax treatment, the percentage of the equity or assets acquired has been revised downward from the current not less than 75% to not less than 50%. Furthermore, Document No.48 issued by the SAT in 2015 specifies that where a special tax treatment administration method applies to an enterprise restructuring, a change is made from the current prior approval to reporting at the time of annual final settlement.

In terms of overseas acquisitions and divestment, the SAT published Order No.7 at the beginning of 2015, repealing some of the provisions of Document No.698, and setting forth improved provisions for several income tax treatment matters relating to the indirect transfer by non-tax-resident enterprises of property such as equity in Chinese tax-resident enterprises.

Furthermore, with respect to income tax on natural person limited partners of PE funds organised as partnerships, many local governments permit such partners to pay tax at the rate of 20%. This tax break has, however, become somewhat murky against the background of the State Council's issuance of the Circular on Screening and Making Compliant Tax and Other Such Incentive Policies at the end of 2014 and the Circular on Matters Relevant to Tax and Other Such Incentive Policies this year.

9. What new opportunities are available for foreign investment in renminbi funds and for offshore investment of China funds?

Due to differences in factors such as valuations, domestic financing and domestic listings by Chinese enterprises may become the norm in future. This signifies a need for a large number of renminbi funds. The Circular on Reforming the Method of Administration of the Conversion of the Foreign Exchange Denominated Registered Capital of Foreign-invested Enterprises implemented in June this year specifies that foreign exchange-denominated registered capital can be converted at will and permits the use of the renminbi proceeds to engage in domestic equity investment. However, the conversion of foreign exchange-denominated registered capital at will is still subject to many restrictions, and has not been truly implemented in many regions, making this the greatest obstacle to foreign investment in domestic renminbi funds.

As for offshore investment by Chinese funds, the new opportunities are manifested as follows: (1) administration by way of the record filing system has been established for new overseas investment projects, greatly reducing the operational time for projects; (2) SAFE has specified that exchange control in respect of overseas investment is changed from prior registration to direct handling by the bank at the time of remittance of the funds, simplifying the procedure for the outward remittance of funds in connection with direct overseas investment by enterprises; and (3) the central bank is accelerating the pace of relaxation of qualified domestic institutional investor (QDII) limits. Accordingly, we are confident that Chinese funds carrying out overseas investment will be operating in a more convenient and open environment.

10. What are the major concerns foreign PE clients might have in doing deals in China? Are these issues improving?

It is our opinion that the issue of greatest concern to foreign PE clients carrying out transactions in China remains the asymmetry in the information of the companies in which they wish to invest, including the reliability of their financial statements and the audit results of the accounting firms, the actual profitability level of the enterprises and the degree of risk faced by their investments.

Secondly, although the reform involving the change in the ownership system of SOEs to the mixed system, which presents enormous business opportunities, is accelerating, SOEs remain targets that are difficult to invest in for foreign PE clients. In addition to having to pay attention to the valuation issue (SOEs commonly use book values that give an overly high valuation, without paying attention to how returns are generated), negotiating complex governmental approval procedures is also required. Accordingly, to what extent foreign PE clients can participate in the current SOE ownership system reform remains an unknown. With the reductions in the restrictions on foreign investment that follow each new revision of the Foreign Investment Industrial Guidance Catalogue as well as the vigorous push by the state to develop the Free Trade Zones, more investment opportunities and options should open up to foreign PE firms.


Author biography

Hai Huang
Partner

Hai Huang has extensive experience in representing international and PRC companies in their M&A, PE/VC investments, FDI and capital markets transactions. Huang has represented companies in traditional manufacturing and services, emerging industries such as the internet, mobile networks, value-added telecom, high-tech, education and clean energy. In M&A, Huang worked for MNCs such as Pfizer, Shell, GE, Nokia and Cadbury, as well as Baidu, JD.com, China Mobile, Huawei Technologies and other PRC state-owned and private companies. In PE/VC, in addition to working with Temasek, Hopu Capital, Actis, Avenue, Macquarie, CITIC PE, IDG and DFJ, he also assists start-ups with their VC financings. In terms of capital markets, Huang represented both issuers and underwriters in many IPOs, follow-on offerings and debt offerings on the NYSE, NASDAQ, HKSE and LSE.
Huang worked in the Beijing and New York offices of Shearman & Sterling before joining Global Law Office in 2007. He obtained his LLM from the Columbia University School of Law and his LLB and master of law from the Jilin University School of Law. He is admitted to practise in China and New York.

环球律师事务所的黄海律师重点阐述了私募投资最热门的行业、外资私募投资公司面对的挑战，以及交易结构、并购融资和外汇的变革

1. 最近中国出台了什么法规是对私募股权市场带来影响的?

进入2015年以来，中国相关政府部门发布的多个法规和规章对私募投资都会产生较大影响。从基金募集和管理的上看，中国证监会发布了《私募投资基金监督管理暂行办法》，旨在从登记备案、资金募集和投资运作等方面入手对私募投资基金进行监管。

从投资方向上看，中国政府修改了《外商投资产业指导目录》，进一步放宽了对外资开放的领域。其中最引人注意的是在电子商务领域，中国政府突破了增值电信行业外资比例不超过50%的限制，允许外资全资控股电子商务公司。此外，中国商务部发布了《境外投资管理办法》，旨在简化境外投资活动的审批制度。这项举措应当能够降低很多中国私募投资者在进行跨境投资时的门槛。另外，多份国企改革相关文件密集出台，这些新的政策举措将促使国企资产更加广泛地面向市场，对私募投资者来说蕴藏着巨大的商机。

另外，中国商务部在年初发布了《外国投资法》（草案）。该草案旨在统一中国目前较为零散的外商投资法律法规，其中对于VIE结构的态度吸引了广大私募投资者的眼球。鉴于该法案对现行外商投资法律体系影响甚广，预期需要相当长的时间酝酿和讨论方能最终成为法律。

2. 中国有哪些行业是最受PE投资者欢迎的?

根据2015年上半年的相关公开数据显示，电信、传媒和技术(TMT)仍然是私募投资和风险投资的热点。移动互联网正在迅速地深入人们的生活，改变着人们的生活方式，在“互联网+”及相关利好政策的带动下，移动互联网是最吸引私募和风险投资者的领域。

另外值得注意的是，在金融准入市场逐步开放的大环境下，很多私募资本聚集金融领域。从投资金额上看，金融行业虽略低于互联网行业屈居次席，但其平均融资额远高于前者，而其中互联网金融领域吸引了可观的资金，这也体现了互联网行业对金融行业发展的巨大推动作用。

3. PE交易是如何融资的?交易结构是否在改变中?

中国的互联网公司传统上更多地接受外资私募基金以美元进行投资。为避开中国的市场准入，这种投资往往借用VIE结构在中国境外完成。随着中国资本市场的逐渐进步和境内投资产业的成熟，越来越多的私募投资由境内基金用人民币在中国境内完成。很多传统的外资基金也在中国境内组建人民币基金以顺应这种新的发展。

4. 决定私有化并在中国交易所上市的美国上市中国企业正面对尴尬的处境。它们下一步行动是什么 (借壳上市是否一个选择)?

制度原因迫使很多优秀的中国公司到境外上市，但当国内资本市场能投提供各项政策利好和更高估值的时候，部分中概股考虑回归是可以理解的。因此，即使目前IPO暂停，部分中概股回归的大方向不会变。对于回归时间要求较高的企业来说，目前可以选择在新三板上市，并最终实现转板；此外，也可筹备登陆即将成立的战略新兴板。虽然法律上利用借壳的方式回归A股的通道依然畅通，但受制于壳资源稀缺且审批严格，目前较难成为主流。

5.现行的法规使境外并购贷款人难以向境内企业放贷。企业如何应对此限制?

在现行法规的严格限制下，境外并购贷款人将资金直接出借给境内公司是比较困难的。具体来说，不但境外贷款人将资金出借给境内企业难以得到与境内贷款人相同的担保措施，而且境内企业对外借入资金有一定的配额限制，在外汇兑换前还需要经过SAFE的批准。另外，用境外贷款偿还境内债务更是被严格限制的。因此，境外并购贷款人往往会通过境内关联方将资金出借给境内公司，以补充其营运资金或偿还境内贷款。

6. IPO暂停对PE有什么影响? 您认为何时会恢复上市?

此轮IPO暂停对PE的影响是多方面的：一方面，IPO暂停使得企业一度不合理的过高估值逐渐得到控制，同时将可能导致部分企业急缺现金，这为私募创造了更多的收购机会和相对有利的投资环境；另一方面，如果作为私募主要退出渠道的IPO长时间暂停，将会有更多的PE转向并购退出。这客观上促进了PE退出渠道的多元化，有利于国内资本市场和并购市场的成熟。历史数据显示，IPO暂停的时间一般在半年到一年之间，但具体重启时间仍需要等待市场实现平稳过渡之后，视市场的走势而定。

7. 证监会面对着什么挑战? 有什么新任务?

对于证监会来说，推进股票发行注册制改革无疑是大的挑战，也是证监会推进监管转型的重要突破口。如果待《证券法》修改完毕再重启IPO，伴随着排队等待上市企业的增多，市场可能面临更大的恐慌和心理冲击。因此，证监会接下来的任务应当是待市场企稳后尽快重启IPO并且放开定价的管制。

8. 有什么新的税务动态是PE企业和基金需要注意的?

自2015年以来，数个税收政策可能对私募行业产生影响。在收购税收方面，2014年底财政部和国税总局的“109号文”明确了在适用特殊性税务处理的股权收购和资产收购中，被收购股权或资产比例由原来规定的不低于75%调整为不低于50%；此外，国税总局2015年发布的“48号文”确定企业重组适用特殊性税务处理的管理方式由原来的事先核准改为年度汇算清缴时进行申报。

在境外收购和退出方面，2015年初国税总局公布了“第7号令“，废止了“698号文”的部分规定，对非居民企业间接转让中国居民企业股权等财产的若干所得税处理事项作了更完善的规定。

此外，合伙制私募基金中自然人有限合伙人的所得税，很多地方政府允许该等合伙人按照20%的税率缴税。这个优惠政策在2014年底国务院的《关于清理规范税收等优惠政策的通知》以及今年国务院发布的《税收等优惠政策相关事项的通知》的背景下变得有些捉摸不定。

9. 对投资人民币基金的外资和投资境外的中国基金，有什么新机遇?

由于估值等方面的差异，未来中国企业境内融资、境内上市很可能成为一种常态。这就意味着需要有大量的人民币基金；今年6月实施的《关于改革外商投资企业外汇资本金结汇管理方式的通知》规定了对外汇资本金实行意愿结汇，并且允许使用结汇人民币资金开展境内股权投资。但是，目前外汇资本金意愿结汇还有很多限制，在很多地方并没有真正开展，这成为外商投资境内人民币基金的最大障碍。

对于中国基金的境外投资，新的机遇表现为，首先，新的境外投资项目管理确立了备案制的管理方式，这大大缩短了项目操作时间；其次，外管局明确了将境外投资外汇管理由事前登记改为汇兑资金时在银行直接办理，简化了企业对外直接投资资金汇出手续；另外，央行正在加快放开QDII额度的步伐。因此，我们相信中国基金进行境外投资将会有一个更加便利和开放的环境。

10. 外国PE客户在中国进行交易时的最大关注是什么? 这些问题有没有在改善?

我们认为对于在中国进行交易的外国PE客户来说，其最关心的问题依然与所投资公司的信息不对称，包括财务报表和会计师事务所审计结果的可信赖度，企业实际盈利水平，以及投资面临的风险程度等。

其次，虽然蕴含巨大商机的国企混合所有制改革在加速，但对外国PE客户来说，国企依然是很难投资的对象。除了需要注意估值问题（国企通常使用估值过高的账面价值，不关注收益如何产生），还要应对繁杂的政府审批程序，因此外国PE客户能在多大程度上参与本轮国企混改还是一个未知数。随着不断修订的《外商投资产业指导目录》对外商投资限制的减少，以及国家积极推进自贸区建设，外国PE客户在投资上应该会拥有更多的机会和选择。


作者简历

黄海
合伙人

黄海律师为境内外公司的兼并收购、私募/风险投资、外商直接投资以及资本市场活动提供法律服务，具丰盛经验。所涉及的行业既包括传统的制造业和服务业，也包括新兴的互联网、移动互联网、增值电信、医药、科技、教育以及新能源等行业。在兼并收购领域，黄律师为辉瑞、壳牌石油、通用电气、诺基亚、吉百利、安万特等知名跨国公司在中国的收购兼并活动提供法律支持，也协助了百度、京东、中国移动、华为等国有和民营企业在境内外开展并购活动。在私募股权投资领域，黄律师代表了诸如淡马锡、厚朴资本、中信产业基金、麦格理、英联资本、艾威资本、纪源资本、IDG等众多国内和国外投资基金在中国进行投资，同时也协助了大批成长型的中国公司及其创始人进行融资；在资本市场领域，黄海律师协助多家发行人或承销商成功完成了在纳斯达克、纽约交易所、香港、伦敦等证券市场进行上市或再融资。
在2007年加入环球律师事务所之前，黄律师在美国谢尔曼•斯特灵律师事务所北京和纽约办事处工作。他在美国哥伦比亚大学法学院取得法学硕士，以及在吉林大学法学院取得法学学士和法学硕士。他在中国和纽约州取得执业资格。