New chapters in the rulebook

pfm: At the start of the year China unveiled the Asset Management Association of China (AMAC), a self-regulatory organization authorized by China’s securities regulator. How has this changed oversight of private funds in the region? 

Anderson: Well, the first thing domestic managers have needed to do is register with the AMAC before the deadline of April 30. It’s not the first time private funds have been required to report to a regulator in China. Before this new regime, domestic private equity funds had to register with the National Development and Reform Commission (NDRC). Going forward, the China Securities Regulatory Commission (CSRC), which set up the AMAC, is working on a more detailed set of regulations and rules for the industry.

When can we expect to see the finalized rules? 

I think it’s going to be quite a long gestation process before the new rules come out. At this point it’s not clear how long it is going to take or what the final regime will look like.

Is this new registration regime more burdensome than the last? 

The new regime is not particularly onerous. The information that has to be provided by the manager and the fund is relatively limited (e.g. the fund’s investment focus, legal name, size, investors, and fund agreement). It’s not comparable to the Form ADV or Form PF in the US. The previous regime was in some ways more difficult, because the NDRC could comment on the fund partnership agreements.

However, the AMAC will also be afforded certain powers, including on-site inspections, the suspension of filing status for securities violators, and maintaining a public record of misconduct. Managers must also make quarterly and annual filings providing the AMAC with updated information with respect to managers or their funds.

Is registration required for all fund managers with activity in China or just those based there? 

This applies to domestic Chinese managers and RMB funds. At the moment it doesn’t affect fund managers and funds based outside China. However, it does catch local subsidiaries or joint ventures of offshore managers and their RMB funds.  As a result, a number of international private equity firms with domestic Chinese operations managing RMB funds in China have registered with the AMAC.

GPs were recently buoyed by policy talks of a regulatory framework that would allow Chinese insurance companies to invest in both offshore funds and RMB funds. What’s the latest on this? 

This is a potentially significant development, which could provide fund managers with access to a large pool of new capital. We have started to see Chinese insurance companies making investments under this framework (for example, it was reported in the press that China Reinsurance committed $30 million to KKR’s North American Fund XI, on top of commitments to a number of domestic RMB funds).

However, fund managers should be aware that they must satisfy certain conditions before being eligible for investment, including with respect to the amount of assets under management, paid-in capital, track record and maturity of the investment team.