The popularity of RMB funds among foreign firms remains buoyant, despite continued uncertainty around their set up, according to the recently released China Venture Capital Association’s (CVCA) Foreign Investors’ Participation in RMB Funds Report 2009.
Some 91 percent of the foreign private equity and venture capital firms interviewed in the Chinese industry-wide survey said they believed the rise of RMB funds was an inevitable trend and one they anticipated joining in the long term.
Among those foreign venture capital and private equity firms surveyed which do not already manage an RMB fund, some 23 percent said they were currently in the process of setting up such a fund, while a further 18 percent said they planned to establish one in the short term.
Among those foreign firms surveyed that already manage RMB funds, close to 18 percent plan to set up an additional RMB fund in the near future according to the survey, which was conducted from September to November 2009.
Joel Rothstein, a Beijing-based partner at law firm Paul, Hastings, Janofsky & Walker, which collaborated with CVCA on the report, attributes the current wave of interest in RMB funds among international investors to a combination of developments in China’s partnership laws and local government incentive programs in various cities.
Shanghai, Tianjin and most recently Beijing have all introduced policies which encourage the formation of private equity funds and fund management companies in local jurisdictions.
Foreign investors frustrated with the lengthy government approval processes they must pass through to invest in China see RMB funds as a potential shortcut, adds Rothstein. They also see them as a way to try to tap into the increasing pool of domestic capital available to invest in private equity, he adds.
Not all RMB funds are equal
While RMB funds in general seem to be popular with foreigners, some RMB funds are more equal than others. According to the CVCA report, some 64 percent of foreign GPs stated they would prefer to set up pure RMB funds, invested in only by domestic LPs in RMB, while the remaining 36 percent would prefer to set up mixed RMB funds, which can be invested in by both foreign and domestic LPs.
In reality, Rothstein points out, there is still a lot of ambiguity in the laws and regulations regarding mixed funds and foreign firms eager to get on the RMB bandwagon must continue waiting for a more comprehensive regulatory framework.
There was hope clarification would be offered for the private equity industry when government authorities finally issued a set of rules on foreign invested partnerships in late November 2009. But many foreign investors and fund managers interested in forming or managing foreign invested RMB funds were left disappointed, Rothstein notes.
The regulations did give the green light to the inclusion of foreign investors under China’s limited partnership laws, allowing foreign investors to form a vehicle with the same kind of attributes as limited partnerships in other jurisdictions, such as the limited liability of partners and a pass-through tax vehicle.
However, they “effectively included a requirement that when a partnership is being utilised for fund purposes, it must comply with certain additional regulations, which do not yet exist, thereby leaving many unanswered questions,” Rothstein explained.
According to market insiders, China’s National Development and Reform Commission (NDRC) is currently developing comprehensive regulations to govern the fund industry, although when these might be completed nobody knows.
But Rothstein says even this will not be enough, as there will also need to be additional regulations from the State Administration of Foreign Exchange (SAFE) and other governmental authorities that “describe, among other things, how you repatriate, and move money in and out of a foreign invested partnership fund” – something which at the moment is subject to restriction under SAFE’s 2008 Circular 142 law.