Jointly released by Tricor and JunHe, 'Foreign Private Equity Funds in China - Guide to Market Entry and Operations 2022' introduces PE funds in China, including the market landscape, establishment considerations, compliance requirements and daily operations, as well as insights into how foreign investors can plan ahead accordingly
Based on our years of experience in serving numerous domestic and foreign PE funds, Tricor has collaborated with JunHe Law Firm to compile this report. Our purpose is to interpret the development of foreign PE funds and relevant regulatory provisions in China, and provide suggestions for establishment and operations.
As an important part of the multi-level capital market in China, private equity (PE) investment has grown over the past 30 years to become a large-scale sector. Although the growth rate of the operational scale of Chinese PE funds has decreased, since the New Regulation on Asset Management was implemented in 2018, China’s PE fund market has entered a “quality improvement” phase in which it has become increasingly standardized and systematic. For instance, the Asset Management Association of China (AMAC) published that by the end of September 2022, there were 24,129 private fund managers, 139,570 private funds, the scale of which was RMB 20.39 trillion (equivalent to USD 2.87 trillion), and over 31,549 PE investment funds with a total AUM of RMB 10.96 trillion (equivalent to USD 1.54 trillion). In terms of the number of managers and the scale of funds, PE investment funds play an important role.
Against headwinds brought about by COVID-19 and global uncertainties, China’s PE industry has continued to grow. With ongoing improvements to the business environment and China’s financial opening up in full swing, we have witnessed heightened optimism from foreign private funds in the Chinese investment market. As of the first half of the 2022, the number of foreign PE funds totaled 801, including 259 JVs. The target amount of funds totaled USD 313.95 billion, and the target amount of JV PE funds totaled USD 83.07 billion. Foreign private fund managers have emerged as very prominent players. International asset management institutions typically set up an asset management company in Singapore, Hong Kong, or offshore islands (such as the Cayman Islands or the British Virgin Islands), as an investment vehicle for the Chinese market.
According to the report, as an integral part of China’s PE fund market, foreign PE funds have displayed the following characteristics for the past couple years: Despite a decrease in fundraising speed and scale, foreign PE funds remain relatively stable. Foreign PE funds are increasing their investment in China and prioritizing high-quality, mid-, and late-cycle asset allocation. The institutionalization of limited partnerships (LPs) and the Pareto Principle effect of fund managers has become increasingly apparent.
In terms of the operational management, the regulation of foreign PE funds has become increasingly systematic and standardized. For instance, the AMAC website shows that as of November 3, a total of 2,442 private fund institutions have been deregistered for violating regulations. This year, 552 private fund institutions have been deregistered for reasons such as failure to proactively contact the AMAC, failure to submit special legal opinions upon expiration of the time limit, and failure to consistently comply with managerial registration requirements.
The report shows, to ensure business continuity and performance stability, PE institutions should establish a complete and robust corporate governance system and compliance risk control mechanisms to respond to evolving compliance requirements. To keep abreast of evolving compliance regulations and the market environment, foreign investors must set up and operate PE funds in China in a standardized, orderly and reasonable manner.
Despite numerous challenges - including evolving compliance requirements, operational complexity, local competition, rapid growing demand for wealth management solutions - foreign PE funds are picking up pace. With constant improvements being made to policies and the business environment, foreign PE funds are continuing to exhibit profound development and fulfill their potential and invigorate China’s real economy.
CEO of Tricor Group, Kim Jenkins, said “As the world’s second largest capital market, China is one of the most important channels for global investors engaging in asset allocation. With the gradual opening up of its capital market, an increasing number of foreign institutional investors are gaining greater access to China’s colossal opportunities and expanding their business scope cross the country. With its vast economic and market potential, the Chinese PE fund market continues to be an attractive investment destination for foreign investment funds. Setting up a business in another country and managing an international business is much more complicated than it appears. Foreign asset management firms must plan ahead accordingly.”
CEO of Tricor Greater China, Hailiang Zhang, said “Foreign asset management institutions recognize the long-term stable development and investment potential of the economy and are continuing to invest in China. In addition to business continuity and performance stability, foreign PE fund managers must also focus on the challenges of evolving compliance requirements, complex mid- and back-stage operations, and fierce local competition. Domestic investors are demanding more in terms of professional competence, investment strategies, and service systems. Based on long-term development strategies, PE fund managers should look to improve their professional investment skills and risk control ability, operational efficiency and compliance levels.”
COO of Tricor Mainland China, Xuting You, said “Recent years have seen increasingly stringent regulation of the PE industry and standardizing compliance has become a focal point. The regulatory authorities have promulgated specific provisions for the registration of PE fund managers and products, management structure, practitioner qualification, performance appraisal, remuneration management, accounting treatment related to asset management products, and finance & tax information reporting. Because of these industry characteristics, foreign PE fund managers face more complex business decisions, daily operational practices and compliance concerns across the entire life cycle of alternative investment business.”
Please view our report here: https://www.tricorglobal.com/foreign-private-equity-funds-in-china-guide-2022
For more information, please contact:
MAINLAND CHINA
Tricor Mainland China
Head of Business Development
Tel: +86 138 1717 7071
Email: christine.yl.wang@cn.tricorglobal.com
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