CDC, UK government-backed private equity emerging markets fund of funds, has invested $100 million in two China-focused private equity funds, bringing its total commitments to the country to $300 million to date.
CDC is committing $75 million to CDH China Fund III, the biggest China-focused fund raised to date, and $25 million to CITIC Capital Partners, which is the maiden fund of a Chinese manager which began by making investments in the US mid-market. CITIC is also in the process of raising a China real estate fund.
CDH China Fund III, the most prominent private equity fund dedicated to China, is closing in on $1.6 billion, while CITIC beat its hard cap to hold a final close on $425 million in April.
Last year, CDC made commitments totaling $50 million to two Chinese funds – Capital Today, a first-time fund, and Aureos China Capital, an affiliate of CDC.
China has certainly had little trouble attracting capital, but tightening implementation rules governing cross-border private equity and venture capital transactions are poised to have a “profound impact” on how these deals may be done, international law firm DLA Piper warned in its latest note to its clients.
The “Implementation Rules” by China’s State Administration of Foreign Exchange – which took effect in the second week of June – threaten to herald a dry period of offshore investments into China and offshore listings of local companies.
The rules require 3 years of financial information for onshore companies targeted by funds, registration of option plans, and documentary evidence of the source of foreign exchange in excess of $50,000. They also introduce qualitative guidelines for retroactive applications, and clarify the definition of local residency.
Combined with new merger and acquisition regulations promulgated by China’s Ministry of Commerce and other regulatory bodies last year, the new rules part of an “unwritten policy to encourage onshore listings,” according to DLA.
The law firm, which has been building its China team, advises companies and investors to speed up transactions already under way.
“We have already seen a number of transactions fail to obtain proper registrations from SAFE due to technical mistakes even when handled by reputable PRC counsel. We have also been presented with a growing number of transactions with improper or no registrations in place.”
DLA concludes that for the long term, funds committed to investing and acquiring Chinese enterprises may be “forced to establish Renminbi-denominated funds and to consider Chinese A share exits.”