Foreign private equity firms appear to be taking their cue from the Chinese government and adopting a wait and see approach to the pilot policy allowing them to establish wholly-owned Chinese entities in the Shanghai New Pudong Area.
The policy, unveiled in June, offers foreign firms up to June 2010 to register local entities to manage their equity investments. Chinese officials have hinted that it may be possible later on for these local entities, so-called “equity investment management enterprises”, to qualify as domestic GPs, which will be able to form RMB funds to invest in Chinese targets.
For now, having an on-shore entity enables firms to beef up their presence in China and develop local networks with an eye towards the future when new and more relaxed regulations come into being.
While the overall response from foreign private equity firms has been positive, only one firm had been known to register under the policy by the end of July; Shanghai Amara Investment Management, a joint venture between Dubai-based Amara Holdings and Shanghai Ding Hai Investment Management, a unit of one of China’s oldest trust fund companies, New China Trust. US buyout firm Blackstone, sovereign wealth fund Oman Investment Fund and investment firm First Eastern Investment Group have also been named in media reports as interested in taking advantage of the policy.
Other firms, however, seem to biding their time on this one. This is not without reason. “There is talk that the Shanghai government is trying to extend the rule to the whole of Shanghai and not just within Pudong,” said Hubert Tse, a managing director and head at Yuan Tai PRC Attorneys, which led a team advising the establishment of DBS Private Equity Enterprise, a $100 million on-shore RMB fund this February.
However, the Shanghai government cannot make such decisions independently. “[It] needs to work with State Administration of Foreign Exchange (SAFE) on foreign exchange issues, and Ministry of Commerce of the People’s Republic of China (MOFCOM) as it approves all foreign direct investment, the tax office and Beijing, before they can come up with a more detailed policy. It is very much an on-going discussion,” Hubert pointed out.