Following months of speculation about its contents, Shanghai has officially released a detailed guide to its pilot programme – effective as of 1 February – to allow foreign investors to commit to onshore RMB-denominated private equity funds.
When the programme was first announced back in October, it was dubbed Shanghai’s Qualified Foreign LP (QFLP) programme by the industry. However, the Implementation Measures on Pilot Program of Foreign-invested Equity Investment Enterprises in Shanghai (Pilot Measures) published in January carefully avoid mention of the term QFLP and seem to contain more good news for foreign GPs than foreign LPs.
The highlight for foreign GPs is a determination on the status of foreign-managed RMB funds, such as those currently being raised by The Carlyle Group and The Blackstone Group. These funds, into which foreign GPs are allowed to invest up to 5 percent of their own money, will now be classed as “pure” RMB funds under the Shanghai programme – as long as all other capital in the fund is domestic in source.
This means they will be exempt from the restrictions imposed on foreign investment when it comes to buying companies in certain industries. Examples include petrochemicals and telecommunications, which are subject to approval by Chinese Ministry of Commerce and State Administration of Foreign Exchange (SAFE). It also means the funds will be able to invest without going through the onerous and time-consuming approval processes China imposes on foreign capital.
However, for offshore LPs, areas of the programme remain very grey.
Among the questions that have yet to be addressed in the document is that which has been foremost in LPs’ minds since the pilot scheme was first announced: i.e. whether a comingled fund raised from domestic and foreign LPs will continue to be treated as foreign capital and subject to the investment restrictions that status implies, or instead granted local fund status like the RMB funds.
Also missing from the Pilot Measures are details on the total quota that would be granted by the Shanghai authorities for conversion from USD into RMB in this initial pilot scheme.
However, a news report from China Securities Journal posted on the website of Shanghai Municipal Financial Services Office has indirectly confirmed some earlier speculation.
According to the report, the conversion quota for Shanghai may be set at $3 billion and it will likely be separated into three stages of distribution. The RMB funds launched last year by Carlyle in partnership with Chinese conglomerate Fosun Group, Blackstone and Hong Kong-based First Eastern Investment Group are likely to be the beneficiaries of the first stage, which has a $300 million quota.
In addition, about 15 private equity firms will be allowed through for the second stage, which has $1.5 billion quota, while the remaining $1.2 billion will be allocated for the third stage, the report said.