China regulators look to streamline private equity oversight

It represents part of a six-year effort – the draft version dates to 2017 – to encourage early-stage investment in small start-ups in science and technology, according to an explainer article published on the regulator's website. The new rules, comprising seven chapters and 62 items, come into effect on September 1.

There will be a higher-level framework for private equity industry supervision that focuses on core principles, leaving flexibility for amendments around specific operational issues. Core principles cover the obligations of fund managers and custodians, fundraising, identifying risk levels, and overall supervision and management.

One chapter is dedicated to venture capital, which will be treated differently from private equity to encourage long-term investment in technology start-ups. Registration and filing processes for VC managers will be simplified, on-spot inspections will be less frequent, and exits will be facilitated, the regulation state.

Significantly, current agreements offering LPs a guaranteed annual minimum return or the return of principal will be invalidated for violating administrative regulations. These arrangements are commonplace in the renminbi-denominated fund world.

The same rule emphasises "penetrating supervision" and controls on the ultimate source of capital - positioned as a means to improve investor protection and strengthen regulation of beneficial owners. GPs may not establish multiple vehicles under a single project to evade limitations on the number of participating investors. They are also barred from soliciting capital from or transferring assets to investors who represent third parties.

Yongchun Zhu, a lawyer at Beijing-based Zhong Lun Law Firm noted that it is not yet clear whether the rule will be applicable to the qualified foreign limited partnership (QFLP) regime through which funds can raise capital from offshore.

“Some places like Shenzhen and Hainan province do not impose mandatory requirements for QFLP funds to register, and in practice, there are cases where such funds submitted for filing and were turned down," Zhu said.

"However, as these funds will mainly invest in mainland China, we think it is worthwhile to further discuss whether it is necessary to apply the provisions on fund investment, supervision and information reporting that are applicable to the domestic funds."

As of May, 22,000 private investment managers had registered with the Asset Management Association of China. Total assets amounted to CNY 21trn (USD 2.9trn) across 153,000 funds. As of the first quarter of 2023, Chinese private equity funds had invested nearly CNY 5trn in businesses deemed to be aligned with national strategy.

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• Topics
• Greater China
• Regulation
• Technology
• GPs
• Fundraising
• China
• CSRC
• regulation
• Asset Management Association of China (AMAC)