On June 10, 2009, the Pudong New Area Government of Shanghai issued the Trial Measures on the Establishment of Foreign-Invested Private Equity Management Enterprises (the “Trial Measures”). Following a series of policies encouraging private equity developments in Shanghai formulated by the municipal government since 2008, for the first time, foreign direct investments in private equity management companies (“PE Mgmt Cos”) in Pudong seems to be permitted. Though the Trial Measures were only effective for approximately two months, several PE Mgmt Cos have already been established, with more international private equity funds seeking an opportunity to enter into the PRC market.
Before the issuance of the Trial Measures, the only available form for foreign investments in fund management entities was through the establishment of a foreign-invested venture capital management enterprise (“FIVCMIE”) pursuant to the 2003 Administrative Provisions on Foreign-Invested Venture Capital Enterprises (“FIVCIE Rules”). While establishment of a PE Mgmt Co requires a higher threshold (at least US$2 million registered capital), it has some advantages over FIVCMIE. First, a FIVCMIE requires three management personnel with at least three years professional experience, but a PE Mgmt Co only requires two such personnel with at least two years of experience. Second, while the funds managed by a FIVCMIE can only be invested into the high-tech area according to the FIVCIE Rules, the investments of the funds managed by a PE Mgmt Co are not subject to this restriction. Finally, a PE Mgmt Co can enjoy all the subsidies provided by the Pudong Government to the domestic private equity fund and fund management entities.
However, the Trial Measures expire on June 30, 2010. We understand the Trial Measures were introduced as a trial run for the regulations that will be promulgated by the State Council on the establishment of private equity funds and fund management entities (the “PE Rules”). According to the National Development and Reform Commission, the draft PE Rules are going to be submitted to the State Council for the final read soon. Therefore, serious questions have been raised by the potential foreign investors in the PRC fund management: Will the PE Mgmt Cos registered under the Trial Measures survive June 30, 2010? How would the PE Mgmt Cos be adapted to the PE Rules which will come into effect in the near future?