Analysis of Zhuhai’s QFLP pilot programme

By Chen Fang and Wen Limei, Zhong Lun Law Firm

On 21 December 2018, Zhuhai Financial Bureau released the Interim Measures of Zhuhai Municipality for the Administration of the Pilot Programme for Foreign-invested Equity Investment Enterprises (QFLP [qualified foreign limited partner] pilot programme of Zhuhai) on its official website. This article provides a brief introduction to the highlights of Zhuhai’s QFLP pilot programme, with consideration to QFLP pilot programmes of other places.

陈芳 Chen Fang 中伦律师事务所合伙人 Partner Zhong Lun Law Firm
Chen Fang
Zhong Lun Law Firm

Most of the QFLP funds are private equity (PE) funds with foreign investors as its limited partners. Generally, QFLP funds focus on investing in non-publicly traded company equities. Compared with other foreign-invested enterprises, QFLP funds benefit particularly from more efficient foreign exchange treatment, which is considered the main advantage at the policy level. Specifically, through the QFLP pilot programmes, capital in foreign currencies may be converted into renminbi up to the quota at the fund level, and therefore investments proceeds may be paid in renminbi.

A QFLP fund manager under the pilot programme measures of Zhuhai is an enterprise that is: (1) recognized by the pilot programme leadership team appointed under the pilot programme measures of Zhuhai; (2) established by foreign investors directly as shareholders; and (3) focused on the promotion, establishment or management of equity investment enterprises.

Wen Limei
Zhong Lun Law Firm

Please note that, given QFLP pilot programmes are local policies, QFLP funds and QFLP fund managers must be incorporated in appropriate places where the relevant QFLP pilot programmes are adopted. QFLP funds and QFLP fund managers should complete PE fund manager registration or PE fund filing procedures in accordance with the relevant requirements of the Asset Management Association of China (AMAC).

According to the pilot programme measures of Zhuhai, eligible domestic private equity and venture capital fund management companies are also allowed to establish or manage QFLP funds.

Common structure. Usually, a QFLP fund is established in the form of a limited partnership with one or more foreign investors together with domestic investors as limited partners. According to the pilot programme measures of Zhuhai, the manager of a QFLP fund should act as the general partner of the limited partnership; if the general partner and any limited partner(s) of the fund are under the same control, the total commitment made by such general partner and limited partner(s) should not exceed 50% of the total capital contributions of the limited partnership.

In other words, the manager of a QFLP fund and the general partner of the fund should be the same entity, and the fund should at least have one third-party investor that is not an affiliate of the general partner. As far as we know, under QFLP pilot programmes in other places, there are precedents that the manager and the general partner of a QFLP fund are not the same entity, and the general partner is a foreign entity that is under the same control as the limited partners. In contrast to these programmes, Zhuhai’s QFLP programme implements more stringent regulation over fund structuring.

Special requirements for shareholders. In addition to the basic requirements relating to the asset scale of fund managers and the qualifications of officers, the pilot programme measures of Zhuhai expressly state that any foreign shareholder of the manager should hold an asset management licence issued by the appropriate foreign financial regulator, and any domestic shareholder should be a licensed financial institution incorporated in Zhuhai, with approval from the national financial regulator or its first-tier subsidiary, of which such institution holds more than 50% equity. The authors are of the view that these provisions reflect the AMAC’s requirements about specialization of PE fund managers, which may pose tough challenges for some overseas investment managers who submit applications under Zhuhai’s QFLP pilot programme.

Requirements for foreign investors. The pilot programme measures of Zhuhai only state that foreign investors should meet the requirements of qualified investors under the relevant PE fund regulations. While the QFLP pilot programmes in Shanghai, Tianjin, Chongqing and some other places impose high asset-scale requirements on foreign investors, and generally restrict eligible foreign investors to several types (such as overseas sovereign funds, pension funds, insurance companies, banks, etc.), the pilot programme measures of Zhuhai ease requirements for foreign investors of the funds significantly, thereby providing fund managers with high flexibility in fundraising.

Investing activities of the funds. Pursuant to the pilot programme measures of Zhuhai, QFLP funds should invested in industrial areas in real economy. Therefore, QFLP funds under Zhuhai’s QFLP pilot programme are prohibited from making investment activities as a fund of fund (FOF), unless the fund that the QFLP intends to invest in is set up for a municipal level (or above) strategic co-operation project, or it is a special purpose fund for a single project.

As such, these structures that use QFLP funds as special purpose vehicles for domestic investments in funds (other than funds set up for the above-mentioned purpose) may not be feasible under Zhuhai’s QFLP pilot programme. The pilot programme measures of Zhuhai expressly include infrastructure projects into the permitted scope of investment, while QFLP pilot programmes of Shanghai, Tianjin, Beijing, etc., generally do not allow QFLP funds to invest either directly or indirectly in real estate not for self-use.

In addition, according to the relevant regulations, QFLP funds should be deemed as foreign investors when conducting investment activities. Subject to foreign investment industrial policies, and depending on different local policies and practices, portfolios of QFLP funds may be regarded as foreign-invested enterprises by local administrations for industry and commerce.

In general, the pilot programme measures of Zhuhai are consistent with the QFLP pilot programmes in Shanghai, Shenzhen, Beijing, etc., in terms of principle and framework, and reflect regulatory requirements of the AMAC and other regulators for PE funds and PE fund managers.

Chen Fang is a partner and Wen Limei is an associate at Zhong Lun Law Firm

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