China never lacks opportunities for private equity investors, but fund managers must now keep up with a swiftly maturing regulatory framework, writes Joy Jiao

Private equity and venture capital (PE/VC) funds in China have defied global downward trends of late and best predictions are for continued sterling performances for the rest of the year. But with the rapid growth comes also, in many areas, a rapid rate of regulatory development to keep pace and better control fresh markets.

Although the proceeds raised and the amounts invested by PE/VC funds declined globally in 2016, the China market made a strong showing with new highs, as PE/VC-led M&A deal value increased to US$223 billion, according to China Private Equity/Venture Capital 2016 Review and 2017 Outlook, published by PricewaterhouseCoopers (PwC).

Looking ahead to 2017, PwC predicts that the proceeds raised by Chinese PE/VC funds will continue their upward trajectory. M&A led by PE/VC, particularly overseas M&A, will become even more frequent, and PE/VC investment will be active in such industries as high technology, financial technology, culture and entertainment, healthcare, real estate and consumer goods, the multinational accounting firm says. However, funds will continue to face exit challenges this year.

But despite the strong growth patterns, fund managers are facing more stringent requirements from authorities as the sector moves towards a better controlled and regulated environment. “Given the signals released by China Securities Regulatory Commission and the Asset Management Association of China, fund managers and fund investment are facing more complicated compliance requirements and issues,” says Gong Lefan, a partner in the Shanghai office of Zhong Lun Law Firm.

And each of the favoured industries for investment presents its own legal issues, with the compliance matters faced by investors in certain emerging sectors being particularly complex. So to glean the profits from rapid growth, fund managers now not only need to understand how to invest, but they must stay ahead of the curve on regulatory and compliance issues.


In the past 12 months, the Asset Management Association of China (AMAC) issued several sets of questions and answers relating to the registration and recordal of private funds. According to AMAC’s answer No. 7, the name and scope of business of a private fund manager is required to contain such words as “fund management”, “investment management”, “asset management”, “equity investment”, “venture capital”, etc.

“However, the restrictions on the registration of financial enterprises have not yet been fully relaxed everywhere around the country,” says Gong Lefan, a partner at the Shanghai office of Zhong Lun Law Firm. “With respect to fund managers that are applying for the first time, we usually recommend to the client that it first talk with the administration for industry and commerce of the place where it proposes to establish, to ensure completion of business registration of the fund management company in accordance with the AMAC’s requirements.”

Gong Lefan new quote

Other more important answers include No. 12, which requires senior management personnel of private fund managers not to serve concurrently with non-affiliated private investment firms. “In practice, regulation of the service of senior management personnel has consistently been one of the key focal points of regulation of the registration of private fund managers by the AMAC,” says Gong Mulong, a partner at the Beijing office of King & Wood Mallesons.

Gong Mulong, Partner, King & Wood Mallesons Beijing

Answer No. 13 requires private fund managers applying for registration to choose only one from three types of business: private securities fund manager, PE/VC fund manager, or other private fund manager. A private fund manager may not manage a fund that is not consistent with the type of business for which it registered, and may not concurrently engage in multiple types of private fund management business.

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