New rules for SOEs engaging in private equity fund business

By Zhou Qian, Tian Yuan Law Firm

State-owned enterprises (SOEs) at both central and local levels are actively establishing comprehensive compliance systems. New rules now provide crucial institutional support for constructing them. The Private Investment Fund Registration and Filing Measures, and the corresponding rules, were implemented in May 2023, and the Regulation on the Supervision and Administration of Private Investment Funds, are set to take effect on 1 September 2023.

These regulations will significantly impact subsequent compliant engagement of these enterprises in fund-related activities. Built on a general applicability, they outline differentiated supervisory measures for SOEs, striking a balance between regulations overseeing state assets and private equity funds.

Against this backdrop, the authors suggest paying particular attention to the following areas.

Differentiated group management

Zhou Qian, Tian Yuan Law Firm
Zhou Qian
Tian Yuan Law Firm
Tel: +86 139 1006 6749

Articles 17 and 18 of the registration and filing measures establish fundamental compliance requirements for situations where the same controlling shareholder or actual controller oversees two or more private fund management entities.

These provisions emphasise the need for clear differentiation of business scopes, establishment of relevant internal control systems and continuous compliance and risk management systems, specifying that the Asset Management Association of China (AMAC) will implement classification and differentiated self-regulation for private fund management entities based on specific circumstances.

In conducting business, it is common for SOEs to exercise control over multiple private fund management entities, driven by considerations such as distinct matters and collaborative partners. While these regulations provide a basis for SOEs controlling multiple management entities, they still lack precise practical guidelines.

Executive stock ownership

Both article 13 of the private fund regulation and article 8(3) of the registration and filing measures require the legal representative, executive partner, their appointed representatives and senior executives responsible for investment management at a private fund management entity to directly or indirectly hold its certain proportion of equity or property share.

However, this requirement does not apply to private fund management entities controlled by the government or its authorised agencies. Although there is currently a cautious attitude towards employee shareholding at management level of state-controlled private fund management entities in terms of state-owned asset supervision, it does not prohibit eligible employees from holding shares.

Co-investment qualification

Article 8 of the registration and filing measures requires private fund management entities to have at least five full-time employees, except for private fund management entities under group management with other provisions.

According to article 9 of the Guidelines No.1 for the Registration of Private Fund Managers, senior executives appointed by controlling enterprises of state organs, public institutions, governments and authorised agencies are also considered full-time employees.

This provision better aligns with the current reality where, due to management and risk control demands, senior executives from higher-level entities often concurrently hold positions as senior executives in subordinate private fund management entities while maintaining their original employment relationships.

However, this also poses challenges for implementing employee co-investment in funds. As per the existing requirements of the AMAC, if employees form a co-investment platform to invest funds, they are exempted from applying the qualified investor recognition criteria. During the fund registration process, the system mandates uploading labour contracts signed between relevant employees and the associated manager.

Nonetheless, the above-mentioned appointed senior executives might be unable to provide labour contracts signed with their management entities, raising uncertainties about whether they can also be exempted from the qualified investor recognition criteria. Further clarity is still needed on these matters.

Investment hierarchy determination

Article 25 of the private fund regulation explicitly states that the investment hierarchy of private funds shall comply with regulations from the financial regulatory authority under the State Council.

However, private funds that meet the conditions specified by the China Securities Regulatory Commission (CSRC) for investing their primary assets in other private funds shall be exempt from the investment hierarchy calculation.

Venture capital funds and the investment hierarchy of private funds mentioned in article 5 (2) of the private fund regulation are provided by relevant departments under the State Council.

In response to media inquiries, the Ministry of Justice and CSRC mentioned that this provision is policy support for parent funds, venture capital funds, government funds and other private funds with reasonable expansion needs.

Funds initiated by SOEs aren’t necessarily parent funds, and if they don’t meet specific requirements in terms of government contributions and other conditions, they cannot be automatically categorised as government funds.

Therefore, when it comes to determining nested investment hierarchies, whether such funds can be exempted still requires careful consideration based on specific circumstances and subsequent specific application rules to be issued.

Related-party transactions

The private fund regulation and the registration and filing measures reinforce oversight of related-party transactions.

Private fund management entities are now required to establish robust systems for managing related-party transactions, emphasising that private fund assets shall not be used to engage in improper transactions or benefit transfers with related parties.

The private fund regulation also lays out administrative penalties for private fund management entities and responsible individuals who engage in unlawful related-party transactions. These penalties can include confiscation of illicit gains and fines ranging from RMB100,000 (USD13,700) to RMB1 million.

Engaging in such transactions unlawfully could even trigger article 153 of the Civil Code, rendering contracts void due to violations of mandatory administrative regulations.

Funds initiated by SOEs generally support both their upstream and downstream business activities, and their investment targets often exit through transactions with entities within their system.

Against this backdrop, conducting related-party transactions requires heightened compliance awareness. For instance, it’s crucial to effectively identify related-party transactions, and make decisions and information disclosure in line with regulatory requirements and fund contract terms strictly.

Adhering to state-owned asset management regulations, transactions must also be fairly priced based on evaluations or valuations. If state-owned asset transaction procedures are triggered, rigorous adherence to all prescribed procedures under state-owned asset management regulations is imperative.

Zhou Qian is a partner at Tian Yuan Law Firm. She can be contacted at +86 139 1006 6749 or by e-mail at