Comparative Analysis of Local Rules Regarding Formation of Private Equity Funds and Management Companies in China

Against the backdrop of a huge amount of domestic liquidity from both state-owned and non-state enterprises, the launch of the long-awaited Growth Enterprise Market (GEM) in Shenzhen at the end of 2009 and the continued growth of private equity investment activity in China, China's four major cities, Beijing, Shanghai, Shenzhen and Tianjin, continue to compete to become China's hub for the formation of both domestic and foreign-invested equity investment fund enterprises (EIFEs) and equity investment management enterprises (EIMEs) with the promulgation of various local rules and incentive policies for the formation of EIFEs and EIMEs. This GT Alert discusses national and local rules regarding and incentives for the formation of EIFEs and EIMEs from a comparative perspective.

Formation of EIFEs and EIMEs

Permissible Entity Forms. In all four cities, EIFEs and EIMEs can be established either in partnership or in corporate form. Since March 2010, foreign fund sponsors may also set up RMB funds as "foreign-invested partnerships" (FIPs) pursuant to the FIP Registration Rules issued by the State Administration of Industry and Commerce (the FIP Rules). Carlyle and the Shanghai-based Fosun Group were the first to take advantage of the new FIP Rules to jointly establish a US$100 million equivalent RMB fund in Shanghai in the form of a general partnership. The foreign-invested venture capital enterprise (FIVCE) in the form of a contractual joint venture, the mainstream entity form for foreign-invested EIFEs before the advent of the FIP Rules, appears to be gradually fading away. Of the four cities, only the Tianjin rules still refer to the contractual form of EIFE in addition to the corporate, partnership and trust forms.

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