1 Outline What are RMB funds Why RMB funds Key PRC legislations Alternative fund models under the existing legal regime The parallel fund structure Recent developments
2 What Are RMB Funds Key characteristics -RMB-denominated funds usually formed by private equities and venture capitals -Formed under PRC law -Portfolio investment primarily in China Two basic types of RMB funds -Purely domestic RMB funds (e.g., Bohai Industrial Investment Fund) -Foreign invested RMB funds (e.g., Blackstone Zhonghua Development Investment Fund) RMB funds can be managed by foreign fund managers through their onshore affiliates
3 Why RMB Funds – from A Foreign Fund Manager’s Perspective Current status -Skyrocketing number of RMB funds: 29 formed in 2007; 88 formed in 2008; 84 formed in 2009 -Amount of funds raised: RMB25 billion raised in 2009 -Value of deals closed: RMB20 billion closed in 2009 Voices of fund managers   -91.2% of the surveyed “believe the rise of RMB funds is an inevitable trend and wish to prepare to set up RMB funds”   Based on the data provided by China Venture Capital Association.
4 Why RMB Funds – from A Foreign Fund Manager’s Perspective (Cont’d) Main reasons for foreign investors to set up RMB funds
5 Why RMB Funds – from A Foreign Fund Manager’s Perspective (Cont’d) Opportunities relating to clean technologies -Pursuant to the CVCA survey, RMB funds’ No. 1 target sector is — ENVIRONMENTAL PROTECTION AND NEW ENERGY!
6 Key PRC Regulations Governing Foreign Invested RMB Funds Stage one (pre-2003): absence of legal basis -No legal basis to form foreign invested RMB funds Stage two (2003 – 2006): the inception and rise of FIVCIEs -Key legislation: The Regulations on the Administration of Foreign Invested Venture Capital Enterprises (the "2003 FIVCIE Regulations") -An FIVCIE can take the form of an incorporated entity or a non-legal person entity -Representative funds: SAIF – Tianjin VC Fund (formed in 2005; fund size: around RMB150 million); Infinity – Suzhou VC Fund (formed in 2004, fund size: around RMB75 million); Gobi – Tianjin HiTech (formed in 2007, fund size: RMB150 million)
7 Key PRC Regulations Governing Foreign Invested RMB Funds (Cont’d) Stage three (2007 – 2009): new doors opened by the Partnership Law -Key legislation: The PRC Partnership Law (the "2006 Partnership Law") -The 2006 Partnership Law made possible the establishment of a “limited partnership” in China and introduced the concepts of “GP” and “LP” -Increasing number of local legislations to attract international PE/VC firms to set up funds and fund management entities -Representative funds: Blackstone Zhonghua Development Investment Fund (estimated fund size: RMB5 billion); Guosheng-CLSA Industrial Investment Fund (estimated fund size: RMB10 billion) Stage four (2010 onwards): foreign invested partnerships – a new world on the horizon? -Key legislation: The Administrative Measures relating to the Establishment of Partnerships in China by Foreign Enterprises or Individuals (the "2010 Foreign Invested Partnership Measures")
8 Alternative Foreign Invested RMB Fund Models under Existing Legal Regime Four common models for foreign investors to tap RMB funds market -Establishment of FIVCIEs -Establishment of onshore partnerships -Cooperation with trust companies -Establishment of a plain-vanilla company to make investments
9 Introduction of the FIVCIE Model Key characteristics of the 2003 FIVCIE Regulations -2 to 50 investors, including at least one “Requisite Investor” (the equivalent of GP) -Stringent qualification requirements of the “Requisite Investor”: at least US$50 million already invested in the VC area; at least 3 VC professionals and each with at least 3 years’ VC experience, etc. -Can take the form of an incorporated entity or a non-legal person entity -Minimum committed contributions (from investors) of US$10 million for the non-legal person entity and US$5 million for the incorporated entity
10 Illustrative Chart of the FIVCIE Model SAIF Tianjin Growth Fund (the 1st non-legal person FIVCIE) (based on public information) Cisco SAIF Partners (requisite investor) SAIF Tianjin Growth Fund (FIVCIE) A B CD Portfolio Companies SAIF Tianjin Advisory JV Management Agreement Fee Commitment Offshore Onshore Tianjin Venture Capital x% Commitment Softbank y%
11 Key Facts of SAIF Tianjin Growth Fund   Place of formation: Tianjin Fund size: around RMB150 million Investment targets: high technology enterprises Current status: fund formed in January 2005 and already made several investments   Based on public information.
12 Downside of the FIVCIE Model Possible approval hurdles -Approvals from the Ministry of Commerce and Ministry of Science and Technology Investment restrictions -An FIVCIE’s investment is subject to foreign investment industry restrictions Stringent qualification requirements on the “Requisite Investor”
13 Introduction of the Domestic Partnership Model Legislation -National level: 2006 Partnership Law -Selective local legislations: Shanghai: The Tentative Measures for the Establishment of Foreign Invested Equity Investment Enterprises in the Pudong New District Beijing:Opinions for Promoting the Development of Equity Investment Funds Tianjin:Opinions on the Registration of Private Equity Investment Funds and Private Equity Investment Management Enterprises Chongqing:Opinions on Encouraging the Development of Equity Investment Enterprises
14 Representative Benefits Offered under the Local Legislations Reduced income tax and tax rebates -Tianjin: waiver of business tax for two years starting from establishment Financial subsidies -Tianjin: a one-off subsidy equal to 3% of the relevant entity’s registered capital (capped at RMB5 million) -Chongqing: for properties purchased by the relevant entity, a one-off subsidy of RMB1,000/square meter Other types of benefits -Beijing: government to share its database of IPO candidate companies -Tianjin: government to grant local residency to the staff of local registered PE funds
15 Illustrative Chart of the Domestic Partnership Model Blackstone Zhonghua Development Investment Fund (based on public information) Blackstone Group Blackstone Investment WFOE (GP) Shanghai Blackstone Partnership ABCD Portfolio Companies Blackstone Advisory WFOE Chinese LPs Management Agreement no commitment Fee 100% Offshore Onshore100% Payments
16 Key Facts of Blackstone Zhonghua Development Investment Fund   Place of formation: Pudong New Area, Shanghai Fund size: RMB5 billion Investment targets: enterprises located in Shanghai and the neighboring areas in the Yangtze River Delta Current status: fund management company established in October 2009 and reportedly fundraising completed in July 2010   Based on public information.
17 Downside of the Domestic Partnership Model Government and judicial authorities’ lack of experience in dealing with partnerships - Relatively new legislation: 2006 Partnership Law -Relevant agreements seldom tested in courts, so uncertainty over the validity and enforceability of certain arrangements Difficulties in making offshore investments Investment restriction -The fund potentially regarded as a foreign invested fund due to the GP’s foreign background -Accordingly the fund’s investment is subject to foreign investment industry restrictions and may trigger onshore approval requirements
18 A Variation of the Domestic Partnership Model: the Nominee GP Structure Foreign Investors Chinese GP RMB Fund ABCD Portfolio Companies Advisory WFOEChinese LPs Management Agreement no commitment Fee Commitment 100% Offshore OnshoreContractual arrangements Payments Chinese Individual(s) 100%
19 Recent Development on Structuring RMB Funds: the Parallel Structure Based on the Domestic Partnership Model Offshore Advisor Investment WFOE (GP) RMB Fund ABCD Portfolio Companies Advisory WFOE Chinese LPs Management Agreement no commitment Fee Commitment Offshore Onshorecontrol Offshore Fund GP Affiliate Offshore Fund Offshore structure Affiliate Offshore Fund LPs Co-investment
20 Recent Developments Key legislations -The 2010 Foreign Invested Partnership Measures -SAIC’s implementing rules Breakthroughs under the legislations -Foreign investors acting as GP and LP on the horizon -Possibility for a PRC individual to be a partner -No government approvals required
21 For more information, please contact Michael Chan Partner, Hong Kong Tel: +852 2230 3581 Email: firstname.lastname@example.org James Chen Partner, Taipei Tel: +886 2 2326 5155 Email: email@example.com Alan Xu Foreign legal consultant, Hong Kong Tel: +852 2230 3547 Email: firstname.lastname@example.org