2021.04.28 XIE, Qing (Natasha)、QIN. Tianyu、LUO, Danchen
Since Shanghai initiated the first Qualified Foreign Limited Partnership (QFLP) pilot program in 2011, the QFLP pilot program marked its 10th anniversary this year. In the past decade, the QFLP pilot program has evolved and improved significantly, with an increase in the number of piloted cities, a more mature management system, as well as an expanded investment scope. With these changes, the pilot program has become a predominant route for foreign institutions to access China equity market, both the primary and the primary semi-markets, opposite to secondary markets (i.e., listed markets), in addition to the commonly sought foreign direct investment (FDI) route. Up to now, a total of thirteen (13) cities have established the QFLP pilot program, including the major cities like Shanghai, Shenzhen, and Beijing.
We have compared the QFLP policies of these thirteen cities, reaching a conclusion that though similar, the QFLP policies of each city have distinct characteristics that provide diverse options for foreign institutions. Here below we summarize the key points of the QFLP policies (each individually as the “QFLP rule”) in nine major cities (i.e., Shanghai, Shenzhen, Beijing, Tianjin, Chongqing, Qingdao, Hainan, Zhuhai and Guangzhou) which most concern foreign institutional investors participating in the QFLP pilot qualification application process.
Taking Shanghai as an example, foreign institutions participating in the application process for QFLP pilot qualification must first set up a foreign-invested equity investment management enterprise (the “QFLP fund manager”) in China, and then they must set up a foreign-invested equity investment enterprise (the “QFLP fund”). Though the names of the “QFLP fund manager” and the “QFLP fund” vary according to different QFLP rules, the basic structures of QFLP pilot program are the same – i.e., the QFLP fund manager establishes the QFLP funds and/or conducts investment management for QFLP funds as entrusted. A QFLP fund manager may be formed as a company or a partnership enterprise, while a QFLP fund is usually formed as a partnership enterprise.
2.1 Foreign Investors
Aside from Beijing, Qingdao and Zhuhai, the other six cities do not have a requirement for license-holding or a minimum asset under management (AUM) on foreign shareholders of the QFLP fund manager. However, in practice, various locations still have certain soft requirements for the background and qualifications of foreign investors. For example,, Shanghai mainly welcomes foreign asset management institutions that are internationally renowned or leading in professional segments.
2.2 Registered Place, Registered Capital, Paid-in Capital and Senior Management Personnel
Registered Place: All nine cities require both the QFLP fund manager and the QFLP fund to be established in the city where they intend to apply for the QFLP qualification.
Registered Capital and Paid-in Capital: Some pilot cities set minimum thresholds for the registered capital and paid-in capital of the QFLP fund manager, for example, Shanghai, Chongqing and Zhuhai require the registered capital of a QFLP fund manager to be no less than USD 2 million, while Tianjin requires the paid-in capital to be no less than RMB 10 million (approximately USD 1.55 million).
Senior Management Personnel: The QFLP rules of Shanghai, Tianjin, Qingdao, Chongqing, Hainan and Zhuhai require a QFLP fund manager to have at least two senior management personnel, each having no less than two years experiences in equity investment or investment management as well as hold a post at senior management level for no less than two years; Beijing requires no less than two senior management personnel as well, each having at least three years of equity investment or investment management experience. Notably, Shenzhen and Guangzhou have no explicit requirements on the number and qualification of senior management personnel.
3.1 Management Model
There are three QFLP management models at present, namely:
(1) "A foreign-invested QFLP fund manager manages foreign-invested QFLP funds",
(2) "A domestic QFLP fund manager manages foreign-invested QFLP funds"
(3) “A foreign-invested QFLP fund manager manages domestic QFLP funds."
Up until now, Shanghai, Beijing, Shenzhen, Qingdao, Hainan, and Zhuhai permit the aforesaid three management models, while Tianjin, Guangzhou and Chongqing have not yet permitted the second model, i.e., "a domestic QFLP fund manager manages foreign-invested QFLP funds".
It is noteworthy that the Tianjin QFLP rule requires the QFLP fund manager to subscribe no more than 5% of the fund units of each QFLP fund, while the QFLP fund manager shall be the general partner of the QFLP fund in accordance with the Zhuhai QFLP rule. That being said, the general partner and the fund manager of a QFLP fund shall be the same legal entity in both cities.
All nine cities allow QFLP funds to be formed purely through offshore fundraising, or through a combination of onshore and offshore fundraising.
Except for Shenzhen and Guangzhou, the other seven cities have set minimum thresholds for the fundraising amount, the minimum investment amount of a single limited partner, as well as a requirement on the qualification for the foreign investors of the QFLP fund. Among them, Zhuhai offers a lower minimum threshold, particularly for the capital contributions subscribed by Hong Kong/Macao investors.
Regarding the qualification requirements for foreign investors of QFLP funds, most piloted cities require foreign investors to be long-term institutional investors, such as sovereign funds, pension funds, endowment funds and charitable funds, and they further stipulate the requirements on the AUM, governance structure and investment experience of foreign investors.
Shenzhen, Hainan, Qingdao, Guangzhou, and Zhuhai explicitly stipulate that the QFLP fund manager shall be registered as a private fund manager (PFM) with the Asset Management Association of China (AMAC) before launching the first QFLP fund, while no such requirement can be found in the QFLP rules of Shanghai, Chongqing and Tianjin. In practice, a QFLP fund manager incorporated in Shanghai is not required to be registered as a PFM with the AMAC if it does not raise funds onshore. Notably, if a QFLP fund manager hopes to raise a RMB fund in China, it is mandatory to register itself with the AMAC as a PFM in accordance with the relevant regulations governing private funds before conducting fundraising activities, and file the RMB fund with the AMAC whether or not there are such explicit requirements under the QFLP rules of each piloted city. We learnt that Beijing applies the same rule as Shanghai in practice.
The permissible investment scope of QFLP funds varies among the nine cities, out of which Shanghai, Beijing, Shenzhen, and Hainan offer a relatively broad investment scope.
1) All QFLP funds established in the nine cities are allowed to invest in equities of unlisted company;
2) Both Shanghai and Beijing allow QFLP funds to invest in non-performing assets, mezzanine debts, preference shares and debt-to-equity swaps, whilst Shanghai has approved QFLP funds investing in non-performing assets and mezzanine debts;
3) Shanghai, Beijing, Shenzhen, and Qingdao allow QFLP funds to invest in non-publicly traded equities (including acquiring listed shares through block trade, transferring by agreements and private placements) and convertible bonds of listed companies;
4) Shenzhen explicitly allows QFLP funds to invest in onshore private equity and venture capital funds; Qingdao allows QFLP funds to invest in industrial funds; Shanghai currently only allows QFLP funds to invest in other onshore funds on a case-by-case basis; and Zhuhai explicitly prohibits QFLP funds from investing through Fund of Funds;
5) The investment scope of QFLP funds under the Hainan QFLP rule appears to be the most flexible of all nine cities. Hainan adopts a “negative list” regime for the management of QFLP funds’ investment scope, that is, the QFLP funds may invest in any industry that is not included in the negative list. However, it remains to be seen how such a rule will be implemented in practice.
6) Currently, the investment scopes of QFLP funds in Tianjin, Chongqing, Zhuhai, and Guangzhou are limited to equities of unlisted companies. Tianjin and Chongqing further specify the industrial sectors which QFLP funds are allowed to invest. Specifically, Tianjin encourages QFLP funds to invest in strategic emerging industries within Tianjin, while Chongqing encourages investment in industries of high-end manufacturing, high-tech, modern services, energy conservation and consumption reduction, new energy, environmental protection, and industries that coordinate urban and rural development and promote industrial restructuring within Chongqing.
In a comparison of the QFLP rules in these nine cities, we observed similarities in basic structure, application procedures, qualification requirements for foreign investors and senior management personnel. However, there are significant differences among these cities in terms of the management model, investment scope, policy orientation and implementation practice, which may result in different foreign investors being attracted to different cities. Our clients are advised to closely follow the development of practices, and choose suitable location for pilot application to better seize the opportunities investing in China.