CHINA Trends and Developments Contributed by: Richard Guo, Zhen Chen, Zhiyi Ren and Sherman Deng, Fangda Partners
cial institutions to hand over customer data; before summarised compliance information can be shared, onshore institutions must complete statutory reporting and observe the PRC data security and personal infor - mation protection regulations. An increasing number of global sponsors that rely on onshore distributors for QDLP subscriptions have been enhancing the dis - tributors’ obligations on the flow of data at the investor onboarding stage so that foreign AML expectations can be met without overstepping PRC constraints. Building the Patient-Capital System: Government, Insurance and Banks The most stable increments of fundraising today come from government balance sheets and insurance gen - eral accounts. Governmental guidance funds have proliferated across provinces and cities, with a more market-based approach, including lower return invest - ment requirements, longer investment terms and the establishment of loss tolerance mechanisms. Sector priorities – semiconductors, biopharma, AI – are con - sistent with national industrial policy. Cross-regional partnerships and entrusted management structures have become standard practice for concentrating capital with specialised GPs and avoiding fragmented, duplicative pools. Insurance capital operates on both blind pool fund and separately managed account (SMA) tracks. Although an SMA is not a distinct legal structure but takes the legal form of a partnership with a single LP under PRC law, its customised one-to-one design makes it easier to align strategy restrictions, fee arrangements, and information rights with the requirements of the single LP. Negotiations often focus on how to set hurdles and performance fees for cyclical assets, how to calibrate information-sharing to PRC data rules and LPs’ par - ticipation in fund operations without triggering regula - tory concerns. Bank-affiliated financial asset investment companies, meanwhile, have begun co-sponsoring private equity funds with other sponsors under an expanded pilot, adding a source of counter-cyclical, long-duration capital. While it may still be premature to conclude that bank-affiliated pooled vehicles will structurally ease fundraising pressures for private GPs, a resilient ecosystem of government, insurance, banking, and
private equity capital is gradually emerging, character - ised by greater tolerance for buyout strategies, recy - cling mechanisms, and continuation-heavy mandates. Global Sponsors in China: QFLP and RMB Platforms For global sponsors, the QFLP remains the most effective gateway to the onshore market. Leading cit - ies continue to expand eligible investment scopes and streamline procedures, materially improving execution for control and late-stage growth transactions. Many global sponsors now use hands-on QFLP experience and team localisation as a springboard to build up their RMB platforms that serve RMB investors and run strategies across buyouts, continuation vehicles and secondaries. In recent years, local regulators have promoted QFLP programmes while industrial and oth - er applicable regulators have streamlined regulation of both QFLP and RMB funds. For instance, regulators’ emphasis on substance means that shell entities can no longer rely on form over function; data-compliance duties, at the same time, require layered, limited infor - mation rights for overseas LPs consistent with China’s governance model. Under the complex and growing regulation, foreign sponsors are increasingly adopt - ing the path of piloting first under the QFLP, building operational muscle memory and later forming RMB sleeves while maintaining cross-border capability. Geopolitics and Cross-Border Compliance The final rule implementing US Executive Order 14105, effective 2 January 2025, has significant implications for US investors’ (US investment funds are directly impacted) and offshore funds’ investments in China. The rule targets outbound investments by US persons into entities in China, Hong Kong and Macau that are involved in semiconductors, quantum technologies, and certain AI applications, collectively referred to as “Targeted Sectors”. Investments by US LPs in non-US funds may be clas - sified as a “Covered Transaction” under the rule. If a fund invests in, or holds interests in, Targeted Sectors, as defined by the rule, a US LP’s investment in that fund will be considered a Covered Transaction. Such transactions are either prohibited if the fund focus - es on high-risk technologies or notifiable to the US
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