CHINA Law and Practice Contributed by: Zhen Chen, Candy Tang, Flora Qian and Yan Zhao, Fangda Partners
ing stage. Additionally, the fund custodian is required to monitor the flow of funds between the private equity fund and the SPVs. SPVs are frequently used for various purposes. For instance: • An SPV is typically used as a leading applicant entity for the fund’s overseas direct investment (ODI) application in cross-border downstream investments. • An SPV is set up to serve as the borrower of acqui - sition loans. • An SPV is used to accommodate co-investment or other business collaboration strategies. 2.8 Local/Presence Requirements for Funds Generally, a private fund formed within China must be managed by a private fund manager formed within China and registered with AMAC. However, there is no requirement for the fund manager to be based in the same city or province where the private fund is formed except that in the case of QFLP/QDLP/QDIE funds, the local authority will in principle request the relevant fund manager to be established in the same city or province where the funds are formed. Regardless of their domicile, private funds and their managers are subject to a uniform industrial regula - tory regime – ie, the CSRC/AMAC regulation. Man - agement team members are typically employed by the fund manager and operate at the fund manager’s independent and stable business premises, while the funds are not required to maintain actual business premises or hire local employees of their own. 2.9 Rules Concerning Service Providers In 2017, AMAC released the Trial Measures on Private Fund Service Business, requiring private fund service providers engaging in fund distributions, fund units registration, valuation and accounting, fund custody, and information technology system services to com - plete service provider registration with AMAC. Fund managers can only engage service providers that are AMAC members and have completed such AMAC registration to provide the named services.
AMAC publishes a list of qualified private fund service providers on its website for ease of verification. 2.10 Anticipated Changes for Funds Affected by global economic and geopolitical devel - opments, some foreign sponsors have adopted a more cautious approach to investing in China. Vice versa, the fundraising for USD funds focusing on Chi - na investments is significantly impacted, with such funds increasingly giving way to RMB funds support - ed by sophisticated institutional investors and more experienced high net worth individuals (HNWIs). At the same time, fundraising now encounters greater hurdles due to more rigorous due diligence, enhanced regulatory requirements for risk management, and the longer decision-making processes of institutional investors. Whereas fundraising once typically spanned 6–12 months, RMB funds now generally require 18–24 months to complete their fundraising cycles. Further, due to an increasing number of PE funds com - ing to the end of their fund terms, there has been a boom in secondary transactions, GP-led fund restruc - turing and formation of secondary funds (“S funds”). Regulation on the private fund sector and private fund market is evolving as well. The CSRC has issued draft Administrative Measures on Supervision and Admin - istration of Private Investment Funds. Once finalised and released, it is expected to have further impacts on the sector, which are likely to include heightened criteria for QIs, enhanced look-through KYC/AML examination standards, stricter requirements on cus - tody of funds, and tailor-made requirements for spe - cial funds, such as separately managed accounts and single-asset funds, etc.
3. Fund Managers 3.1 Origin of Promoters/Sponsors of Alternative Funds
Given its relatively short history, the sponsors in the Chinese market initially primarily consisted of reputa - ble global sponsors recognising opportunities in Chi - na (eg, Blackstone, Carlyle, Goldman Sachs, and Mor - gan Stanley) and certain local sponsors experienced
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