CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
such as recapitalisation through dividend distribution, are usually funded by interna - tional lenders or certain offshore branches of PRC banks. • Some PRC banks are wary of providing loans for dividend recapitalisations due to ethical concerns. They perceive that such transac- tions primarily benefit PE sponsors by ena- bling early returns, potentially at a time when the portfolio companies are not yet ready for a significant IPO or trade sale. This could increase the banks’ risk exposure, as the bor- rowers’ ability to repay may be compromised by the additional recapitalisation loans. Another common challenge for PE sponsors in this market is the maximum term for acquisi- tion loans in China, which cannot exceed seven years. Sponsors are often unable to secure an exit through an IPO or trade sale by the time the loan matures, so they must orchestrate a new acquisition transaction (or set up a continuity fund) to finance a new deal on the same target, using the new loan proceeds to retire the debts from existing lenders. This new fund structure allows new investors, seeking fixed returns similar to those of mezzanine credit investors, to join (by contributing new cash) existing LPs, which will roll over their shares into the new fund. Despite significant valuation markdowns demanded by senior lenders and mezzanine investors, this strategy helps to maintain the overall loan-to-value (LTV) ratio based on current market valuations, thereby not materially altering the internal rate of return for original LPs. Faced with challenges in raising funds from US or European LPs for new transactions, Asian- based general partners (GPs) are now turning to RMB LPs and other Asian sovereign wealth funds. By establishing funds onshore in China, these sponsors can access lower-cost RMB
lending sources – the RMB lending base rate is lower than that in Western markets for the first time in 30 years, in a trend expected to con- tinue. This arrangement enhances lenders’ risk appetite by aligning them closer to the target assets and the cash flows they generate, while also allowing sponsors to benefit from onshore interest costs as a tax shield, which is not avail- able when acquisition loans are made to an off- shore holding company. The breakthroughs in large AI models achieved by DeepSeek in early 2025 have led to a re- evaluation of Chinese hi-tech company stocks in the Hong Kong and US markets, driving increased activity in mergers and acquisitions (M&A) among hi-tech companies, data centres and AI technology firms. Since 2024, the Chinese government has intro- duced several policies aimed at encouraging and supporting efficient M&A in the technol- ogy sector. For instance, the China Securities Regulatory Commission implemented a series of supportive measures in 2024, such as the “Six - teen Measures for Capital Markets to Support the High-Quality Development of Technology Enterprises” and the “Eight Measures on Deep - ening the Reform of the Science and Technol - ogy Innovation Board (STAR Market), Serving Technological Innovation and the Development of New Productive Forces” . These policies explicitly propose initiatives to promote efficient M&A activities for tech companies, diversify pay- ment instruments and support the acquisition of unprofitable “hard-tech” enterprises. In addition, the National Financial Regulatory Administration launched a pilot policy on acqui- sition loans related to tech company M&A, under which the maximum loan-to-cost ratio for M&A deals involving tech companies was raised from
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