The Legal Environment for Foreign Private Equity Firms in China

By Zhang, Lawrence Zhan | Fordham Journal of Corporate & Financial Law, October 1, 2011 | Go to article overview

The Legal Environment for Foreign Private Equity Firms in China


Zhang, Lawrence Zhan, Fordham Journal of Corporate & Financial Law


ABSTRACT

From a little-known, foreign concept to a critical component of the country's increasingly multi-layered capital markets, private equity in China has undergone tremendous development in the past decade. This Note first reviews the representative deals of major U.S. private equity firms (Bain Capital, Blackstone, Carlyle, KKR, TPG, Warburg Pincus, and the private equity arms of Goldman Sachs and Morgan Stanley) in China, and profiles leading Chinese private equity firms and their relationship with the U.S. firms. Then, the Note analyzes the evolving web of laws that regulates China's private equity industry, with special attention to the rise of RMB funds, and recent legal developments such as the Foreign-Invested Partnership ("FIP") regulation and the Qualified Foreign Limited Partners ("QFLP") program that many believe will lead to a level playing field for foreign and domestic firms. The thesis of this study is two-fold. First, the development of a legal framework for private equity in China is closely tied to the country's economic fundamentals. To date, private equity boomed in China largely in response to the unmet financial needs of small and medium-sized private companies and a financial system overly reliant on stateowned banks; going forward, the prosperity of foreign private equity firms in China will hinge on the country's gradual relaxation of its foreign exchange control and its plans for the renminbi to become a global currency. Second, private equity offers a unique lens for understanding understanding China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

understanding China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

understanding China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

understanding China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

understanding China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

understanding China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

China's legal system. In particular, this study examines the advantages and potential pitfalls of China's administrative rulemaking process, and the important yet controversial role of the government in a historic economic transformation.

Introduction

2010 was a banner year for China's private equity industry. A mere decade ago, private equity was little known in China, and fund-raising was trivial. The industry saw meteoric growth through the decade, first led by American and other foreign private equity firms, with domestic firms entering the scene in late 2006 and rapidly catching up. From 2003 to 2010, the compound annual growth of China's private equity industry was 40%.' 2010 saw eighty-two new China-focused private equity funds that raised a total of $27.6 billion, and 363 new investments in the total amount of $10.3 billion.2 In a series of new regulations and decisions, Chinese government at the national, provincial and municipal levels sent strong signals encouraging the country's private equity industry. …

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