Asia Private Equity

Here’s an excerpt from the July 6 edition of the Asia Private Equity newsletter. You may want to re-read Saru’s earlier posts on Chinese currency as background.
RMB Notes Part 1
RMB Notes Part 2

These days, however, there is really no place in America that hums with the kind of 24-hour activity that Beijing has. But this week in Beijing, an official of the State Administration for Foreign Exchange (SAFE) showed up at one of China ‘s principal private equity events and delivered enough bad news to make every Beijing Duck eating capitalist dyspeptic. SAFE, the government agency that has brought private equity in China to its knees in six short months by issuing two controversial circulars in January and April, is, according to the official, pretty pleased with itself and the progress it’s making in developing regulations to prevent rich Chinese entrepreneurs from secreting away hundreds of millions from their IPOs in the U.S., in banks in the Cayman Islands or other places.

The problem with the understandable desire of Chinese authorities to tax its citizens is that in trying to accomplish that goal, it has effectively brought down the curtain on the clever legal structures, WOFEs, developed in 1999, which private equity firms have used for the last six years to get their money back out of China investments. And according to SAFE’s Li-Ping Lu, there is nothing on the horizon, other than a bunch of cranky Chinese and American VCs, that is likely to change the current situation.

When Lu shared those and other less positive views, the PE professionals in Beijing this past week turned as surly as a bunch of striking teamsters. WOFEs are, it seems, pretty much dead in the water. And until somebody in the Chinese government does or says something different, private equity firms are having to retreat into joint ventures (sometimes referred to as Chinese PE roach motels–investors check in, but they don’t check out) or giving their portfolio companies bridge loans until or even more troublingly, working with Chinese partners on the basis of “gentleman’s agreements.” When is the last time you saw a VC fork over a million for a handshake?

To paraphrase Bill Murray in the movie Groundhog Day, it’s going to be a long, hot summer. And it’s never going to end.

— Editor Jerry Borrell (

One thought on “Asia Private Equity”

  1. This is from a friend of mine who is a lawyer in Shanghai.

    “And as usual the media gets it a little right, a little wrong. Foreign
    investors can still use WFOEs (wholly foreign owned entities), a Chinese
    investment vehicle designed for foreigners, to make investments in
    China. SAFE just made clear that Chinese persons may not invest back
    into China through WFOEs. SAFE did this because WFOEs receive certain
    tax benefits, and Chinese persons were inappropriately taking advantage
    of them. Most of the Chinese persons who made use of this structure
    were coinvesting with foreign investors, hence the need to now use
    onshore JVs, another type of entity Chinese investment vehicle for
    foreigners. The problem with JVs is that their constitutive documents
    are governed by Chinese law, and it is very difficult for foreign
    investors to bring an action against Chinese persons in China.
    Investors used to have a WFOE wholly owned by an offshore SPV, and
    document their relationship at the offshore level choosing Hong Kong law
    and courts/arbitration.”

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