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FastTrack to private capital investment in China

 

With over a year’s worth of disruptions from the global pandemic, the rollout of vaccination programmes is giving us a glimpse of light and returning to normality. Asian markets are proving to be the fastest to recover from Covid-19, and China in particular, has seen its GDP rose by 2.3% in 2020. China is already back on a strong growth trajectory while the world struggles to rebound in these turbulent times.

The private capital market in China is poised for growth as a result of record-high dry powder, active deal flow and emerging new economy activities, coupled with sound underlying fundamentals. In addition, China is increasingly welcoming foreign capital by modernising its regulatory and investment landscape. 2021 is an active year for private capital investment in China, presenting enormous opportunities for fund managers to grow, invest and thrive.

Are you prepared to unleash the potential?

FastTrack: to private capital investment in China

While most industries across the globe are still reacting to the continued challenges presented by the global pandemic, one sector is already mobilising to ensure it can play its part to support the recovery cycle.

Private capital has an important role to play in the recovery of Covid-19, and nowhere is this role more important than in China, which is the first country to re-emerge after prolonged economic hibernation and its first downturn in decades. China’s asset management industry witnessed double-digit growth in 2020 in the face of a volatile market and major disruptions from the Covid-19 pandemic. Total assets under management (AUM) reached 58.99 trillion yuan (US$9.2 trillion), up 12% from 52.23 trillion yuan in 20191.

Some portfolio companies have been impacted, valuations distorted, and some liquidity and redemption issues encountered. But, despite this, there is dry powder ready to deploy and opportunities to seize. Some PE firms have already started to make their move.

FastTrack: to private capital investment in China has some main elements.

Tailored for each client’s specific requirements, we offer customised solutions across virtually every need a GP, LP, fund or portfolio company may have.

1/ We can help form your fund & investment vehicles

2/ We can take care of your fund’s administration

3/ We can help keep you compliant with rules and regulations

4/ We can provide end-to-end corporate solutions beyond fund itself

  • Entity formation: We assist in the set-up of your fund and investment structure. Whether it is an offshore and/or onshore structure, we are here to help.
  • Fund administration: Using our global platform and other tech-enabled solutions, we can take care of investor onboarding, capital calls/distributions, fund accounting, NAV and investor reporting, waterfall calculations, financial statements preparation, regulatory & compliance reporting (FATCA, CRS) and other statutory reporting requirements depending on your fund domicile.
  • Corporate services: We can provide legal administration of your fund entities, investment holding and portfolio entities – in China and/or other jurisdictions. We can also help to reduce risk, enhance efficiency and comply with rules, regulations and filing requirements. Services such as legal entity management, bookkeeping and accounting, tax compliance filings, HR & payroll, custody of company license and stamps, office space, board meetings, liquidations and regulatory reporting are available and manageable via our proprietary IRIS technology platform.

1 https://www.theasset.com/article/43739/thriving-in-volatility-chinese-asset-servicing-firms-see-bumper-year

We can manage your entities set-up in over 30 jurisdictions whilst helping you stay compliant and on the right side of rules, regulations and filing requirements.

What activity are we seeing?

Throughout the Covid-19 crisis, we have seen volumes pick up across Asia, particularly in China as private capital funds set up and making new investment. For example:

  • Provided fund administration services for a global asset manager to launch a Hong Kong Limited Partnership Fund.
  • As fund administrator, we helped successfully launch a new smart cities/real estate fund in Wuhan for an Asia-based investment management firm.
  • Supported the set-up of an onshore Qualified Foreign Limited Partnership (QFLP) for a global asset manager investing into distressed debt and non-performing loan (NPL) opportunities in China.
  • Set up new investment structures for a Greater Bay Area focused real estate fund.
  • Incorporated substantial new structures for a series of real estate investments by a top US private equity firm for their asset portfolio in China.

Case studies

As China’s financial sector has continued to attract to foreign capital, we have seen an increase in investment activity. Post Covid-19, we are now seeing further acceleration across a range of asset classes as private equity investors seek out attractive valuations and distressed opportunities. The following case studies provide examples of how Intertrust has moved quickly to support our clients in the current environment.

Case one – Global distressed debt fund

With the opening up of China’s non-performing loan segment to foreign investors, we were brought in to assist the set-up and administration of a Qualified Foreign Limited Partnership (QFLP) Fund.

The solution

  • Support the establishment of onshore QFLP
  • Fund accounting & reporting
  • Onshore fund vehicle maintenance services, including book-keeping, tax filing, treasury, custodian chops/certificates and annual compliance services
  • Set up and maintenance of joint venture vehicle and various legal entities across China, Hong Kong and the UK

Our advantages

  • Cross jurisdictional teams supporting the client across Europe, the UK, China and Hong Kong
  • Local knowledge to help guide our client through a complex local regulatory environment in China
  • Global service delivery standards to ensure our client’s investors receive the same level of comfort for their onshore investments in China as they receive in other jurisdictions

Case two – US private equity buyout firm

We supported our client with their investment into a Chinese consumer goods company, providing a wide range of services solution across the entire deal lifecycle, from handling the formalities at deal closing to enhancing the operational efficiency of the acquired entity.

The solution

Deal structuring & closing

At the outset of the deal, the Intertrust Group team was brought in to set up a Hong Kong holding company, consolidate the existing entities of the target whilst working closely with their legal advisor to support the deal closing.

Post deal integration

  • Set-up of a new Hong Kong operating company to host four retail outlets and their employees
  • Performed health check on the past statutory records of the acquired entity and rectify them where applicable
  • Assisted the transition of the employees from the acquired entity to the combined business

Ongoing operational efficiency

We now manage the back-office administrative activities of the new venture, and offer comprehensive financial management and control solution including:

  • Accounting and reporting
  • Cash flow forecasting and treasury
  • HR and payroll management

Hong Kong Limited Partnership Fund: a rising fund domicile jurisdiction

In August 2020, the Hong Kong Limited Partnership Fund (LPF) regime was launched to provide an alternative investment vehicle for private fund managers who are raising funds or investing in Asia-Pacific to establish an onshore fund in Hong Kong.

The new regime is a significant milestone in boosting Hong Kong as a leading international asset and wealth management centre. The operation of the Hong Kong LPF is governed by the limited partnership agreement, like other jurisdictions such as Cayman Islands and Delaware. Since its launch, more than 260 LPFs have been set up in Hong Kong.

Introducing regulatory updates to stay competitive

To enhance Hong Kong’s position as a fund domicile of choice, the Government continues to roll out ongoing developments and measures to maintain Hong Kong LPF regime and keep it attractive to foreign fund managers to operate in Hong Kong.

Carried interest tax concessions

Much awaited by the Hong Kong private equity (PE) funds industry, the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 (the Amendment Ordinance) was enacted as law on 7 May 2021. The Amendment Ordinance introduces a tax concession for eligible carried interest that arises from qualified funds. Where the underlying qualified transactions are received or accrued on or after 1 April 2020, the amendment provides for a 0% tax rate on Profits Tax and full exclusion of employment income from Salaries Tax.

Fulfilment of certain conditions are required, such as profit-related return, qualified transaction, qualified payer, qualified recipient, provision of substantial investment management services activities, as well as the need for the fund to be certified by the Hong Kong Monetary Authority (HKMA) and the Inland Revenue Department (IRD). To find out more about the Ordinance, read here.

Re-domiciliation mechanism for foreign funds

A task force led by the Financial Services and the Treasury Bureau, comprising members from the HKMA, the Securities and Future Commission (SFC) and the IRD, has published proposals on 25 January 2021 to put forward a re-domiciliation mechanism, providing a flexible and effective way to transform overseas limited partnerships into a Hong Kong LPF2. It is proposed that a PE fund set up under the laws of a jurisdiction outside Hong Kong is eligible to be registered as LPF in Hong Kong if it meets the same set of eligibility requirements for a new fund to be registered LPF. Upon re-domiciliation, the fund would have the same rights and obligations as any other newly established LPFs in Hong Kong. To find out more about the proposed bill, read here.

2 The proposed re-domiciliation regime is also applicable to the Hong Kong Open-ended Fund Companies (OFC).

China remains an attractive destination for private capital investment

The long-term fundamentals of China’s business environment remain sound. China’s sheer size of population, its 400 million and growing middle class and the central government’s policy to prioritise domestic consumption (a stance likely to continue) sets a solid foundation for quality assets.

In addition, a number of recent reforms signal the commitment of China to welcome foreign investment:

  • China’s Foreign Investment Law (FIL): Effective from 1 January 2020, FIL introduced simplified procedures (such as streamlined entity establishment) and enables foreign investors to enhance their existing joint venture arrangements and better safeguard their intellectual property rights, resulting in a fairer market environment between domestic and foreign players.
  • Non-performing Loans (NPLs): China has expanded the capacity of the local asset management sector to purchase and manage NPLs, while also opening the market to foreign investors via a range of reforms. As part of the Phase One China US Trade Deal, China has agreed to allow U.S. firms to apply for asset management company licenses and acquire non-performing loans directly from Chinese banks.
  • Greater Bay Area (GBA) opportunities: The GBA is China’s plan to integrate Hong Kong, Macau and nine cities in the Pearl River Delta (PRD), including Shenzhen and Guangzhou, into a leading economic and innovation hub for business growth. Each city is rolling out a range of sector-specific initiatives to attract investment.
  • Hainan Free Trade Port (FTP): In addition to GBA initiative, the central government has aimed to develop Hainan FTP as an attractive port with innovative tax incentives such as a reduced corporate income tax (CIT) of 15% compared with standard of 25%; CIT exemption for “new” foreign-sourced income received by Hainan FTP enterprises in the tourism, modern services and high-tech industries, as well as reduced IIT for income of employees with high-end and urgently-needed skills working in Hainan FTP.

What makes Intertrust Group different?

As the market readjusts, capital will need to be deployed quickly and legal entity structures set up swiftly. Furthermore, in a dynamic market, funds will need capable partners to provide additional comfort to their investors.

Incorporated in Hong Kong in 1976, today we have more than 220 employees across Hong Kong, Shanghai, Beijing, Guangzhou and Shenzhen.

4,000+ experts across our global network, with a presence in 18 fund services hubs around the world

Over US$470bn in assets serviced globally

Serving 40 of the top 50 Private Equity International 300

Offering unrivalled expertise across all private capital asset classes including private debt, private equity, real estate, infrastructure, venture capital and hedge funds

The latest fund platform technology enabling a high degree of control and visibility 24/7, 7 days a week

Wide multi-language capabilities

Deep offshore USD funds and onshore RMB fund experience

Seamless teamwork across offices and service lines; end-to-end corporate solutions to fund managers, investors and portfolio companies to support in HR admin, accounting and regulatory compliance.

Intertrust Group offices in Greater China

Beijing

Guangzhou

Hong Kong

Shanghai

Shenzhen

How can you seize the opportunities and minimise the risks?

To find out more about how Intertrust Group can help FastTrack your private capital investments in China, talk to our experts today.

Talk to our experts today

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