QFLP Enterprises and QFLP Funds
In order to allow foreign capital to enter China investment market through QFLP channels， it is necessary to establish an enterprise that invests in equity assets or is entrusted with the management of equity assets in China, whose essence is a Private equity investment fund company. Then, the QFLP management enterprise can set up the QFLP fund.
QFLP Basic Framework
According to the relationship between the investor and the manager of foreign private equity funds, the structure of foreign private equity funds has gradually expanded from the original “foreign capital manages foreign capital” mode to “foreign capital manages foreign capital”, “foreign capital manages domestic capital” and “domestic capital manages foreign capital” three modes. So far， In addition to Qingdao clearly requiring that the manager must be domestic capital， other pilot areas almost apply to these three models.
The development of QFLP
Since the launch of the “Qualified Foreign Limited Partnership/Limited Partnership Enterprise” (QFLP) system first in 2010, the QFLP pilot system has been playing an essential role in attracting the inflow of foreign capital and the opening up of the PRC financial markets.
Unlike the traditional foreign direct investment model, foreign asset management institutions can establish foreign-invested equity investment management enterprises onshore (usually referred to as “Pilot Management Enterprises”, together with the pilot fund usually referred to as “Pilot Enterprises”) through the QFLP pilot system. Pilot Management Enterprises can establish equity investment funds or other closed-end private funds in the form of the private placement. Such funds can accept domestic and overseas investors. Moreover, after obtaining the pilot qualification and foreign exchange settlement quota, the funds can flexibly convert the foreign investors’ foreign exchange capital into Renminbi to participate in private equity investment in China. Not to mention that domestic private equity fund managers can also take advantage of the flexibility of the QFLP pilot system to directly accept subscriptions from foreign investors who invest through foreign currencies into their RMB funds.
At present, there are nearly 20 pilot areas, and the preliminary estimate of the pilot enterprises is about 600, In the future, the pilot area will be extended to the whole country. There are 82 QFLP pilot enterprises in Shanghai, with an actual investment scale of more than 40 billion yuan. Shenzhen has 155 QFLP foreign-invested equity investment management enterprises, the total registered capital (subscribed capital amount) of the pilot enterprises is 5.45 billion US dollars, among which 37 foreign-invested equity investment enterprises (funds) have obtained the pilot qualification.The QFLP fund has mainly invested in biomedicine, new-generation information technology, environmental protection and other industries.In the regulatory aspect, it will gradually parallel with domestic private equity funds.
Expansion of investment scope
Shenzhen, Shanghai, Hainan and Tianjin have all already begun to gradually relax restrictions on the investment scope of pilot funds. The Beijing QFLP pilot policy expressly states that, under its regime, investments made by the pilot funds would be subject to the foreign investment negative list, but apart from that, the pilot funds can, on the condition that existing industry practices and current regulatory practices are being observed, invest in the following types of investment targets:
Transactions with both primary and secondary features.
This type of transactions includes non-public issues and trading of ordinary shares of listed companies (including private issues of new shares, block trading, negotiated transfers, etc.), preference shares that can be converted into ordinary shares, debt-to-equity swaps and convertible bonds. Here, the pilot funds can participate in share allotments as original shareholders of the listed companies.
Mezzanine investment, private placement bonds, non-performing assets.
Both domestic and foreign private equity fund managers will seek to expand their asset management categories and establish a more extensive product line once their asset size reaches a certain level. Mezzanines, private placement bonds and non-performing assets, as important asset classes, have always been the focus of major asset management institutions, as well as investment hotspots in the domestic market. From a regulatory point of view, since 2020, various policies have been encouraging foreign financial institutions to enter into the domestic market, especially in areas such as the disposal of non-performing assets. By utilising the Beijing pilot system, foreign asset management institutions can implement diversified investment strategies under a more relaxed policy environment.
Domestic private investment funds
Both from a capital perspective and an asset perspective, it would be difficult for foreign asset management institutions to ignore the growth potential of the Chinese market. The Beijing regime allows pilot funds to invest into private investment funds, and provides channels for foreign asset management institutions to substantially participate in China’s domestic asset allocation, FOF investment and PE secondary market transactions.
Updates on the QFLP program in China
On 28 April 2021, ten years since the introduction of the Beijing QFLP pilot system, the Beijing Financial Supervision and Administration Bureau (in Chinese北京市金融监督管理局) and the Beijing Market Supervision Administration Bureau (in Chinese北京市市场监督管理局) officially issued the “Interim Measures on the Commencement of the Pilot Program of Qualified Foreign Limited Partnership in the Municipality” (in Chinese《关于本市开展合格境外有限合伙人试点的暂行办法》). Throughout the last decade, a series of remarkable changes in China’s foreign direct investment and capital account foreign exchange regulatory system, as well as the continuous improvement of the private equity fund industry regulations, have been observed.