Connecting QFLP with Real Estate PE Funds
Eric (Ye) Zou
On February 20, 2023, China launched a pilot program for real estate private equity funds (“real restate PE funds”), with a press release by the China Securities Regulatory Commission ("CSRC") and a filing guidance issued by the Asset Management Association of China (“AMAC”).
The investment scope of real estate PE funds includes specific residential housing, commercial housing and infrastructure projects. The pilot work follows the principle of pilot first and steady progress. PE fund managers who meet certain conditions can form real estate PE funds in accordance with the pilot requirements by CSRC and AMAC.
Given the material differences between real estate PE funds and other traditional PE funds in terms of investment scope, investment methods, revenue characteristics, etc., CSRC has instructed AMAC to create a new category of real estate PE funds under the framework of PE funds and adopt differentiated regulatory policies.
QFLP (i.e., Qualified Foreign Limited Partnership) is a pilot scheme that serves as a channel for foreign investors to invest in China's private equity market. Through QFLP pilot scheme, foreign investors can participate in the establishment of foreign-invested QFLP fund managers or foreign-invested QFLP funds. With QFLP license and quota (if any), the QFLP funds can flexibly convert the foreign investors' FX capital into RMB to participate in private equity investment in China.
This paper will have a brief introduction on how to connect QFLP with the newly born real estate PE funds in China.
1. Foreign investors allowed to invest to real estate PE funds through QFLP?
According to the press release by CSRC, foreign investors are encouraged to invest to real estate PE funds through QFLP.
It is a kind of indirect investment, with foreign investors investing to QFLP funds (FOF) and QFLP funds then investing to real estate PE funds.
2. QFLP funds allowed to be filed with AMAC as pilot real estate PE funds?
Instead of investing to real estate PE funds, is a QFLP fund allowed to be filed with AMAC as a pilot real estate PE fund, if meeting all eligibility requirements on real estate PE fund manager and real estate PE fund? CSRC and AMAC kept silent in the press release and filing guidance. It remains to be seen.
3. How to understand the look-through exemption applicable to QFLP?
(1) QFLP funds as investors of real estate PE funds
As a general principle, if an investor of a private fund is in the form of partnership or contractual fund, it shall be looked through to ensure that the ultimate end investors are qualified investors as well. According to the filing guidance by AMAC, QFLP funds investing to real estate PE funds are exempted from such look-through.
Tips:
Please do not confuse look-through from the perspectives of (i) qualified investors, (ii) AML and (iii) others.
(2) Foreign investors as investors of QFLP funds
It is not relevant to the press release by CSRC or the filing guidance by AMAC. Where foreign investors investing to QFLP funds, the originally existing rules on look-through (or not) will apply.
4. Will QFLP funds investing to real estate PE funds be subject to forex regulation?
The major governmental authorities on the nation level is the State Administration of Foreign Exchange (“SAFE”).
On local level, it is the local financial regulation and administration authorities (usually called as local financial offices) in most pilot areas, provided however that the support by local SAFE offices is key to the success of QFLP business. For example, remittance of funds and settlement and purchase of forex are regulated by SAFE.
Therefore, after CSRC encourages foreign investors investing to real estate PE funds through QFLP, still we need to closely watch the attitude of various pilot areas to see whether QFLP funds will be allowed to invest to real estate PE funds in those particular areas.
Practice is more complicated than laws and regulations in the area of QFLP business.
5. A brief introduction on real estate investment polies of various QFLP pilot regions?
As of now, there have been nearly 60 QFLP pilot regions. Most of them forbid QFLP funds from investing to real estate directly or indirectly, and just a few pilot areas allow investment to specific real estate (e.g., industrial parks and warehousing logistics). Residential housing is forbidden from investment by all pilot areas.
In those areas permitting investment to real estate, usually it relies on negotiation with local competent authorities on a case by case basis.
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Please contact us if you have any query.
Eric (Ye) Zou
Partner, Merits & Tree Law Offices
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Phone: (86 21) 5253 3523
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Email: eric.zou@yuanfo.net
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