Foreign private equity (PE) and growth capital (GC) firms will soon be able to open fund management offices in Shanghai. While China is seen as a desired spot for private equity to be, don’t expect a big rush firms to fill vacant office space in the city.
"An important consideration for the PE firms thinking of renminbi funds is going to be whether additional liberalization will help them raise funds and source deals," said Basil Hwang a partner with Dechert, an international law firm with offices in Hong Kong and Beijing.
Blackstone, the large US private equity firm has reportedly expressed interest in setting up in the city, but smaller firms are more likely to "adopt a wait and see stance" said Sumeet Chander, China country manager for Evalueserve, a global researcher provider based in Shanghai.
The primary reason may concern the lower tax liability of operating a business out of Hong Kong.
"[Having] an asset management company in Hong Kong [allows] you to have lesser tax and when you talk about deal sourcing you can just have the people in Hong Kong fly up to Shanghai [to discuss deals]," said Tony Tsang, managing director of transaction advisory services for Ernst and Young in Shanghai.
However, Hwang said that many of Dechert’s clients are interested in the plan and the new rules released by Shanghai’s Pudong new area government have generated a lot of interest amongst clients.
The district government this month made it clear that attractive tax incentives are available in Pudong for foreign fund management companies. These include a 40% refund on taxes paid for senior management, and a 20% refund for other key personnel.
The business scope of these PE funds would also be expanded beyond what is available under the current system of representative offices or wholly-owned consulting enterprises.
Being located in China would potentially allow the PE funds to raise capital locally – and in renminbi – and allow cooperation with local firms, said Chander. "However, foreign PE firms should be well aware that this move will for sure be closely regulated and monitored by the Chinese government," he said.
The city will benefit as well. It will realize another step in its goal of becoming a global financial center.
"I think it will help the domestic growth capital and private equity by having more international experience involved in that sector," said Michael Hickman, a partner with Dechert. "Domestic firms will have exposure to other types of practices."
It would also attract the talent that Shanghai needs to bring to develop the local PE and growth capital industry.
"Allowing foreign fund managers to come in work in Shanghai is going to open the door for people from all over the world to do what they’re best at [in Shanghai], which is to manage capital," Hwang said.