Preface

China's private equity fund industry has developed rapidly. According to the statistical data on the official website of the Asset Management Association of China (hereinafter referred to as "AMAC"), as of July 2022, there were 24,304 surviving private equity fund managers in China's private equity fund industry, with 135,836 surviving private equity fund products, and the total asset management scale of private equity funds reached RMB 20.39 trillion. State-owned private equity funds involve numerous regulatory authorities and complex regulatory provisions, and the legal issues encountered in practice need to be further clarified. Therefore, it is necessary to study and judge the compliance issues in the operation of state-owned private equity funds to achieve compliance objectives.

I. Compliance System Applicable to State-Owned Private Equity Fund Managers

The compliance system of state-owned private equity fund managers can be disassembled from two dimensions: one is "state-owned", i.e., the state-owned asset regulatory system; the other is "private equity fund manager", i.e., the private equity fund regulatory system.

(I) State-Owned Asset Regulatory System

The legal norms involved in the state-owned asset regulatory system mainly include:

• Enterprise State-Owned Assets Law of the People's Republic of China
• Measures for the Supervision and Administration of Enterprise State-Owned Asset Transactions (Decree No. 32 of the State-owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance, hereinafter referred to as "Decree No. 32")
• Notice on Matters Relating to the Transaction and Circulation of Enterprise State-Owned Assets (Guo Zi Fa Chan Quan Gui [2022] No. 39, hereinafter referred to as "Document No. 39")
• Interim Measures for the Administration of Government Investment Funds (Cai Yu [2015] No. 210, hereinafter referred to as "Document No. 210")
• Interim Measures for the Administration of Industrial Investment Funds Funded by the Government (Fa Gai Cai Jin Gui [2016] No. 2800, hereinafter referred to as "Document No. 2800")

The focus of the above regulations is on the preservation and appreciation of state-owned assets, mainly focusing on the openness of foreign investment decisions, daily operation and control of state-owned enterprises, and exit transactions; for funds funded by the government, since they invest with fiscal funds, the compliance focus also includes whether the fund's investment direction has a driving capacity for the regional economy or a specific industry, so there are specific requirements for the industries of investment.

(II) Private Equity Fund Regulatory System

"Private equity funds" correspond to the private equity fund regulatory system, the main basis of which includes:

• Company Law of the People's Republic of China
• Partnership Enterprise Law of the People's Republic of China
• Securities Investment Fund Law of the People's Republic of China
• Interim Measures for the Supervision and Administration of Private Investment Funds
• Guidelines for the Registration of Private Fund Managers
• Several Provisions on Strengthening the Supervision of Private Investment Funds, etc.

Its focus is on publicizing the industrial and commercial information of market entities, regulating the internal governance structure and investment-raising behaviors of fund managers, so that managers can perform their duties faithfully, fulfill their obligations of honesty, credit, due diligence and diligence, thereby protecting the rights and interests of investors.

II. Special Compliance Requirements for State-Owned Private Equity Fund Managers

(I) Relevant Requirements for the Establishment of State-Owned Private Equity Fund Managers

1. Conduct Due Diligence, Feasibility Analysis, and Formulate Risk Response Plans

At the central level, Article 15 of the Measures for the Supervision and Administration of Central Investment Enterprises stipulates requirements for the establishment of fund managers by state-invested enterprises in which the State-owned Assets Supervision and Administration Commission of the State Council performs the duties of capital contributor, i.e., "For new investment projects, in-depth feasibility research and demonstration shall be conducted in terms of technology, market, finance, law, etc., among which equity investment projects shall carry out necessary due diligence, and perform asset evaluation or valuation procedures as required".

Some local governments also require local state-owned private equity fund manager companies to clarify the processes and requirements for each link such as project development and screening, due diligence, project valuation, project approval, investment decision-making, project implementation, and post-investment management.

In accordance with the above provisions, state-owned enterprises shall conduct comprehensive due diligence before investing in private equity fund managers, conduct feasibility demonstration and compliance investigation on the project, and perform asset evaluation or valuation procedures as required.

2. Evaluation Procedures for Foreign Investment with Non-Monetary Assets

Pursuant to Article 47 of the Enterprise State-Owned Assets Law, wholly state-owned enterprises, wholly state-owned companies, and state-controlled companies that make foreign investments with non-monetary assets or in other circumstances where asset evaluation is required by laws, administrative regulations, or the articles of association of the enterprise shall evaluate the relevant assets in accordance with regulations. Therefore, if these three types of state-owned enterprises make foreign investments with non-monetary assets to become shareholders of fund managers, they shall evaluate their non-monetary assets.

3. Registration of State-Owned Equity in Partnership Enterprises

In accordance with the provisions of the Interim Provisions on the Registration of State-Owned Equity in Limited Partnership Enterprises (Guo Zi Fa Chan Quan Gui [2020] No. 2, hereinafter referred to as "Document No. 2"), the equity formed by state-invested enterprises and their controlled subsidiaries contributing to limited partnership enterprises and its distribution status shall be registered for state-owned equity, which includes the registration requirements for partnership-type private equity fund managers, including possession registration, change registration and cancellation registration.

(II) Relevant Requirements for the Transfer and Exit of State-Owned Private Equity Fund Managers

1. Prior Evaluation Procedures

Article 3 of the Measures for the Administration of State-Owned Asset Evaluation stipulates: "Where a state-owned asset-holding unit (hereinafter referred to as the holding unit) is under any of the following circumstances, it shall conduct asset evaluation: (1) Auction or transfer of assets; (2) Merger, sale, joint operation, or shareholding operation of enterprises;……"

Article 10 of the Implementation Rules for the Measures for the Administration of State-Owned Asset Evaluation stipulates: "If asset evaluation is not conducted for circumstances where it should be conducted, the economic act shall be invalid."

The above legal provisions clearly stipulate the requirement for asset evaluation during the transfer of state-owned assets and the legal effect of transfer behavior without evaluation, and apply to both partnership-type and company-type state-owned private equity fund managers.

2. Prior Government Approval Required When Losing Controlling Status

Pursuant to Article 53 of the Enterprise State-Owned Assets Law of the People's Republic of China: "The transfer of state-owned assets shall be decided by the institution performing the duties of capital contributor. Where the institution performing the duties of capital contributor decides to transfer all state-owned assets, or transfer part of the state-owned assets resulting in the state no longer holding a controlling position in the enterprise, it shall report to the people's government at the corresponding level for approval."

After the evaluation procedure, if it involves the transfer of all state-owned assets, or the transfer of part of the state-owned assets resulting in the state no longer holding a controlling position in the enterprise, it is also necessary to report to the people's government at the corresponding level for approval.

3. Special Provisions on Trading in the Exchange

Private equity funds differ from ordinary state-owned corporate enterprises in terms of the identification of state-owned nature and whether transfer requires trading in the exchange. According to the official reply on the website of the State-owned Assets Supervision and Administration Commission of the State Council:

Decree No. 32 regulates the circumstances of corporate enterprises. The disposal of shares held by state-owned enterprises in limited partnership enterprises is not within the scope of Decree No. 32, and it is recommended to perform decision-making approval, asset evaluation and filing procedures in accordance with the internal management system of the enterprise.

Therefore, if a state-owned enterprise holds shares in a partnership-type fund manager, it does not need to conduct trading in the exchange when transferring such shares.

III. Conclusion

Based on the above provisions, state-owned fund managers are subject to supervision by various laws and regulations and different authorities due to the state-owned nature of their capital sources and the organizational forms such as limited partnership and company type they adopt. State-owned private equity institutions and their compliance and risk control personnel should raise their compliance awareness, establish and improve their internal control systems, attach importance to the allocation of professional compliance personnel, and abide by the compliance provisions in the fundraising, investment, management and exit processes of private equity funds.