To implement the policy outlined by the Party Central Committee and the State Council regarding the “furtherance of the virtuous cycle and healthy development of the real estate industry”, fortify the functionality of the capital market, reinvigorate the real estate market inventory, and support the role of the private equity fund industry in serving the real economy, the China Securities Regulatory Commission (CSRC) released a statement on the evening of February 20, 2022. The statement, titled “The CSRC Initiates the Pilot of Private Real Estate Investment Funds to Support the Steady and Healthy Development of the Real Estate Market”, officially marked the launch of the pilot project for private real estate investment funds.
On the same day, the Asset Management Association of China (AMAC) promulgated the Guidelines for Record-Filing of Private Real Estate Investment Fund Pilot (Trial Implementation) (Zhong Ji Xie Fa [2023] No.4) (hereinafter referred to as the “Guidelines”). The Guidelines, comprising twenty-one articles, follow the principle of piloting before full-scale implementation and prudently advancing, clearly defining the parameters of real estate investment and the prerequisites for pilot managers. In addition, the Guidelines stipulate the conditions for private real estate funds applying for joining the pilot program, covering areas such as investment range, entity qualification requirements, paid-in capital, and information disclosure, and further elaborate on the pilot policies and product registration rules for private real estate investment funds.
1 | Part.1、Policy Key Points
(1) Introduction of the “Private Real Estate Investment Fund” as a Product Type, with Clear Definition of the Investment Range for Real Estate Funds
The Guidelines formally introduce the “private real estate investment fund” as a distinct product classification. Should a privately offered fund seek to partake in the pilot in accordance with the Guidelines, and if it involves real estate investment activity, the product category should be selected as “private real estate investment fund”. Nonetheless, it is important to note that the private real estate investment funds remain within the purview of private equity funds, hence, matters not explicitly stipulated in the Guidelines should continue to comply with existing laws, regulations, and self-disciplinary rules.
The Guidelines specify the investment boundaries for private real estate funds aspiring to join the pilot scheme. These boundaries fall into three primary categories: the first encompasses specific residential properties, including inventory commercial housing, indemnificatory housing, and market-driven rental properties; the second is commercial-use properties; and the third pertains to infrastructure projects.
(2) Private Real Estate Funds that Apply for the Pilot Scheme are Eligible for Numerous Preferential Treatments
With the issuance of the Guidelines, a prevalent question amongst numerous private real estate funds is whether it is obligatory to apply for participation in the pilot scheme. As per the Paragraph 2 of Article 20 of the Guidelines, this decision is contingent upon the investment project handled by the fund manager. Should the manager envisage establishing a fund to invest in inventory commercial housing and market-driven rental properties, it becomes imperative to acquire qualifications for this pilot; conversely, if the manager’s intent involves setting up a fund to invest in indemnificatory housing, commercial-use properties or infrastructure projects, obtaining the pilot’s qualifications is not mandatory.
Nevertheless, upon securing pilot qualifications, private real estate funds can transcend certain limitations inherent to standard private equity funds, and avail of numerous special advantages as delineated in the Guidelines. These include a broader investment scope, as well as an debt-to-equity ratio and a leverage ratio that can exceed the bounds set for regular private equity funds, among others, as detailed hereinbelow. The Guidelines are due to come into effect on March 1, 2023. Fund managers who meet the criteria for the pilot scheme may submit application materials after March 1 via the policy application module located on the homepage of the AMAC’s Asset Management Business Comprehensive Reporting Platform, prior to undertaking fund raising or management activities.
2 | Part.2、Requirements for Private Real Estate Fund Managers
Pursuant to the Guidelines and the corresponding drafting instructions, the AMAC has set rather stringent qualification criteria for managers of private real estate funds applying for participation in the pilot. The focal points include the manager’s paid-in capital, real estate investment management scale and experience, specialized staff, principal investors, and the background of the de facto controllers.
(1) Entity Qualifications
As per the Item (1) of Paragraph 1 of Article 4 of the Guidelines, managers applying for participation in the pilot must be private equity investment fund managers lawfully registered with the AMAC. Hence, it is deduced that managers who are yet to be registered with the AMAC, or those registered as private securities investment fund managers, private asset allocation fund managers, and other categories of private fund managers, fail to satisfy the qualification prerequisites to apply for the pilot.
(2) Capital Structure and Contribution Capability
1. Stable Capital Structure
Managers applying for participation in the pilot must assure a steady capital structure. As per the Item (2) of Paragraph 1 of Article 4 of the Guidelines, the principal investors and de facto controllers of the manager should not have undergone changes within the past two years. Therefore, for private real estate funds aspiring to apply for the pilot, tactics like temporarily substituting the principal investors and de facto controllers to attain qualifications are non-viable.
2. Identity of Investors
Managers applying for joining the pilot should exclude private real estate fund managers possessing a real estate background. In accordance with the Item (3) of Paragraph 1 of Article 4 of the Guidelines, the principal investors and de facto controllers of the manager must not be real estate development firms or their affiliated parties. If the principal investors and de facto controllers are natural persons, the Guidelines enumerate exceptions, meaning natural persons who dispatch managers to real estate development project companies due to private fund investment necessities also satisfy the requisites to apply for the pilot.
3. Paid-in Capital
Current regulations impose a substantially higher requirement on the paid-in capital for managers of private real estate funds applying for the pilot compared to when they function as managers of standard private funds. As per the Item (5) of Paragraph 1 of Article 4 of the Guidelines, should a manager wish to apply for the pilot, its paid-in capital must comply with a stringent prerequisite of not less than RMB20 million. Conversely, according to Article 8 of the Private Investment Fund Registration and Filing Measures (Draft for Solicitation of Comments), when acting as a manager of a typical type of private fund, the paid-in monetary capital should not fall below RMB10 million or its equivalent in freely convertible currency.
(3) Investment Capability
1. Scale of Investment Management
Should private real estate fund managers aspire to apply for the pilot, they must adopt different standards for the scale of investment management based on whether their fundraising targets comprise individual investors. As per the Item (6) of Paragraph 1 of Article 4 of the Guidelines, if the manager’s fundraising targets do include individual investors, then their managed real estate investment capital should be no less than RMB5 billion, or the cumulative managed real estate investment capital since the manager’s registration should be no less than RMB10 billion. According to the Paragraph 2 of Article 4 of the Guidelines, if the manager’s fundraising targets consist solely of institutional investors, the standard for the scale of investment management can be reduced to a standing stock of no less than RMB3 billion, or a cumulative total of no less than RMB6 billion since registration.
Noteworthy is that the AMAC, as delineated in Article 3 of the Drafting Instructions, underscores the undermentioned cardinal elements that ought to be heeded in the course of estimating the scale of real estate investment management:
Firstly, it should be ascertained whether it pertains to the scale of real estate investment management for the already filed private equity funds (excluding venture capital funds), as the scale of unfiled private funds will not be validated;
Secondly, the scale managed by the manager aspiring to apply for the pilot should be considered, whereby any scale managed by an affiliated manager, or by a senior manager under the name of an affiliated manager will not be validated;
Thirdly, the apt investment ambit must conform to the specifications of Article 3 of the Guidelines, encompassing residential real estate (standard residences, apartments, indemnificatory housing, and market-driven rental housing), commercial-use properties (office buildings, shopping malls, hotels and the like), and infrastructure projects (traditional infrastructure such as high-speed railways, highways, airports, ports, warehousing and logistics projects, urban rail transportation, municipal roadways, water, electricity, gas and heat municipal facilities, industrial parks, and new infrastructure construction projects like 5G base stations, industrial internet, data centers, new energy wind and solar facilities);
Fourthly, the computation scope of the investment management scale should only include real estate investment principal, which means the amount of equity capital that is actually paid by the fund and invested in the project (excluding the value-added part). The scale of external loan leverage and FOF invested in the real estate industry will not be validated;
Lastly, as stated earlier, depending on whether the manager’s fundraising targets include individual investors, different standards for investment management scale should be applied. If all the manager’s fundraising targets are institutional investors, a comparatively relaxed standard can be used. However, it must be pledged upon material submission that all investors in the subsequent private real estate investment funds will be institutional investors.
2. Investment Experience of Managers and Their Professionals
For private real estate fund managers aspiring to partake in the pilot, compliance with requirements extends beyond just investment scale, but also their investment expertise. As per the Item (7) of Paragraph 1 of Article 4, the Guidelines stipulate that the managers should have a successful exit record from at least three private real estate investment projects. Given the absence of explicit constraints on the specific project exit methods in the current Guidelines, it is our opinion that commonly adopted private equity strategies such as valuation adjustment mechanism and equity transfers should suffice.
Furthermore, private real estate fund managers seeking participation in the pilot must also assemble a team of professionals possessing the requisite real estate investment experience. In line with the Item (8) of Paragraph 1 of Article 4, the Guidelines mandate that there should be no fewer than eight professionals in the investment department with over three years of real estate investment experience. Additionally, of the aforementioned professionals, a minimum of three should possess the experience exceeding five years.
(4) Other Requirements
Beyond the entity qualification, the capital structure and contribution capability, and the investment capability, the Guidelines stipulate further prerequisites for private real estate fund managers endeavoring to partake in the pilot:
1. Pursuant to the Item (4) of Paragraph 1 of Article 4 of the Guidelines, the manager ought to have a governance structure, a management system, a decision-making process, and internal control mechanisms that are all highly professional;
2. As per the Item (9) of Paragraph 1 of Article 4 of the Guidelines, the manager should be devoid of any major legal and regulatory infractions within the preceding three years;
3. In accordance with Article 14 of the Guidelines, to prevent the risk of self-financing by the manager, the AMAC strictly forbids fund managers from making direct or indirect investments of fund assets in the fund manager, controlling shareholders, de facto controllers, and the respective enterprises or projects under their actual control.
4. As stipulated by Article 16 of the Guidelines, the manager is required to submit quarterly reports on the operation of the fund to the AMAC, and furnish a report on the overall operation of the fund at the year’s end.
3 | Part.2、A Delineation of Prerequisites for Private Real Estate Funds
(1) Paid-in Capital Scale of the Fund
For a private real estate fund desirous of applying for the pilot scheme, with regard to the fund per se, pursuant to the stipulation under Article 6 the Guidelines, the first round of paid-in capital raised by the fund shall not be less than RMB30 million, signifying that the fund can only be filed after the initial fundraising and completion of the paid-in capital of RMB30 million. Noteworthy is the fact that Article 33 of the Private Investment Fund Registration and Filing Measures (Draft for Solicitation of Comments) prescribes the requirements for the initial paid-in capital scale raised by traditional types of private equity funds, i.e., “unless otherwise stipulated, the private equity fund shall not be less than RMB20 million, whereas the venture capital funds shall not be less than RMB10 million”. Hence, it can be inferred that the AMAC has escalated the initial paid-in investment threshold for private real estate funds intending to partake in the pilot program.
(2) Scale of Investor’s Paid-in Capital
In relation to the investors of the private real estate fund, pursuant to Article 7 of the Guidelines, the first round of paid-in capital contribution by the investor should not fall short of RMB10 million, and the primary body of the fund’s investors should be institutional investors. For funds holding in excess of 75% of the equity in invested enterprises, a limited proportion of ultra-high net worth individual investors may be incorporated, ensuring, however, that the aggregate capital contributions by individual investors do not surpass 20% of the fund’s paid-in capital. Nonetheless, the AMAC imposes no such constraints on the fund managers and their practitioners investing in the real estate funds under their management.
The Guidelines impose limitations not only on the paid-in scale of fund investors and the proportion of individual investors but also effectuate a penetration check on non-corporate forms of investment in the private real estate fund, such as partnerships and contracts. The investors after penetration also come under the purview of the RMB10 million first-round paid-in and 20% individual capital contribution ratio limitations as per the Paragraph 1 of Article 7 of the Guidelines. That being said, asset management products offered by financial institutions and QFLP funds are exempted from such penetration checks.
(3) Fund Expansion
Article 11 of the Guidelines prescribes the regulations pertaining to fund expansion following the completion of the fund’s filing. This entails the fund’s operation within the investment period stipulated by the fund contract, a unanimous consensus on expansion by all investors or approval through the decision-making process detailed in the contract, compliance by investors with the regulations on paid-in capital and the proportion of individual capital contributions, and adherence to other requirements mandated by the CSRC and the AMAC.
It merits attention that in comparison to the conditions stipulated for expansion in the Notice on the Filing of Private Investment Funds (2019 Edition), the Guidelines have deleted the following two requirements: firstly, the fund’s organizational structure must take the form of a corporation or partnership; secondly, the fund undertakes composite investments, with investments in a singular target not exceeding 50% of the total subscribed capital of the fund.
(4) Provision of Loans and Guarantees to Investee Enterprises by the Fund
The Guidelines alleviate restrictions on private real estate funds applying for participation in the pilot program from providing loans and guarantees to investee enterprises. Pursuant to Article 8 of the Guidelines, the fund merely needs to fulfill the following conditions: firstly, the fund contract specifically stipulates such provisions and execution takes place in accordance with the fund contract; secondly, the maturity date of the loan or guarantee should not be later than the date of fund liquidation completion; thirdly, private real estate funds are capable of achieving asset control, with specifics being that if the fund comprises individual investors, the private real estate fund should retain more than 75% of the equity in the investee enterprise, wherein the debt-to-equity ratio can descend to as low as 1:2; or if the fund exclusively contains institutional investors, the private real estate fund should retain more than 75% of the equity in the investee enterprise, or more than 51% of the equity in the investee enterprise.
In addition to this, given that the private real estate fund meets the decision-making procedures, it can also provide guarantees with fund assets to external parties predicated on commercially reasonable conditions, and apply for operational property loans, merger and acquisition loans, etc., thereby expanding investment funds.
(5) Related Party Transactions
Article 12 of the Guidelines, which stipulates on related party transactions, is largely coherent with the provisions for general private funds as specified in the Notice on the Filing of Private Investment Funds (2019 Edition), barring the following two aspects: firstly, the Guidelines incorporate “transactions occurring between the fund and the fund manager’s senior executives” in the recognition of related party transactions; secondly, the entities involved in related party transactions, as per the Guidelines, not only encompass fund managers, investors, de facto controllers, associated private equity, and other related parties, but also introduce “related parties that share substantial interests with senior management of the fund manager”.
(6) Leverage Ratio
In regard to internal leverage, private equity funds maintain a leverage ratio of 1:1. Pursuant to Article 13 of the Guidelines, private real estate funds seeking participation in the pilot program can reasonably surpass the 1:1 preferred to subordinated leverage ratio. As for external leverage, the total assets of private real estate investment funds must not exceed 200% of the net assets.
(7) Other Requirements
Besides the aforementioned stipulations, private real estate investment funds applying for participation in the pilot program must also conform to other conditions prescribed under the Guidelines:
1. As per Article 9 of the Guidelines, the funds must be under compulsory custody and quarterly reports pertaining to fund operations are required to be submitted to the AMAC;
2. In accordance with Article 10 of the Guidelines, the fund contract must unambiguously stipulate an array of requisite clauses;
3. Pursuant to Article 15 of the Guidelines, the fund’s pledged assets, shareholder loans, and other loans are deemed to be part of the special risk disclosure content, and should thus be disclosed to investors;
4. As stipulated in Article 16 of the Guidelines, if a manager desires to apply for participation in the pilot program, along with submitting documents proving compliance with the pilot conditions, they should also provide explanatory documents such as fund-raising plans and investment operation plans.
