Editor: Please describe your role in Akin Gump’s Investment Funds Practice. Do you have Chinese and U.S. and other non-Chinese clients?
White: Sure. I head Akin Gump’s Investment Funds Practice in Beijing, with a focus on China-focused private funds, investment management and China outbound investments. We frequently represent managers in establishing private equity funds designed to invest in China or funds that are designed to invest in the U.S. with capital generated from within China. We also advise investors who invest in those funds, including Chinese governmental and institutional investors.
Besides investment funds, another exciting development in this part of the world is that the Chinese government now encourages Chinese outbound investments. For international law firms like Akin Gump that have a significant Chinese clientele, China outbound transactions have become an interesting and attractive area of practice.
Editor: How has the experience you gained at the World Bank been helpful?
White: I spent seven years at the World Bank in Washington, D.C. and was responsible for legal aspects of the World Bank’s pension fund investments. Because the World Bank pension fund invested in a wide range of assets worldwide, as its lawyer, I gained a global perspective on investments. While at the World Bank, I provided technical assistance to Chinese institutional investors in their global portfolio investments. This led to my return to China in 2007. The time has come that Chinese investors are investing outside of China, and my experience in investment management and investment funds, which was gained at the World Bank, has proven to be very much needed and useful.
Editor: How difficult is it to get approval in China to list Chinese companies on the public markets of other countries?
White: You touched on a very hot topic. Generally, a Chinese company wishing to list in a public market outside of China needs to have the approval of the China Securities Regulatory Commission (CSRC), the Chinese counterpart of the SEC. The approval process is difficult and time-consuming. Some companies have created holding companies outside of China (that hold the operating companies and assets in China) and list these offshore companies on international stock exchanges. Many listed in the U.S. have used this strategy. That structure is currently under scrutiny by the regulatory authorities.
Editor: Have you assisted Chinese firms in listings on foreign stock exchanges?
White: No, that’s not really my practice area. You see, that is assisting Chinese firms in raising capital from foreign markets. What I do is the opposite - advising Chinese firms on investing their capital in foreign markets. Of course, I also help sponsors raise private capital from Chinese investors or establish private equity or hedge funds that are designed to invest in China.
Editor: How difficult is it to get approval for a U.S. company to invest in China?
White: That is an interesting question. I’m sure you will hear different answers from different people. My view is that, over a period of 30 years, China has established a whole legal regime for regulating foreign investments. It’s essentially based on two pillars – one is a foreign entry approval regime and the other is the currency conversion approval regime. Remember, the Chinese currency is not freely convertible. So, any time capital is coming into China or going out of China, there has to be an approval and registration. For U.S. companies investing in China, these are important considerations.
Now back to the first pillar – there are restrictions on foreign investment in certain sectors. Essentially, all foreign investment must get approval from the Chinese government. In certain sectors, called “restricted” sectors, there are limitations on foreign ownership. So a U.S. company must do a joint venture with the Chinese company. In a few sectors, foreign ownership is prohibited. But these are becoming fewer and fewer. By contrast, in a growing number of sectors, a company can be wholly foreign owned.
Finally, you have to determine the level of governmental authorities from which a U.S. investor would seek approvals. If a foreign investment is less than $300 million and is in the “encouraged” or “permitted” sectors, the approval could be obtained from the provincial authority. Otherwise, you’ll have to go to the national level, which is generally much slower.
Editor: How are private equity and venture capital firms making their investments in China?
White: Typically they establish a U.S. dollar-denominated private equity or venture capital fund offshore (typically in an offshore jurisdiction like the Cayman Islands). When this fund invests in China, it would be considered a foreign investor. That means the fund will be subject to the Chinese foreign investment approval regime and currency conversion approval regime. The whole process brings uncertainty and time delay to the investment.
That’s why many private equity and venture capital firms are now very interested in establishing renminbi (RMB)-denominated funds in China for investing in Chinese companies. If you have an RMB fund and it’s structured correctly, the fund may be able to secure the status of a domestic investor and will no longer be subject to China’s foreign investment regime. This is the latest and newest development in China.
The whole RMB funds phenomenon shows two fundamental attractions to fund managers. One, you no longer need to wait long periods for regulatory approval for foreign investment or face the uncertainties inherent in the regulatory process. Two, it opens up a whole new avenue of capital raising and solves a problem that has haunted the investment funds industry post financial crisis, that is, the lack of funding in the U.S. and European markets for fund managers. By contrast, there is a lot of RMB capital in the domestic market here in China as well as in places such as Hong Kong, Macau, Taiwan and Singapore.
Editor: I would assume you’re involved in arranging to set up these funds.
White: Yes, that’s what I do and enjoy doing. It’s an emerging market and there are all sorts of new products and unique issues to resolve.
Editor: How sophisticated are Chinese regulators in relation to fund formation and regulation?
White: The Chinese regulators have recognized the need to foster a homegrown private equity industry by creating a regulatory regime. In the past, there wasn’t any regulatory framework to support that. Now local and national regulations, rules and policies have been issued to encourage the establishment and development of the private equity industry.
As a Chinese-speaking lawyer and situated right in Beijing where the regulations and policies are made, I get to frequently participate in the legislative rulemaking process and draft rules for the industry. This is good – a benefit of working in an emerging market and an emerging industry.
Editor: How has the governmental policy of encouraging outbound investments affected your practice?
White: Traditionally, China has focused on inbound foreign direct investments to facilitate its economic development. The legal services market for this area is becoming commoditized and saturated. The new and fast expansion of Chinese outbound investments has provided an edge to international law firms like Akin Gump to service the global legal needs of the Chinese. Personally, I think this will be a growth area for international law firms for quite some time.
In my practice area, the latest development for Chinese investors is to partner with private equity investment funds when making investments in the U.S. or other countries. There is a whole new group of Chinese managers that are forming offshore funds with money from both the Chinese investors and foreign investors. These funds are designed to co-invest with Chinese companies in global acquisions. It is a new and interesting phenomenon. It shows the tremendous interest of Chinese investors to diversify outside of China.
Editor: What are the areas of interest for Chinese outbound investors?
White: You can group them into three general areas:
1. Natural resources, including minerals, oil and gas, and timber as well as related services. These investments are important and are considered to have a good profit potential down the road. A lot of my current practice is involved in advising Chinese investors that are making investments in the natural resources outside of China.
2. Technologies that will serve present and future needs of the China market. This is illustrated by Lenovo’s acquisition of IBM’s PC unit.
3. Manufacturers and service providers that give market access to the global market and will enable a company to use the skills and brands to serve the Chinese needs.
Besides these, Chinese state-owned banks have become a major source of financing for these outbound investments. Working for the lender in such transactions is also rewarding and feasible for international law firms.
Editor: Do you have any concluding remarks?
White: Playing a role in facilitating the Chinese economic miracle gives me and my firm great satisfaction.