Chinese PE Deals Held Up by Opaque Rules

HONG KONG (Reuters) – Private equity and venture capital investors on Monday called on China to set clear and stable rules for investments in a country where it has become notoriously difficult to complete a deal.

While Beijing is eager to lure foreign capital to support small- and medium-sized enterprises hungry for funding as bank loans prove harder to come by, investors complained of frequently-changing rules and protectionism at the local level.

“What I want to advise the Chinese government is to work with private equity and venture capital professional people before they make any new regulation,” said Feng Deng, founder and managing director of venture capital fund Northern Light, which is based in Beijing and funded by U.S. investors.

“What I have seen is those things are made by some 20-something young kids without knowing the private equity industry at all,” he complained, referring to certain new merger and acquisition restrictions on foreign investments.

Recently, for example, Beijing required foreign investors to seek approval from the Ministry of Commerce for any deal valued at over $50 million when it involves investment in a sector that the Chinese government defines as a “restricted industry”.

For a deal valued at more than $100 million in a sector where the government encourages foreign investment, commerce ministry approval is also required under the new rules.

Investors must also file dozens of forms to local tax offices to complete legal registration of a deal or joint venture company.

Different bureaucracies within the country make different demands.

“You see, sort of, the bureaucracy among different government agencies and they all have different agendas there,” said Northern Light’s Deng, whose firm manages two China-focused venture capital funds of a combined $500 million.

While private equity and venture capital firms have raised hundreds of millions of dollars to invest in China, they have often been thwarted by red tape, and full buyouts are rare.

Earlier this year, U.S. buyout giant Carlyle Group [CYL.UL] finally walked away from three years of negotiations to buy Xugong, the country’s top construction equipment maker, after running into bureaucratic obstacles.

The deal was seen as strategically sensitive by some in the Chinese government.

In addition to Chinese officials’ lack of expertise and experience in making M&A rules, Edan Lee, a Hong Kong-based managing director for Asia-focused private equity fund Olympus Capital, said ever-changing rules are a constant in China.

“Frequent change of law is something that we really have to deal with in China,” Lee, whose firm has led investments of $1.3 billion, said at an Asia Society forum in Hong Kong.

Industry protection at the local government level also makes dealmaking uncertain until the last minute, in many cases, industry players said.

David Mahon, managing director of Mahon China Investment Ltd, said that his firm had recently won three court arbitrations involving deals in China but has failed to complete them due mainly to political obstacles and protectionism of industries at the local Chinese government level.

“What we want is a restructuring of its legal system and respect of private equity investments in China,” he said.

By George Chen

(Editing by Tony Munroe and Simon Jessop)