Foreign asset managers are finding it hard to create investment management wholly foreign-owned enterprises (IM WFOEs) to operate private funds in China because the country’s securities regulator hasn’t issued implementation details, according to a senior executive from UBS Asset Management.
The Swiss fund manager is keen to adapt one of its two existing WFOEs into the structure, but current rules are not sufficiently clear to be certain that this will be allowed, said Aries Tung, head of strategy and business development for China at UBS AM.
“A lot of hurdles on execution are not clear at this momen; we need to work with regulator to understand their needs,” Tung told AsianInvestor at a media event in Hong Kong yesterday.
The CSRC relaxed the rules surrounding WFOEs in late June, allowing the vehicles to register and effectively operate as private fund managers in addition to offering general consultation to local asset owners. But the announcement did not provide further guidance on WFOEs’ infrastructure or personnel requirements, said Tung.
He hopes the government of Shanghai, which operates the free trade zone in which many WFOEs are based, will let UBS AM change the registration of its qualified domestic limited partnership (QDLP) to become a IM WFOE.
There are several advantages to the latter structure. It would let UBS AM advise and manage the assets of domestic institutional investors. These companies are looking for institutional-style products that offer lower risks and portfolio turnover, compared to the strategies of most local fund managers.
In contrast, QDLP WFOEs are designed to help foreign firms raise funds onshore that they then use to invest into their overseas products.
“We would try to use our existing WFOEs to meet the regulator’s requirements," said Tung, and if they cannot, then it would consider setting up another WFOE.
UBS AM established its first WFOE – called UBS AM (China) – in Beijing in 2011. The funds operated by this vehicle focus on real estate and infrastructure investments. It launched its second WFOE last year – UBS AM (Shanghai) – in Shanghai’s free trade zone for the city’s cross-border scheme QDLP.
It is unclear whether the China Securities Regulatory Commission, the country’s securities agency, would let QDLP WFOEs conduct such a registration change.
International law firm Clifford Chance is doubtful. In an earlier interview with AsianInvestor, the law firm said Beijing wanted to see domestic and cross-border operations ringfenced from each other, as reported. Therefore QDLP vehicles would most likely need to set up a new WFOE to run private fund business onshore.
UBS AM is taking a more optimistic stance. Tung noted there was no certainty about the rules surrounding IM WFOEs at the moment. “The [detailed] rules are not out yet, but we do expect the QDLP programme to change,” he said.
Following central government’s practice in mapping out five-year plans, Tung noted the Shanghai government has softly indicated it expects to make changes on QDLP guidelines, aiming to align the cross-border progamme with the regulator’s requirements on WFOEs and thus prevent the two schemes contradicting each other.
The QDLP vehicle was first announced in January 2011, but the municipal government took until September 2013 to hand out the first batch of licences to managers. UBS AM received its licence and greenlight in March 2015 and launched its QDLP product last November.
Foreign asset managers were excited by the WFOE rules relaxation this year, because it marks the first time they could wholly own and control an local investment entity. But Tung believes there could be difficulties in business execution.
“It is more challenging. We have to face local private fund rules, the WFOE rules and the QDLP rules,” he added. The regulator’s new rules in February that tighten requirements for domestic private fund firms are also applicable to the coming IM WFOEs.