A 500 million pounds investment into a London-based fund had been announced by the Chinese company Cocoon Networks at a Beijing-London Tech Venture Forum held on the 19th of January 2016. Two big private equity companies were behind this, namely China Equity Group and Hanxin Capital. This fund is to be expected in place in the next three to seven years with a clear intention on attracting, developing and expanding new tech and innovation startups into China.[1]
This venture capital fund would trigger the EU’s Alternative Investment Fund Managers Directive (AIFMD), which expressly includes managers of a private equity fund as well as procedures on managing such a fund in the Union[2]. Such an amount may also trigger an authorization mechanism under the AIFMD, providing that the managers do not use leverage. The authorization mechanism is realized through the issuance of the ‘AIFM passport’. With such a passport, marketing in the EU internal market will be allowed, otherwise, concerned funds and fund managers will be subjected to national laws of the Member States they’re marketing in.
Is there any compatibility between this Chinese fund and the EU internal market? The EU internal market has been financially harmonized by a series of Community legislation? The very framework for the Union’s financial system is the Markets in Financial Instruments Directive (MiFID), the AIFMD was then adopted to supplement the former. Under the general rule[3], the scope of the AIFMD covers firstly, EU AIFMs managing EU AIFs, and secondly non-EU AIFMs managing EU AIFs or such AIFMs marketing EU or non-EU AIFs. However, as of 2016, non-EU AIFs and non-EU AIFMs in the Union are still subjected to National Private Placement Regimes (NPPRs. Thus, they must comply with national laws of each EU Member States where those non-EU AIFs are operated or non-EU AIFMs are operating. Insofar, the said passport is open only to EU AIFs and EU AIFMs[4].
Nevertheless, the extension of the passport regime is ongoing. The European Securities and Market Authority (ESMA) had been actively taking steps to promote such an extension. In the Advice issued by ESMA on 30 July 2015, China, apart from its special administrative region Hong Kong, is not on the list opening assessments on extending AIFM passport but on the list of potential nominations of opening such assessments[5]. The broader application of AIFM passport is expected to start in 2018[6], but the current process shows that China is unlikely to be one of the first to receive the benefits of an AIFM passport. Countries like the US, Switzerland and Singapore are on the top of list. This could slow down the Sino-UK High Tech Fund in operating and expanding into other EU Member States.
Xuan Hao
[1] Business Wire, Chinese investment firm to launch £500 million London-based fund to invest in European tech startups, London & Partners, 18th January 2016, URL: http://www.businesswire.com/news/home/20160118005564/en/London-Partners-Chinese-investment-firm-launch-£500, last accessed on 17th March 2016; Financial Times, UK tech start-ups set for £500m Chinese fund boost, 19th January 2016, URL: https://next.ft.com/content/4f0cb980-bded-11e5-9fdb-87b8d15baec2, last accessed on 17th March 2016; News with similar contents in Chines by UK Property Weekly, URL: http://www.ukpropertyweekly.com/ukpropertyweekly/news/2016-2-1/698.html, last accessed on 17th March 2016.
[2] European Union, Alternative Investments, URL: http://ec.europa.eu/finance/investment/alternative_investments/index_en.htm#maincontentSec2, last accessed on 17th March 2016; Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers, URL: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32011L0061, last accessed on 17th March 2016.
[3] Supra, Article 2.1 of the AIFMD.
[4] Virginie Gonella and Francois Pfister, Extension of the AIFM Passport to non-EU AIFMs and non-EU AIFs, https://www.ogier.com/publications/extension-of-the-aifm-passport, last accessed on 21st March 2016.
[5] Ibid; Also see: ESMA/2015/1236, ESMA’s advice to the European Parliament, the Council and the Commission on the application of the AIFMS passport to non-EU AIFMs and AIFs, 30 July 2015, page 53, other countries URL: https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-1236_advice_to_ep-council-com_on_aifmd_passport.pdf, last accessed on 21st March 2016.
[6] Ibid.