Exclusive: Beijing plans to boost scrutiny of Chinese offshore private equity funds - sources

China plans to tighten oversight of private equity funds set up outside the country by domestic companies, including the disclosure of investors’ identities, to mitigate financial risk and keep tabs on a new wave of offshore fund-raising, four people familiar with the matter said.

The intensified scrutiny, however, will likely stymie the flow of money from global and Chinese investors to such offshore funds, which have been raising billions for overseas projects, including Beijing’s Belt and Road program, lawyers and private equity investors say.

“If this happens, some of the attractions of investing in offshore funds of Chinese PE firms will be lost,” said a Hong Kong-based lawyer who works with mainland funds and was aware of the plans.

“If the hand of the Chinese regulator is stretched outside China and the level of scrutiny on foreign investor increases, some of them may not find it something they want to deal with and may look for other ways to deploy capital.”

The move comes amid a wider crackdown by Beijing on debt-backed investments overseas, and opaque, shadow banking-linked wealth management products at home that have been repackaged for use in overseas funds.

Under the plan, the National Development and Reform Commission, or NDRC, the state planner, would act as the governing body of Chinese offshore private equity fundraising activities, the people said.

Chinese private equity firms and other institutions would be required to disclose the identity of the true investors, or “limited partners” -- to get beyond the shell entities many investors use -- the ultimate source of capital and details about the fund managers, they said.

Banks and other financial firms would also need approval from the NDRC before setting up future overseas funds, they said.

“The new policy will treat offshore private equity funds as a ‘sensitive area’ and implement strict control over them,” said one of the sources, adding the current draft regulations are not finalised.

The sources asked not to be named as the information was confidential.

The NDRC did not reply to a faxed Reuters request for comment.

As Chinese private-equity firms become more active in overseas dealmaking, they have been bolstering their offshore fundraising abilities. In October, Reuters reported Primavera Capital Group and CITIC Private Equity were planning to raise new dollar-denominated funds totaling around $5 billion.