(Second of a series)

FORT LAUDERDALE, FL—In this Episode II, we will focus on the second type of Chinese investors: Chinese funds and investment companies. This type of investor includes insurance companies, asset management companies and other types of wealth and fund management companies.

Unlike Chinese developers, Chinese funds and investment companies typically focus on investing in income generating properties as long-term investments. In fact, the Chinese government does not allow some Chinese funds and investment companies to develop and construct new projects outside of China in order to reduce the risk of the investments. The main distinction between Chinese funds and investment companies and Chinese developers is that Chinese funds and investment companies invest capital from "other Chinese" sources, while Chinese developers usually use their own capital to invest in the United States.

Practical Considerations. It is critical for Chinese funds and investment companies to diversify their investments, and they commonly purchase trophy assets in the United States to increase their status and reputation in on the global stage in order to attract increased individual Chinese investment in their funds and products. Many of these companies are seeking strategic US partnerships with reputable companies or individuals that will expand with them in the United States and China.

Although certain Chinese funds and investment companies have the most funds available to invest in the United States and most of them are satisfied with being merely equity investors, Chinese funds and investment companies may also be the most highly regulated companies by Chinese government. Therefore, their internal and governmental approval processes in investing in US assets can be more complex than other groups of Chinese investors. They must conduct thorough analysis and justify their investment choices to the companies' management team as well as the Chinese government; as a result, they may request a significant amount of information from sellers, their consultants and their attorneys which may be unusual when measured by US standards.

Due to their focus on long-term investments, their considerations include long-term global economic effects on their investments, future governmental policies on their investments, return on investment, and long-term exit strategies. Due to the regulation on these companies and the complexity of the approval process, these companies typically take longer to set up their base structure in the United States, make decisions and move money out of China.

Tax Considerations. Like Chinese developers, Chinese funds and investment companies must make important decisions regarding how to structure their investments in US projects. These decisions will determine the tax consequences of their investments and the level of reporting, if any, required by individual investors in the fund. For example, if relevant, the Chinese fund or investment company itself must decide whether to elect to be treated as a foreign partnership or instead as a foreign corporation for US tax purposes. If the fund or investment company invests directly in a US project, it generally will form a special purpose entity to hold each property and must decide the most beneficial classification of the entity. If the Chinese fund or investment company invests in a joint venture with a U.S. partner, it must again decide whether to invest directly in a US entity (e.g., an LLC) with the US partner or instead form a foreign holding company for the investment.

Determining the appropriate structure for each investment and implementing it therefore may be a time-consuming process. However, as the Chinese fund or investment company gains experience investing in the United States, the time necessary for tax considerations and related structuring generally is significantly reduced.

The EB-5 Program. Although EB-5 funding does not usually apply to the projects of Chinese funds, due to their high-end clientele, they sometimes assist other projects in obtaining EB-5 funding. When the US businesses communicate with these Chinese companies, they have the impression that these companies have difficulty in focusing on one type of investment. The truth is that any one type of investment is only a puzzle piece to their entire global investment strategy. They are required to diversify their investments geographically and by industry.

Due to the approval requirements by the companies' management team and the Chinese government, the US representatives of Chinese funds have even less authority than the US representatives of the Chinese developers. For a project to be approved, the proposal usually must go through all of the Chinese fund's internal departments, its management team, and then its board of directors before being reviewed by the various applicable Chinese governmental agencies. Any one of these layers may request additional information or a change of the transaction structure.

It is very important that the US businesses understand the multi-layered approval process that Chinese funds and investment companies have to satisfy in order to invest in U.S. assets. The key is to have at least one person on the US side (especially on the legal team) who understands these companies and can provide sufficient information quickly to the Chinese companies and anticipate questions and issues.

About the Authors: Holland & Knight attorneys Geneve "Ying" Dubois, Tony Alfonso, Laurie Green and Kevin Hall specialize in areas such as real estate, corporate governance, securities and tax. They are headquartered in the firm's Fort Lauderdale office. The views expressed here the authors' own.

Instant Insights /

Demystifying Chinese Investors. Episode II: Chinese Funds

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