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Will US PE firms' recent troubles in China, Korea favor India?

A new regulation prohibiting the creation of offshore companies "is bringing foreign private equity investments in China to a halt", says a news item in Private Equity Week:
VCs came up with the practice of setting up offshore holding companies as a way to exit their investments in China. Using that strategy, they took 10 Chinese companies public last year on U.S. stock exchanges.

Richard Xu, a private equity attorney and partner at the law firm Jingtian & Gongcheng in China, says that his own work and that of his firm is slowly grinding to a halt as a result of the regulation...

...Jean Eric Salata, chairman of Baring Private Equity Asia in Hong Kong offered a more sanguine assessment of the regulation. He suspects its goal is to gain tax control over the many citizens who have made considerable fortunes through the sale of equities in off-shore companies. Such investors have escaped taxation by Chinese authorities. Salata maintains that the government is not trying to lessen foreign investment in the country.

Korea's National Tax Service is investigating several US-based private equity firms, says another PE Week article. The firms under investigation reportedly include Newbridge Capital, The Carlyle Group, Lone Star Funds and CitiGroup.
One source told PE Week that tax authorities "invaded" Carlyle's offices in Seoul last week, demanding access to documents and seizing files, as part of an investigation to determine whether the firm qualifies as a permanently domiciled investment company in Korea. If so, the firm may be held liable to pay taxes on deals, such as its lucrative $2.7 billion sale last year of KorAm Bank to Citigroup...

Part of the reason for the rising resentment over the success of U.S. private equity firms was caused by Korea itself. Until recently, the government allowed only foreign firms to invest in private equity within Korea. In December, the government began to reverse that trend as Korea instituted a regulation that allowed domestic firms to invest in private equity within the country for the first time...

...However, of the five Korean funds established under the new regulation, only two have been successful in raising capital thus far. Some have speculated, therefore, that the government has started the latest crackdown on investigating foreign firms, because local firms haven't been able to take advantage of the new regulations.

I wonder what the recent regulation that has brought "China PE to standstill" will do for the occupancy rates on flights from San Francisco to Shanghai vis-a-vis the ones to Mumbai, Bangalore and Chennai.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

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