Focus on the use of PE funds by quasi-REITs in China

According to the data of the Asset Management Association of China (AMAC), 66,418 private equity (PE) funds have been filed with the AMAC as of the end of 2017, growing by 42.82% on a year-over-year basis. Increasingly perceived as providing greater value than merely being an asset management vehicle, PE funds are being used more and more as viable investment tools by other financial products. This article will focus on discussing how PE funds are used as investment tools by quasi-real estate investment trusts (quasi-REITs).

Quasi-REITs structured with reference to fundamental elements of REITs have become an important force of the asset securitization sector in China. For the purpose of this article, a quasi-REIT is an asset-backed security (ABS) programme filed with the AMAC and listed on an exchange, which is collateralized by a pool of existing properties benefiting from steady cash flow. Usually a quasi-REIT is structured in such a manner that stakes in the invested companies are held through a PE fund (please see the chart in this column for a detailed structure).

Considerations for embedding a quasi-REIT into a PE fund. There is an argument that quasi-REITs are embedded into PE funds particularly to facilitate collateral registration, public offerings, control of underlying assets, and transfer and liquidation of shares. However, the author has reservations about this opinion, given the fact that the PE funds into which quasi-REITs are embedded are often contractual funds. Instead, the author is more of the opinion that the design takes risk segregation, tax implications and restructuring of underlying assets into consideration.