China Association of Pri vate Equity (CAP E)

CHINA ASSOCIATION OF PRIVATE EQUITY GUIDING PRINCIPLES FOR CHINESE PRIVATE EQUITY FUND INDUSTRY (THE PRINCIPLES) October 2012 Chapter 1. General Provisions

Private equity funds (PE Funds) are enterprises organized to pool money from qualified individuals or entities through non-public offerings. The assets of PE Funds are managed by specialized fund management institutions. They make equity investments mainly in non-public companies, providing management and other value-added services. China Association of Private Equity (CAPE) is committed to promoting a healthy industry environment, establishing a sound self-disciplinary system, assisting regulatory authorities in the supervision of the industry, and continuing promoting the stable development of the industry. The legal framework of PE Funds is being established, which covers the areas of formation, operation, investment and exit. Fund managers (Managers) and investors (Investors) are subject to the Company Law of Peoples Republic of China (PRC), Partnership Law of PRC, Contract Law of PRC, etc. This legal framework is supplemented by industry self-regulations. These Principles set up self-regulatory guidelines for the private equity fund industry in China. Chapter 2. Relationship with Investors

Investors generally do not participate in the investment decision-making process. Managers should have in place sound internal governance systems and formulate codes of conduct for their directors, management and employees to comply with the fiduciary duties. Investors should possess certain financial strength and the ability to identify and bear risks, meet the qualification requirements provided by relevant laws and regulations, and have obtained all necessary regulatory permissions. Each qualified individual Investor should have over RMB 1,000,000 in net assets (excluding the value of the Investors primary residence), and over RMB 200,000 in average annual income during the past two years. Each institutional Investor should comply with the PE Fund practice qualification requirements stipulated by the relevant regulatory authorities (where applicable), and should have an asset volume that matches its proposed investments and a sound corporate governance structure. The numbers of Investors in a PE Fund should comply with the relevant legal restrictions. Each Investors liability to a PE Fund is generally limited to its capital commitment. An advisory committee comprised of Investors' representatives should be established to monitor the Manager's performance of duties and provide advisory
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China Association of Pri vate Equity (CAP E)

services in respect of the material issues relating to the PE Fund. Subject to law and appropriate risk controls, the goal of a PE Fund should be to maximize the return for Investors. Managers should utilize their professional expertise and resources to add value to the investee companies, aiming to achieve a win-win situation for both Investors and the investee companies. Chapter 3. Fund Management

The primary duty of Managers is to manage, invest and operate PE Funds. Incorporated Managers should comply with the PRC Company Law, while Managers organized as limited partnerships should comply with the PRC Partnership Law. Managers established pursuant to the Administration Provisions for Foreign Invested Venture Capital Enterprises or Interim Measures for the Administration of Venture Capital Enterprises should comply with the relevant requirements for capitalization and professional experience, etc. Managers should also comply with applicable state and local laws, self-disciplinary rules and professional ethical rules. Managers should recruit professionals with relevant expertise and experience; set up reasonable compensation, incentives and key personnel policies; provide professional training; and establish internal control mechanisms. Managers revenue generally includes: (1) management fees (usually between 1.5%-2.5% of the total committed capital during the investment period and 1.5%-2.5% of the investment cost of the outstanding projects during the post-investment period); (2) carried interest (usually 20% of the profit); and (3) profits from co-investments and/or other types of income. Managers should maintain the safety of the fund assets, manage each fund fairly and equitably, engage legal, financial and tax professionals, respect Investors right to information, adopt transparency principles, complete regulatory filings, and accept the monitoring and supervision from authorities and the public. Chapter 4. Investment Management Managers should make investments in accordance with the requirements set out in fund documents. When selecting investments, Managers should comply with the principles of objectiveness, prudence and transparency. Managers should also avoid hostile competitions, commercial briberies and conflicts of interests when making investments. Factors to be considered in PE Funds valuation include the development status of industries and markets, growth stage, cash flow performance, industry practice, etc. Discounting cash flow, P/E ratio and replacement cost are available valuation techniques for Managers to evaluate the market value of target investment. Managers should establish reasonable investment decision-making procedures and strictly comply with them when making any investment. Investment Committees, which are in charge of making fund investment decisions, are usually composed of
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China Association of Pri vate Equity (CAP E)

members appointed by the Managers. Prior to a portfolio investment, the Manager should maintain a lawful cooperative relationship with the target company. After the investment, the Manager should undertake necessary supervision and management, and assist in the healthy development of the investee company. When exiting the investment, the Manager should take into account the long-term development of the invested company in addition to maximizing the returns for the PE Fund. Chapter 5. Conflicts of Interest, Related Party Transactions and Information Disclosure Before forming a PE Fund, Managers should inform Investors of material potential conflicts of interest, stipulate resolution mechanisms in the fund documents, address issues and make fair arrangements consistent with the customary industry practice. Fund documents should define what constitutes "Related Parties". Managers should properly handle related party transactions among the Manager, the PE Fund, Investors, the management team, investee companies and other interested parties, set up voting policies regarding related party transactions, define and disclose related parties transactions according to fund documents and accounting principles. Information disclosure should be made in a truthful, accurate, complete and timely manner. Chapter 6. Risk Management, Compliance and Valuation Managers should establish risk management mechanisms based on the principles of independence, prudence and thoroughness to ensure effective implementation of risk controls. Internal departments such as investment management, risk control and Investment Committees should be incorporated into the risk management processes. If possible, Managers should segregate the following functions: decision making on significant issues, investment management, fund custody and investment monitoring. Compliance procedures and requirements should be taken into account the daily operation of a PE Fund. Managers should seek the advice of external legal counsel when faced with significant compliance risks. Managers are responsible for establishing proper investment valuation policies, assess valuation methods at the end of each reporting period, and preserve complete valuation records and supporting documents. Managers may engage professional firms to develop valuations if necessary. Chapter 7. Third Party Service Providers Third party service providers are important participants in the PE Funds industry. Third party service providers generally include: (1) custodians: qualified fund custodians that protect Investors interest, prevent fraud and/or illegal fund raising; (2)
: 9 902 100033 Add: Room No.902, South Building of Financial Center, 9A Financial Street, Xicheng District, Beijing 100033 Tel 86-10-66017894 / 88087229 Fax 86-10-88086229 Email: cape@chinacape.org


China Association of Pri vate Equity (CAP E)

private placement agents: institutions with competent experiences and qualifications which are legally established to assist the Managers to raise funds (in the name of the PE Funds) from qualified investors through private placements; (3) lawyers: legal professionals who provide legal advice to Managers, although investors may engage independent counsel to represent their own interest; (4) accountants: accounting firms that provide professional services, such as audit, financial due diligence, accounting and tax advisory services, internal risk control consulting, and valuation. Chapter 8. Development of Self-Regulatory Organizations

CAPE is a self-regulatory organization in the Chinas PE Funds industry. It is a not-for-profit organization voluntarily and jointly promoted by institutions and professionals in the PE Funds industry. CAPE provides guidance to its members on legal and regulatory compliance issues, provides members with PE Funds related services and training, educates Investors on how to better understand and manage risks associated with PE Funds, establishes industry standards, professional ethics standards and self-regulation rules, enhances communication with relevant government authorities, legislators and international counterparts, mediates conflicts and disputes between members, protects lawful rights of the members, and compiles integrity records of PE Funds and Managers. CAPE will review the qualifications of applicants for membership and periodically review existing members qualifications. CAPE has the right to sanction its members through various means such as warning, public censure and revocation of membership. Chapter 9. Development Social Responsibilities, Professional Ethics and Industry

PE Funds and Managers should preserve investments value while bearing in mind their social responsibilities. Managers should also strive to comply with professional ethics, including the principles of fiduciary duties, fairness, prudence, professionalism, diligence, and avoidance of conflicts of interests, confidentiality, information disclosure and transparency. CAPE will promote the integrity of the industry, facilitate information exchange, publicize significant events, and establish a system of recognition and evaluation of industry participants. Managers should implement (and continually enhance) a robust internal controls system and be subject to public oversight. CAPE seeks to build an effective information sharing network, through which Managers may exchange information, make joint investments, and obtain more information on potential investments and opportunities. In addition, CAPE will make efforts to cultivate and reinforce the whole industry's credibility through various means, including enhancing internal compliance, establishing industry records and encouraging public supervision.
: 9 902 100033 Add: Room No.902, South Building of Financial Center, 9A Financial Street, Xicheng District, Beijing 100033 Tel 86-10-66017894 / 88087229 Fax 86-10-88086229 Email: cape@chinacape.org