India’s growing ecommerce market has recently been the target of large investments. On Tuesday, October 28, 2013, SoftBank, a Japanese telecommunications and Internet company, announced it was investing $800 million in India’s internet market, specifically in two internet start-ups.1 627 million dollars of this investment will be in Snapdeal.com, an Indian online ecommerce marketplace.2 Additionally,…
How the Chinese government chooses to open up sectors of its financial industry will dictate the returns that investors may receive. Recent deregulation is beneficial because it affords Chinese investors an alternative avenue to invest savings, but significant hurdles remain before domestic private equity (PE) funds will be able to reinvest in domestic startups. The…
With Silicon Valley dominating the venture capital arena, it is easy to overlook the significance of investments occurring in smaller markets. In 2011, roughly $3.4 billion of venture capital investments were made in emerging markets such as Brazil and India with many more made in more established, yet still relatively small, markets such as China and Israel. In fact, despite remaining the world-wide leader in venture capital, the United States is no longer as controlling a market economy as it once was. The move into emerging markets is attributable in part to troubles in traditional markets. As pre-money valuations continue to rise due to increased competition, fund managers are finding it increasingly difficult to realize returns that keep investors close to home. Consequently, venture capital firms looking for the “next big thing” are making significant investments in emerging markets.
While Brazil’s private equity market has seen significant progress in the past decade, venture capital seems to be lagging behind. Due to illiquidity and a relative lack of exit opportunities, global funds are apprehensive about investing in Brazil. Consequently, the venture capital market’s primary investors are local pension funds, the Brazilian National Development Bank, and other domestic institutional investors. Moreover, the relatively long maturation period for most investments leads to a depressed internal rate of return, making investment in Brazil less attractive. Nevertheless, a strong private equity market spells exit options for Brazilian companies and has helped attract at least some venture capital investors.
In 2011, China surpassed its previous record in both dollar amount raised and number of investments entered into. A variety of factors contributed to the country’s all-time highs, including government support for venture capital, a soaring GDP growth rate, ample exit opportunities, high price-earnings multiples, demand for shares in newly listed companies, and the overall strength of late-stage private companies looking for equity in preparation for an initial public offering. The increasingly positive outlook of venture capital in China has not gone unnoticed, drawing the attention of global investment funds such as the Carlyle group and Sequoia Capital. Despite this attention, domestic funds continue to spring-up and grow at very fast rates. Like many other global venture capital markets, China exhibits a strong focus on cleantech, internet technology and e-commerce.
Despite a historical focus on the internet and telecom sectors, India’s venture capital market over the coming decade is predicted to revolve around innovations in both technology and business models in areas such as e-commerce, mobile applications, health care, medical devices, clean-tech and IT. However, the expected paradigm shift is not without its challenges. With roughly 400 funds in operation, valuations in India are growing fast and creating apprehension among potential investors. Nevertheless, India’s rapid GDP growth, its proliferating middle class, and its increased attention to early-stage investments is likely to continue drawing investors in the near future.
Unlike China and India, the Israeli venture capital market is currently struggling. The continued success of domestic firms will depend largely on their ability to raise follow-on funds in the coming years. In 2011, 75% of capital invested came from United State funds, particularly for investments exceeding $50 million. Exacerbating the situation is Israel’s relatively weak IPO market, making acquisition the most practical exit option. Notwithstanding the seemingly grim outlook painted by market analysts, at least one Israeli venture capitalist is optimistic about the near future of Israel’s venture capital market. Daniel Cohen predicts that the optimal Israeli fund over the next decade will most likely be “dedicated [to] health care, tech or cleantech” and will control between “US$100 million–US$200 million . . . with a strong local presence complemented by excellent global access.”
As globalization flattens the investment playing field, venture capital is seeing a shift from traditional markets to emerging markets around the globe. With innovations in countries like China and India growing at astonishing rates, it may not be too long before Silicon Valley becomes an equal player in a truly global marketplace.
 See Ernst & Young, Globalizing venture capital: Global venture capital insights and trends report 6 (2011) [hereinafter Globalizing venture capital] available at http://www.ey.com/Publication/vwLUAssets/Globalizing_venture_capital_-_Global_venture_capital_insights_and_trends_report_2011/$FILE/Globalizing_venture_capital_Global_venture_capital_insights_and_trends_report_2011.pdf; see also, WilmerHale, 2012 Venture Capital Report 6 (2012) available at http://www.wilmerhale.com/files/upload/2012_VC_Report.pdf.
 VC Clone Home: Making money by bringing old ideas to new markets, The Economist (June 2, 2012), http://www.economist.com/node/21556269 $3.4 .billion is over double the amount invested in 2008.
 Globalizing venture capital, supra note 1, at 6.
 Jennifer Kho, Following the Money: Venture Capital Flocks to Emerging Markets, Daily Finance (Mar. 28, 2011, 10:00AM), http://www.dailyfinance.com/2011/03/28/following-the-money-venture-capital-flocks-to-emerging-markets/
 VC Clone Home: Making money by bringing old ideas to new markets, supra note 2.
 There are currently over 350 venture capital firms trying to raise $50 billion dollars in North America. Id.
 Id. See also, Vijay Govindarajan, What Venture Capital Can Learn from Emerging Markets, Harvard Business Review (Feb. 17, 2011, 3:10PM), http://blogs.hbr.org/govindarajan/2011/02/what-venture-capital-can-learn.html
 Kho, supra note 4.
 See Globalizing venture capital, supra note 1, at 21 (interview with Clovis Meurer, Partner and Senior Executive at CRP Companhia de Participações). On the one hand, when asked to describe the history of venture capital in Brazil, Clovis Meurer paints a picture of a flourishing market starting in 2005, where “the Brazilian stock market was booming, with a lot of new IPOs and a very good exit environment.” However, when asked about the biggest obstacles in the path to a larger Brazilian venture capital market, Meurer notes that for global funds to “invest in Brazil they need to see more liquidity than there is currently” and that “exit opportunities, especially by way of the local stock exchange, are still maturing.” Id.
 Id. The stock exchange in Brazil is still developing leaving relatively little opportunity for domestic IPOs.
 The average maturation period of venture capital investments in Brazil is between five and seven years. Id.
 Id. at 22.
 China’s GDP growth rate surpassed that of the United States and Europe by over 400%. Id.
 Domestic IPOs comprise over 90% of venture capital backed exits in China. Id. at 24. Additionally, China has seen a rapid increase in the number of private acquisitions; up nearly 400% from 2008 to 2010. Id. Moreover, the median turnaround for a VC-backed company was just slightly over 4 years. Id.
 Id. at 22.
 Id. at 23.
 Id. at 25.
 Id. at 26
 India’s rapid growth in domestic consumption is leading venture capital firms to invest in “companies that are capitalizing on the proliferation of wealth.” Id. at 27.
 Id. at 26.
 Id. at 34.
 See id. at 35. A major contributing factor is low valuations for Israeli companies in foreign markets. Id.
 Id. at 36
 General Partner of Gemini Israel Funds. Id.
Since the enactment of economic reforms in the early 1990s, India has experienced a period of rapid economic growth. On average, GDP has grown over 7% per year since 1997, making India one of the world’s fastest growing economies. In 2004, investors began seeing opportunities for private equity investment, and the market grew from $6.6 billion in 2005 to $55.8 billion in 2007. Despite taking a major hit in response to the economic crisis, investment grew back steadily through early 2011, at which point India had the fastest growing private equity market in Asia. However, towards the end of 2011, investment began trending downward and has languished ever since. Unfortunately, this is due at least in part to the Indian government’s inconsistent policies, which have created regulatory uncertainty among foreign investors.
In January of 2012, the Supreme Court of India held that the Indian government may not tax capital gains from indirect transfers of capital assets located in India, an issue over which there had been much confusion. The suit began after Vodafone, a Netherlands company, had purchased CGP Investments Ltd. (CGP), a company based in the Cayman Islands. CGP’s main asset was an interest in Hutchison Essar Limited (HEL), based in India. Under Section 9 of India’s Income Tax Act, a non-resident must pay tax on income arising through “transfer of a capital asset situate[d] in India.” India’s tax authorities contended that this section applied to Vodafone, claiming that Vodafone’s acquisition of CGP was equivalent to a transfer of shares of HEL to Vodafone. Therefore, the government insisted that Vodafone owed taxes on capital gains derived from the acquisition of HEL. The Supreme Court disagreed, holding that Section 9 did not cover indirect transfers of capital assets situated in India. The case set an important precedent for a number of foreign investors whose deals were structured similarly to Vodafone’s, and provided clarity for others who were hesitant to invest due to the legal uncertainty of the pending case. Unfortunately, the issue was once again opened in March of 2012, thanks to the Indian Financial Minister’s proposal of new tax rules. The proposal would enact General Anti-Avoidance Rules (GAAR), making transactions between international companies with Indian subsidiaries liable for a domestic capital gains tax. GAAR would “effectively overturn” the Supreme Court’s decision in the Vodafone case.
The Financial Ministry’s proposal sparked massive uncertainty. GAAR would be retroactive through April 1st, 1962, creating the potential for many cases, including Vodafone’s, to be re-examined. In addition, the outcome of several pending cases regarding M&A deals between international companies that hold Indian subsidiaries is once again uncertain. Moreover, GAAR created further uncertainty among those who might have been planning to invest in Indian companies through deals structured similarly to Vodafone’s. To assuage investor concerns, India’s Prime Minister issued a statement in June of 2012 saying GAAR would not be finalized without his approval. The Prime Minister is expected to soften GAAR’s impact on investors, but exactly how he will do so is still unclear.
The recent actions of the Government of India are problematic for two reasons. First, they re-open the issue of whether the Indian government may tax capital gains from indirect transfers of capital assets situated in India. Hopefully, the Indian government will soon clarify what GAAR’s practical effects will be, and resolve the matter once and for all. Second, even if the Indian Government resolves the GAAR issue in favor of investors, they have now set an example to the world that the law of India is volatile. Private equity deals are carefully structured to gain benefits from whatever legal systems they are subject to, so the fact that India’s laws seem to be constantly in flux is highly discouraging to anyone looking to acquire Indian companies. If the country wants any sort of private equity market, it must find a way to rebuild investors’ confidence in the stability of India’s laws. At any rate, it will not be easy to do so before Indian private equity investment falls even further.
 Central Intelligence Agency, Economy: INDIA, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html#Econ (last visited Oct. 27, 2012). See also T.C.A. Anant & N.L. Mitra, The Role of Law and Legal Institutions in Asian Economic Development: The Case of India 4, 57 (Harvard Institute for International Development 1998).
 Central Intelligence Agency, supra note 1.
 Malini Goyal, PE: The story of greed, boom and the fall of private equity in India, The Econ. Times (May 17, 2012), http://articles.economictimes.indiatimes.com/2012-05-17/news/31749390_1_pe-firms-pe-investments-subbu-subramaniam.
 Deloitte, Private Equity: Fueling India’s Growth 6 (2012), available at http://www.deloitte.com/assets/Dcom-India/Local%20Assets/Documents/Thoughtware/Private%20Equity.pdf.
 Id. at 4.
 Id. at 6.
 Vodafone International Holdings B.V. v. Union of India & Anr., (2012) __ S.C.R. __ (India), available at http://judis.nic.in/supremecourt/imgs.aspx.
 Id. at ¶ 2 (India), available at http://judis.nic.in/supremecourt/imgs.aspx.
 Id. at ¶70.
 Id. at ¶ 71.
 Amol Sharma and R. Jai Krishna, Vodafone Overturns Tax Bill in India, Wall St. J. (Jan. 21, 2012), http://online.wsj.com/article/SB10001424052970204616504577172152700710334.html.
 5 Facts About the General Anti-Avoidance Rule (GAAR), NDTV Profit, http://profit.ndtv.com/news/market/article-5-facts-about-the-general-anti-avoidance-rule-gaar-300693 (last updated May 14, 2012, 19:27 (IST)).
 James Crabtree, India to Change Tax Law After Vodafone Case, Fin. Times, http://www.ft.com/intl/cms/s/0/d9d96cde-6f59-11e1-9c57-00144feab49a.html#axzz2ASEttu4q (last. updated Mar. 16, 2012 8:32 PM). Language in the amendments seems to be specifically targeted at the Vodafone decision. One of the explanatory notes reads, “[A]n asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India.” Crabtree, supra.
 Crabtree, supra note 15.
 Crabtree, supra note 15.
 Crabtree, supra note 15.
 After Vodafone, GAAR; PM Takes Charge of Finance Ministry, The Times of India (June 30, 2012, 2:16 AM IST), http://timesofindia.indiatimes.com/business/india-business/After-Vodafone-GAAR-PM-takes-charge-of-finance-ministry/articleshow/14513903.cms.
 FE Bureau, PM Moves to Soften GAAR, Vodafone Blow, Fin. Express (June 29, 2012, 32:00 IST), http://www.financialexpress.com/news/pm-moves-to-soften-gaar-vodafone-blow/968019/0 See .also FinMin May Amend GAAR Rules to Boost Investor Confidence, Firstpost (Oct. 2, 2012), http://www.firstpost.com/economy/finmin-may-amend-gaar-rules-to-boost-investor-confidence-476521.html
Private equity (PE) funds formed to make investments in the People’s Republic of China (PRC) come within three main types of structures. This post identifies and analyzes the characteristics, advantages and disadvantages of each structure, and highlights recent legal developments pertaining to how international investors can build or sponsor an onshore RMB funds.
PRC’s economic growth has created a steady flow of investment opportunities. Especially after the global financial crisis, more and more global PE funds seek to deploy capital in this region. The financial crisis turns out to be a starting point for PRC to usher in a completely new phase for its opening-up and become one of the favorite investment destinations. To date, PE industry enjoyed a steady growth as can be seen in the chart below.
Chart 1 Annual Fundraising Amount by PE Funds focusing on Greater China between 2002 and 2011 Source: Preqin as of 2012
PE funds could be formed in PRC in one of the three structures:
1) offshore US Dollar-denominated funds;
2) onshore domestic-invested RMB-denominated funds;
3) onshore foreign-invested RMB-denominated funds.
Offshore US Dollar-denominated Funds
Offshore US Dollar-denominated funds are formed in non-PRC jurisdictions, most commonly in the Cayman Islands or British Virgin Islands.
· As offshore funds are typically organized as limited partnership, investors enjoy two typical advantages of partnership compared to corporations: greater flexibility of commercial terms and the availability of pass-through tax treatment, i.e. it avoids dividend tax and double taxation because only owners or investors are taxed on the revenue.
· As offshore funds are organized under laws of Cayman Islands or British Virgin Islands, there are greater certainty and predictability pertaining to the legal enforceability of contracts and limited liability protection of limited partners than entities governed by PRC law.
Offshore funds are not governed by PRC law, but their investments made in PRC will be. As they are registered in non-PRC jurisdictions and funded by foreign investors, offshore funds are classified as foreign investors under PRC’s regulatory regime pertaining to foreign investment, and thus are subject to many special restrictions.
According to Foreign Investment Industrial Guidance Catalogue enacted by PRC’s State Council, many sectors and industries are closed to foreign investment. Even for accessible industries, every investment needs government approval. While not difficult to obtain, the great latitude of administrative authorities has generated huge space for rent-seeking. Moreover, the application process can be time-consuming since it involves extensive negotiations with various approval authorities. For example, a large factory may have serious land use or environmental issues. Thus, the exact time frame for approval is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.
· Since offshore funds are denominated in USD yet invest in RMB, government approvals are also required for the conversion of USD into RMB and associated repatriation.
· As there are no PRC tax rules specifically ensuring pass-through tax treatment for offshore funds, investors must be very cautious to make sure that a “permanent establishment” is not created in PRC as the tax exposure of both general partners and limited partners could be adversely affected.
It should be noted that offshore funds used to be able to circumvent the restrictions stated above through “round-trip investment”: typically a PRC national established or controlled an offshore holding company to control a Chinese domestic company by captive contractual arrangement. The Chinese domestic company makes investment in China as a domestic investor while the international investors invest at the offshore level. However, the “round-trip investment” is no longer an easy shortcut as PRC had made significant policy changes in recent years to close related regulatory loopholes.
Since then, more and more PE funds prioritize setting up RMB funds. As can be seen in the graph below, most of the newly-raised funds are denominated in RMB.
Chart 2 PRC Private Equity Fundraising. USD Funds vs. RMB Funds, denominated in $US Billons Source: Preqin as of 2012
Onshore Domestic-Invested RMB-Denominated Funds
Onshore domestic-invested RMB-Denominated funds are registered in PRC, comprising exclusively of domestic source of capital. The vast increase in its popularity in recent years could be partially attributed to the corresponding growth of Chinese sources of capital available to onshore RMB funds, including, among others, 1) PRC’s National Social Security Foundation; 2) local government funds held by several provincial and municipal authorities, such as Beijing, Shanghai, Tianjin and Jiangsu; 3) an increasing number of wealthy Chinese entrepreneurs.
It is crucial to note that onshore domestic-invested RMB-Denominated funds are closed to foreign capital, but not to foreign investors. In other words, international investors could sponsor an onshore domestic-invested RMB-Denominated fund as its general partner. First, they should register a management entity in PRC to raise and manage the RMB fund as its general partner. Then, they would raise limited partner capital from domestic Chinese investors. Specific regulations pertaining to such type of transaction vary across provinces and municipalities, as there is not yet a unified set of rules governing investor solicitation and private offering on a national level.
· As onshore funds are typically organized as limited partnership under PRC’s Partnership Enterprise Law, investors enjoy two typical advantages of partnership compared to corporations: greater flexibility of commercial terms and the exemption from double taxation.
· As onshore funds are classified as “domestic investors” under PRC law, government approval for investment and currency conversion could be avoided, so as the associated lag-time and rent-seeking, resulting in greater efficiency and lower cost.
· As domestic investors, onshore funds can invest in industries restricted to foreigners like television stations and publishing, thus have access to more deals in a broader share of PRC’s economy.
· Onshore domestic-invested RMB-Denominated funds are by its nature inaccessible to foreign sources of capital, and thus very difficult to scale their business. As of now, most of them are relatively small in size, with whole funding below US$100 Million.
· Compared to Cayman Island and BritishVirginIsland, there are less certainty and predictability in PRC’s legal matrix, especially pertaining to enforcing contracts in PRC courts. PRC has a lot of capital, but not a large group of seasoned investors. It could be tricky when dispute arise between foreign sponsors and domestic investors, who are unfamiliar with private equity, regarding terms such as capital calls and years-long commitment.
Onshore Foreign-Invested RMB-Denominated Funds
Onshore foreign-invested RMB-Denominated funds are registered in PRC, comprising at least partially of foreign source of capital. They could be organized either as foreign-invested venture capital enterprises (FIVCEs) or foreign-invested limited partnerships (FILPs).
With respect to regulatory framework, of particular importance are the passage of Waishang Touzi Chuanye Touzi Qiye Guanli Guiding (外商投资创业投资企业管理规定) [Administrative Rules on Foreign-Invested Venture Capital Enterprises] (the “FIVCE Rules”) on March 1, 2003,  and the Waishang Touzi Hehuo Qiye Dengji Guanli Guiding (外商投资合伙企业登记管理规定) [Administrative Measures on Establishment of Partnership Enterprises by Foreign Enterprises or Individuals in China] (the “FILP Measures”) on March 1, 2010. 
According to FIVCE Rules, the scope of investment of FIVCEs is limited to high-tech or new-tech industries. Additionally, FIVCEs are forbidden to make investment by borrowed funds. Thus FIVCE can be a very ineffective model for making PE investment in PRC.
FILPs, as a new investment avenue opened in 2010, offers another promising option for international investors to engage in PE investments in the foreseeable future. The Carlyle-Fosun RMB fund, registered in March 3, 2010, is the first reported FILP. With initial investment of US$100 million, the co-branded fund is a 50/50 joint venture between Carlyle and Fosun, both of which are general partners . Afterwards, Blackstone formed the Shanghai Blackstone Equity Investment Partnership, while TPG launched the TPG Shanghai RMB Fund and the TPG Western China Growth Partners I. Goldman Sachs and Morgan Stanley also reportedly have RMB funds in the pipeline.
· As onshore RMB funds are typically organized as limited partnership under PRC’s Partnership Enterprise Law, investors enjoy two typical advantages of partnership compared to corporations: greater flexibility of commercial terms and the exemption from double taxation.
· Capital contribution could be made in cash or in kind, subject to valuation and filing requirements.
· Previously, PE investments by foreign investments are subject to approval of Ministry of Commerce (MOFCOM), which could be very intrusive, paper-intensive and time-consuming. But according to FILP Measures, FILPs could be set up by registration with State Administration of Industry and Commerce only, thus bypassing the burdensome process of MOFCOM approval.
· It could use RMB to invest more easily in domestic companies in PRC, thus help take them public in PRC, on the Shanghai or Shenzhen stock markets. By contrast, offshore USD funds typically made investment into companies that were structured for a public listing outside PRC. Since IPO valuations are at least twice as high in PRC as they are in Hong Kong or USA, investment through RMB funds leading to a Chinese IPO can earn foreign investors a much higher return, likely over 300% higher, than otherwise.
· When organized as offshore funds governed by Cayman law, the general partner and the fund manager are typically exempted from taxation. But as the general partner and the fund manager of FILP are treated as PRC tax resident, the carried interest and management fee payments are taxed at the PRC corporate income tax rate at 25%.
· FILPs are still subject to the previously mentioned Foreign Investment Industry Guidance Catalogue, thus could not invest in industries restricted to foreigners like television stations and publishing.
· The local limited partners may not be as sophisticated as the international investors. Their lack of experience and unrealistic expectation of high yields may possibly damage the business cooperation.
Recent Regulatory Developments
In 2011, the four direct-controlled municipalities of PRC: Beijing , Shanghai , Tianjin  and Chongqing , initiated significant pilot programs as to RMB funds organized as FILP. Under these programs, certain FILP could avoid more regulatory hurdles. For example, foreign capital contribution by foreign general partners and qualified limited partners may not be subject tot foreign currency conversion approval.
Indeed PRC is taking cautious steps to further open up its PE market. On November 23, 2011, PRC’s National Development and Reform Committee (NDRC) promulgated the first nationwide regulation of PE industry: Guojia Fazhan Gaigewei Bangongting Guanyu Cujin Guquan Touzi Qiye Guifan Fazhan De Tongzhi (国家发展改革委办公厅关于促进股权投资企业规范发展的通知) [The Notice on Promoting the Standardized Development of Equity Investment Enterprises].  On one hand, it tightens regulation of PE funds by requiring that all the PE funds shall register with NDRC or its counterparts at provincial level. On the other hand, the notice further opens PRC’s PE market to international participation as it does not reverse or limit any of the pilot programs’ initiatives to circumvent the foreign current regulations. In other words, this state-level regulation’s “hands-off” approach implicitly encourages local authorities to offer new incentives to attract international capital, and implicitly encourages international investors to continue forum shopping among these competing programs.
To sum up, the PE industry in PRC is blessed, as nowhere else is, with abundant capital, stellar investment opportunities and favorable IPO markets. With respect to investment avenues, the advantages of onshore RMB funds are clear: they can make investment without foreign exchange controls, they face much less red tape and they can raise funds from PRC’s local sources. Carlyle, TPG and Blackstone, as the earliest market entrants in this regard, have each launched their own RMB funds in partnership with leading PRC private company, and point the way forward for many of its peers in US. As PRC authorities gradually opens up its PE market to foreign capital, an increasing number of PRC’s strong private enterprises will get growth capital from international PE investors with the know-how and pools of RMB to build great public companies.
*Chenhao Zhu received a JSM (Master of Science of Law) from Stanford University in 2011, where he was the recipient of Franklin Family Fellowship and an editor of Stanford Journal of International Law. He is now an associate in the Palo Alto office of K&L Gates LLP, focusing on US-China business transactions, especially venture capital and private equity investments.
 Promulgated by the Ministry of Commerce (formerly, Ministry of Foreign Trade and Economic Cooperation), Ministry of Science and Technology, State Administration of Industry and Commerce, State Administration of Taxation and State Administration of Foreign Exchange on Jan. 30, 2003, effective on Mar. 1, 2003.
 Promulgated by the State Administration of Industry and Commerce on Jan. 29, 2010, effective on Mar. 1, 2010.
 See Shanghai Approves Carlyle and Fosun Joint RMB Fund; First Business License Granted to Foreign-Funded Equity Investment Partnership Enterprise. http://thecarlylegroup.com/news-room/news-release-archive/shanghai-approves-carlyle-and-fosun-joint-rmb-fund-first-business-license- (last visited Oct. 13, 2012)
 See Beijing Shi Guanyu Benshi Kaizhan Guquan Touzi Jijin Jiqi Guanli Qiye Zuohao Liyong Waizi Gongzuo Shidian De Zanxing Banfa (北京市关于本市开展股权投资基金及其管理企业做好利用外资工作试点的暂行办法) [Interim Measure on Pilot Program of Utilization of Foreign Capital By Equity Investment Fund and Its Management Entity of Beijing Municipality] (promulgated by Beijing Bureau of Finance, Beijing Commission of Commerce and Beijing Administration of Industry and Commerce on Feb. 28, 2011, effective on Feb. 28, 2011).
 See Shangha Shi Guanyu Benshi Kaizhan Waishang Touzi Guquan Touzi Qiye Shidian Glongzuo De Shishi Banfa (上海市关于本市开展外商投资股权投资企业试点工作的实施办法) [Implementation Measures for Foreign-Invested Equity Investment Enterprises Pilot Programs of Shanghai Municipality] (promulgated by Shanghai Financial Service Office, Shanghai Commission of Commerce and Shanghai Administration of Industry and Commerce on Dec. 24, 2010, effective on Jan. 23, 2011.
 See Tianjin Shi Guanyu Benshi Kaizhan Waishang Touzi Guquan Touzi Qiye Jiqi Guanli Jigou Shidian Gongzuo De Zanxing Banfa (天津市关于本市开展外商投资股权投资企业及其管理机构试点工作的暂行办法) [Interim Measure on Pilot Program of Foreign-Invested Equity Investment Enterprises and Its Management Entity of Tianjin Municipality] (jointly promulgated by Tianjin Development and Reform Committee, Tianjin Financial Service Office, Tianjin Commission of Commerce and Tianjin Administration of Industry and Commerce on Oct. 14, 2011, effectively on Dec. 13, 2011.
 See Chongqing Shi Guanyu Kaizhan Waishang Touzi Guquan Touzi Qiye Shidian Gongzuo De Yijian (重庆市关于开展外商投资股权投资企业试点工作的意见) [Implementation Measures for Foreign-Invested Equity Investment Enterprises Pilot Programs of Chongqing Municipality] (promulgated by Chongqing Administration of Industry and Commerce, Chongqing Foreign Economics and Trade Commission and Chongqing Office of Finance on Mar. 31, 2011, effectively on Mar. 31, 2011.
 Promulgated by the Office of Staff of National Development and Reform Commission on Nov. 23, 2011, effectively on Nov. 23, 2011.
Russia’s ascension into the World Trade Organization signaled an expected, but nonetheless major, opening of the Russian economy. Russian membership in the WTO will dramatically lower tariffs for both Russian exports and imports into Russia. These developments, coupled with Russia’s growing middle class, global engagement through the 2014 Winter Olympics and 2018 World Cup, and market reforms, seemingly transform Russia into a hotspot for private equity investment. However, the actual picture is far from rosy. Despite ending its holdout as the last G20 nation not in the WTO, Russia will continue to challenge private equity investors through both structural and legal barriers.
Many forecast the effects of Russian membership to be similar to those of China’s. After joining in 2001, China’s exports rapidly grew and its economy adjusted to meet the rising global demand for cheap Chinese exports. But simply put, Russia is not China. Though Russia’s economy is also based on exports, these exports are often commodities rather than cheap products buoyed by low wage costs. Additionally, state ownership and interventionism remains the norm in the attractive commodity sectors, meaning that Russia will be slower to adapt new reforms to compensate for the opening of its markets. 
This is particularly significant for private equity companies aiming to invest in Russia. While barriers to foreign investment in the crown jewels of the Russian economy (oil and gas companies) are unlikely to be removed, more foreign investment could flow into Russia’s manufacturing sector. Between 2007 and 2011, the manufacturing sector accounted for 51% of investment projects and 92% of job creation. Other similar sectors, such as the industrial and food sectors, also attracted a high number of projects and significant foreign investors. With newfound access to European markets, these sectors should experience an influx of private equity investment in the near future. 
Despite Russia’s economic structural limitations, private equity investors remain confident in Russia’s future growth.  The main reason for this confidence is Russia’s growing domestic market. Due to rising wealth levels, about 25% of Russia’s population now calls itself middle class.  This is a stark contrast to the oligarch-driven wealth gap that typified Russian society in the 1990’s and early 2000’s. Russian companies, already experiencing a trade surplus, will look to capitalize on the growing middle class rather than exporting to new markets. However, the specter of European competition in Russia’s markets will necessitate expansion and an influx of both domestic and foreign private equity.
While economic forces have seemingly aligned to attract investors, Russia’s culture of bureaucratization and corruption continues to ward off private equity. Additionally, the politicization of Russia’s economy also creates a major barrier for American companies. Currently, the US and Russia do not have normal trade relations due to the Jackson-Vanik Amendment, thus the US is precluded from using WTO mechanism to challenge Russia’s higher tariffs on American goods. Strict government regulation of foreign investment and corruption at all administrative levels further complicates private equity investment in Russian companies. However, investors who have already successfully navigated these barriers remain confident in future growth. For new investors, the risks may be justified by the increasing rewards of Russian companies expanding inward to a robust domestic market.
 Positive Outlook for Russian Investment as it Joins WTO , Ernst & Young Emerging Markets Center (Sep. 7, 2012), http://emergingmarkets.ey.com/positive-outlook-for-russian-inward-investment-as-it-joins-wto/
 Matthew Philips, Don’t Get Too Excited About Russia’s WTO Deal, Bloomberg Businessweek (Aug. 22, 2012), http://www.businessweek.com/articles/2012-08-22/dont-get-too-excited-about-russias-wto-deal
 See note 1, supra.
 Lena Smirova, Russia Climbs Up Investment and Business Climate Rankings, The Moscow Times (October 25, 2012), http://indrus.in/articles/2012/10/25/russia_climbs_up_investment_and_business_climate_rankings_18629.html
 See note 1, supra.