Alarm bells as Chinese retail investors drawn to high-risk private equity funds

Retail investors are increasingly buying into private equity (PE) and venture capital funds even as institutional investors are retreating from new tech companies with exceptionally high valuations, in a trend analysts say is fraught with danger.

“I am afraid institutional investors are shying away from financing plans valuing companies unreasonably high. So some financial intermediaries have been slicing up pricy investment options, which used to be open only to institutions, to make them affordable for retail investors,” said Wang Yansong, managing director of investment bank and advisory firm China First Capital.

“But retail investors do not have the risk pricing power. Many are not aware of the essence of the product they are buying into and are lured by the promise of high returns. They will have no bargaining power in the event of their investment getting stuck,” she added.

A term sheet for convertible bonds of LeSEE, an electric sedan unit under China’s internet conglomerate LeEco, circulating online is a case in point. With a minimum investment of 1 million yuan, retail investors can purchase the bond that carries a 12 per cent coupon rate. Investors can convert the bonds into equities at a 20 per cent discount when LeSEE carries out the next round of fundraising. If LeSEE fails to do another fundraising round in 18 months, investors can ask for their money back.

“This shows smart money does not like LeSEE. The company was forced to turn to retail investors, who are less experienced and more prone to believing the company’s rosy projections,” said a media analyst based in Shenzhen who did not want to be identified.

In a written reply to the South China Morning Post, LeSEE said it has never sold bonds to retail investors and also prohibits institutions from selling them to retail investors. It was looking into the matter, it said.