Shanghai plans to establish a secondary market to enhance liquidity for private equity funds, creating a new exit for embattled early investors amid a drought in initial public offerings.
Shi Haining, a director of the Shanghai Pudong financial service bureau, told a forum yesterday the city's government had given priority to the creation of the secondary market - the first of its kind on the mainland - by the end of the year as part of its efforts to build the Pudong district into an international centre for private equity deal makers.
"The private equity sector is now facing a huge demand for liquidity," Shi said. "Exits via stock market listings don't seem viable. Therefore, a secondary market is urgently needed."
On such a market, investors in private equity funds, or limited partners, can cash out by selling their investments or investment commitments to other funds.
Normally, the investments are sold at a discount, so the buyers of the stakes stand to benefit when the market recovers.
The private equity sector suffered from a slumbering IPO market last year. The mainland's securities regulator suspended IPOs in October to stem fresh supply of equities and underpin the bearish stock market.
According to global consultancy Bain & Co, deal exits for the private equity sector in China declined 38 per cent in volume and 46 per cent in value last year.
The average investment holding period for private equity funds increased 25 per cent to four years, Bain said.
Shi told reporters on the sidelines of the forum that the Shanghai Equity Exchange, an over-the-counter equity transfer market, would provide a trading platform for troubled private equity investors.
It is expected that Pudong will streamline tax and business registration procedures to facilitate transactions.
The idea of a secondary market reflects Shanghai officials' resolve to liberalise the financial sector in support of the city's ambition to become a global financial centre by 2020.
China remains the most attractive Asian destination for limited partners, but it is losing its lustre, with global and regional funds shifting focus elsewhere, a Bain survey showed.
A secondary market in Shanghai would initially benefit only investors in yuan-denominated private equity funds, while limited partners of offshore funds would not be able to participate in the trading, because of China's foreign exchange regulations.
Also yesterday, Gopher Asset Management, a private equity unit of Nasdaq-listed Noah Holdings, announced the launch of its new fund focusing on the mainland's secondary market. The fund, valued at 500 million yuan (HK$627 million) after the first round of financing, is the largest of its kind in China.
"When the private equity sector is sluggish, it's the best timing for those funds dealing with secondary offerings," Gopher chief executive Gan Shixiong said. "The buyers can enjoy bigger discounts at this time."
In China, most limited partners are private entrepreneurs, who have faced a drain in liquidity as their businesses fell victim to the economic downturn.
Gopher said the fund could help the business owners better allocate their assets.