China’s asset managers brace for ‘winter’ amid tightened rules on fundraising in yuan
New asset management rules in China will weigh heavily on the yuan fundraising environment this year, as the amount of capital raised and number of new yuan funds is likely to drop significantly from 2017.
Fundraising by private equity and venture capital funds in the first quarter fell 75 per cent on year to US$11.03 billion while the number of funds dropped by 55 per cent to 103 from 228, according to data from CV Source.
Fund managers have voiced gloomy views about the yuan fundraising environment in the coming months, citing rules unveiled in April, including tightened eligibility criteria for qualified investors and a ban on collaboration with commercial banks.
Financial institutions will have until the end of 2020 as a transitionary period before full compliance.
Wang Yonghua, founder and chairman of private equity fund Tiantu Capital, said the fundraising environment so far this year has been tough, and he does not see any improvement on the horizon.
“I believe that in five years’ time, the number of newly closed yuan funds per year could be significantly reduced,” he said.
Last year 3,502 yuan private equity funds raised 1.79 trillion yuan (US$279.76 billion), compared to just 72 US dollar funds.
Tiantu Capital manages nine yuan funds and a US dollar fund, with assets of over 10 billion yuan (US$1.56 billion) as of the third quarter of 2017.
Characterising this year as the “winter” for fundraising, he stressed there were some potential positive outcomes. Among them, asset prices could cool as fund managers turn more cautious. Wang was speaking at a panel discussion at a China private equity conference in Hong Kong last week.
The regulatory document released in April can be roughly translated from the original Chinese as “guiding opinion on financial institutions’ asset management business”. The framework was issued by multiple regulatory agencies, including the People’s Bank of China, China’s securities and insurance regulators, and the State Administration of Foreign Exchange.
Zhao Yuanqi, a partner at Prosperity Investment, a private equity fund-of-funds manager based in Beijing, said one driver that had fuelled growth of China’s private equity sector in recent years was high net worth retail investors who switched money out of the stock market and into investment funds offered by non-bank wealth management firms.
However, more stringent eligibility requirements on the “qualified investors” that can participate in private equity and venture capital will raise the entrance bar – effectively reducing the number of limited partners in private equity and venture capital.
Qualified investors must now have at least two years’ of investing experience, while the benchmark for gross household financial assets has been raised to 5 million yuan from 3 million yuan.
“The government has realised that some money invested into private equity funds had actually not gone into the real economy, but raised systemic risks, hence fundraising after the new rule has become challenging,” Zhao said.
Industry players also pointed to how Chinese commercial banks had invested in private equity funds through gathering non-compliant “funding pools” from bank customers.
Until recently, banks had issued short-term wealth management products and used the proceeds to invest into private equity investments. These banks then repaid investors by issuing another batch of short-term investment schemes, effectively rolling over its liability. The new rules have disallowed such practises.
One senior private equity fund manager, who spoke on condition that his identity remain anonymous, said about half of the funds under management by private equity in China originated through wealth management products at banks.
“Over the past two years, there has been substantial capital invested into Chinese private equity through banks,” the source said.
He added that some Chinese private equity funds were likely to close down or undergo consolidation in light of the difficulty in sourcing fresh capital from investors.
There are 14,159 private equity and venture capital funds registered in China overseeing 7.89 trillion yuan of assets, according to data from the Asset Management Association of China.