Fuzzy regulations are stunting the spread of yuan-denominated private equity and venture capital funds in China despite growing demand for financing from fast-expanding firms, leading industry figures said at an industry forum in Beijing on July 9.
Some expressed concern about the risks stemming from a lack of clear rules governing the participation of foreign partners in raising yuan funds and eventually exiting their investments.
“We will not change our strategy of focusing on dollar funds, as we cannot control anything from the regulatory aspect, which seems inconsistent and unclear,” said Andrew Yan, a managing partner of SAIF Partners, which is backed by Japan’s Softbank.
Beijing has pledged to develop private equity funds, especially yuan funds run by Chinese managers, to help reduce companies’ dependence on bank financing.
Another goal is to nurture domestic expertise in a sector dominated by U.S. and European firms that have raised funds overseas and then teamed up with local partners; the domestic PE sector is populated mostly with inexperienced state-run entities looking to turn a quick profit, analysts say.
Local and foreign institutions alike have set up a growing number of private equity yuan funds since the 20 billion yuan ($2.93 billion) Bohai Fund blazed the trail in late 2006.
In the second quarter alone, domestic and foreign venture capital yuan funds raised the equivalent of $402 million, or 29.4% of total funds raised during the period, according to Zero2IPO, a data service provider to the industry.
Deng Feng, founder of Beijing-based Northern Light Venture Capital, said the longer-term trend clearly favoured a greater role for yuan funds as it was easier to raise financing from local investors with a lot of cash on hand.
“But we won’t be among the first to test the water because the relevant regulations are not clear enough. We don’t want regulatory risks to undermine our investments,” Deng said.
The forum heard that the focus of many PE and VC funds is shifting from information technology services to sectors that will benefit from the government’s drive to clean up the environment and improve China’s public health system.
“Making investments in clean energy and medical services will be our longer-term investment strategy,” said David Zhang, founding managing partner of Beijing-based Matrix Partners. —Aileen Wang and Alan Wheatley, Reuters