China tightens listing rules for PE firms

Local private equity firms must have total assets worth more than CNY 5 billion in the last three years and should have been in business for at least five years in order to list on the NEEQ exchange.

China’s securities regulator last week lifted its ban on private equity firms listing on its over-the counter-market, the National Equities Exchange and Quotations (NEEQ) and at the same time announced more stringent requirements for funds seeking to list.

The China Securities Regulatory Commission (CSRC) had last year suspended local private firms and several financial companies from listing on NEEQ, also known as New Third Board, to reduce market risks in the fast-growing alternative listing destination.

“The CSRC has in general been tightening requirements for asset management companies including the registration of fund managers with the Asset Management Association of China,” Fengjian Ao, an associate at Debevoise & Plimpton’s Shanghai office told Private Equity International. “While the new rules have little impact on foreign private firms, all this is aimed at protecting investors and promoting a multi-tier capital environment in China.”

New rules stipulate private equity firms must have been in operation for at least five years with at least one fund closed and fully exited, according to a statement from NEEQ.

Private equity firms must have total assets worth more than CNY 5 billion ($761 million; €670 million) for the last three years on average. They would need also to earn at least 80 percent of their income from managing assets rather than investing their own capital. In addition, firms cannot have more than 20 percent ownership of the funds they manage.

Firms are given one year to comply with the new rules and non-compliance would lead to de-listing.

Among local firms on NEEQ are JD Capital or Tongchuangjiuding Investment Management Group, which has CNY 31 billion in assets under management at the end of 2015, China Science Merchants Investment Management Group, which has CNY 60 billion of total assets, and a wholly-owned subsidiary of CITIC Capital Holdings, CITIC Capital Equity Investment (Tianjin) Corporation.

Over the years, NEEQ has attracted small and medium enterprises that are looking for ways to boost their financing. Requirements for listing on NEEQ are also generally less stringent and have a shorter application for start-ups than on the Shenzhen and Shanghai exchanges. According to KPMG, the board’s value in May 2015 had reached CNY 1.7 trillion, from CNY 800 million in 2013.

About 7,500 companies with combined market capitalisation of CNY 3 trillion have listed on the board since it launched in 2013, NEEQ said on its website.