China tightens PE fundraising channels

In response to a scandal, PRC regulators have halted the sale of private equity products through brokerages and banks, which is expected to significantly impact domestic fundraising.

The China Securities Regulatory Commission and the China Banking Regulatory Commission have halted the sale of private equity products through brokerages and banks, respectively, according to announcements from both government entities.

The actions took place during the last three months.

As a result, many private equity funds in China have lost their primary means of fundraising, according to a report from Z-Ben Advisors. 

To date, the majority of domestic private equity fundraising has been conducted through financial institutions. Many large private equity firms, such as Jiuding Capital and SAIF Partners, invested a lot of time and resources in developing relationships with banks, according to the report.

“The local branches of banks are where most GPs go to invite LPs to invest in their funds,” said Johanna Zhang, associate analyst at Z-Ben.

The clampdown started with a scandal at the Shanghai branch of Huaxia Bank in November, Zhang explained. Some personnel sold certain fund positions on the private equity distribution market without conducting due diligence, resulting in large losses for clients.

“In typical fashion, regulators are choosing to clamp down on [all] industry activity until better oversight capacity is in place,” Z-Ben’s analysis concluded.

In the interim, private equity firms are looking for alternative fundraising means. Zhang believes this new development will impact both the large and small private equity funds alike, but she believes the larger ones will be able to handle the change better.

“Smaller private equity funds would always go to the regional branches to sell their funds,” Zhang said. “Now those banks won’t even let them in, and they will have a harder time finding money.”

The larger firms, on the other hand, will be better able to find other platforms. Some are already setting up in-house wealth management departments, according to the report.

The report also predicts private equity industry consolidation will speed up as an indirect result of the new regulations because it will help domestic GPs increase their fundraising capacity. 

“Private equity is facing a lot of uncertainties now,” Zhang said.