China’s manager cull will lead to ‘healthier industry’

Chinese regulators revoking licences of over 10,000 domestic private funds will mean fewer and ‘more competitive’ private equity players, says the HKVCA.

The deregistration of more than 7,800 private fund managers in China this week, including private equity funds, hedge funds, and venture capital funds, will encourage professionalism in the industry, according to Conrad Tsang, president of the Hong Kong Venture Capital and Private Equity Association.

“Fund managers will be competing with fewer, but ‘more professional’ players,” said Tsang.

The Asset Management Association of China (AMAC) has cancelled licences of around 10,000 firms this year, the first of which were withdrawn in May for failure to comply with rule changes announced by the association in February, according to a statement.

AMAC found that some of the firms that had their licences revoked either lacked basic infrastructure or funding, were engaging in private lending, rather than the core business of asset management, or were engaging in illegal activities and criminal activities.

According to AMAC, China’s private funds industry now has over 16,000 registered funds left, which have collectively raised about $980 billion.

The rules announced in February required all managers to register their first private fund product within a given time period. For example, newly registered private managers need to file their first fund product with AMAC within six months of completing registration. Other new rules that took effect in July include a requirement for managers to disclose their investment risks, as well as setting up special accounts to manage capital.

According to AMAC, a regulatory organisation under the China Securities Regulatory Commission, the rule changes aim to protect investors and to rid the financial market of illegal funds and rampant fraud. It said that more than 60 percent of China’s 24,566 registered private fund entities are considered “shell companies” or companies that only exist on paper but have never engaged in any business relating to private funds. Many of these companies run illegal fundraisings and engage in wrongdoings such as open advertisement and disregard its investor sustainability criteria.

HKVCA’s Tsang endorses the AMAC position: “There have been too many fund licenses granted to market participants who are not really operating private equity and venture capital businesses in the most conventional way. The regulator stepping in to clean up the sector should be healthy to the industry in the long-term.”

Private funds in China were mainly unregulated until June 2013 when new fund laws were implemented.

The CSRC’s fundraising rules prohibit offerings to any person that is not a qualified investor or to non-specific targets through general advertisements by means of newspapers, radio, television, or text messages. According to the rules, a qualified investor must be able to invest at least CNY 1 million ($150,000; €135,000). Institutional investors are required to have net assets of at least CNY 10 million, while individual investors need to have assets of at least CNY 3 million, or have an average annual income of at least CNY 500,000 for the past three years.

In addition, the maximum number of investors allowed per fund is determined by the investment vehicle – this means that no more than 200 investors are allowed in a private fund under the Securities Fund Law, while a limited partnership can have no more than 50 partners under the PRD Partnership Law. 

AMAC said in the statement that deregistered fund managers may re-register according to the requirements set out in the Method on Registration and Fund Record of Private Investment Fund Managers.

Nicole Miskelly contributed to this article.