Private equity set to flourish under new rules
Print Edition
Chinese private equity firms are expected to continue to flourish.
In 2014, the sector recorded 593 deals valued at US$73.2 billion. That was triple the year before, according to PricewaterhouseCoopers.
Although the industry is more self-disciplined than to be under inspection, regulation still lags behind compared to various kinds of business activities that have already taken place in the sector.
The China Securities Regulatory Commission took charge of the industry last January, and implemented a contract system to register private equity funds and allow them to sell products themselves last August, starting to make the regulation more systemically.
“The sector was growing so fast that the regulator was formed to implement reforms,” said Catherine F. Chen, a partner of Zhonglun Law Firm.
Chen is team leader of Fund Group under Zhonglun’s Capital Market Department. Her responsibilities include private equity fund raising, formation of such funds and mergers and acquisitions.
She sat down with Shanghai Daily to discuss her views on the sector.
Q: How do you view the current regulation over the private equity sector?
A: There’s been big progress since the China Securities Regulatory Commission took charge of the sector. Under former regulation by the National Development and Reform Commission, fund managers had to register their funds on the basis of location. They had to go to different places to get funds registered and that caused management chaos. The new system is more people-oriented. All of the fund managers get qualified, and funds under their management are recorded later.
Procedures have also been moved online, saving the time of physical document review.
Q: How can the regulatory system be improved?
A: The next stage will be elaboration of the rules. Local securities regulatory bureaus might carry out spot inspections on fund managers and their internal controls. Generally speaking, the sector will still rely on self-regulation.
Q: What trends do you see under the new regulatory framework?
A: Contractual private equity funds are the new format. Prior to the new rules, fund managers had three options for selling products: setting up cooperative funds, setting up partnership or becoming a part of trust plans issued by trust companies.
Under the new system, fund managers can issue their own products.
Q: Is there any hidden risks behind this new policy?
A: Legal vacancy over assets partitioning. The Trust Law clearly identified that assets of trust plans and trust companies should be separated. That has not been the case with the new private equity system. Creditors have the right to sue a fund manager when a fund company is in debt, and money under a contractual private equity fund could be seized if there is no evidence to show that these assets belong to a private equity fund instead of the manager of the fund.
We discuss this risk with our clients. If a fund manager has no fraud motivation or illegal temptations, the risk is small. Our suggestion is the addition of a footnote when registering as a shareholder of an unlisted company.
Q: How does China’s regulation of private equity funds differ from that overseas?
A: Overseas regulation follows an information disclosure system, leaving investors to judge whether the risk is good or not. Besides, private equity funds enjoy preferential tax treatment in foreign countries.
We are still standing at the starting point in the establishment of systematic regulation.
The regulator has to negotiate with other departments to make the process smoother. Anyhow, we should encourage the industry to grow first.
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