China PE firms eye mutual fund market

Apr 2, 2013

But private equity managers are cautious, suggesting it will take three-to-five years before any crossover is likely.

Private equity firms in China have welcomed new rules that will allow them to launch mutual funds, but say it will take time – likely three to five years – and careful consideration before they do so, a recent conference heard in Shenzhen.

“Is it feasible for private equity to start a mutual fund business? I think it takes time,” says Wang Qiwen, president of Shenzhen Co-stone Venture Investment Management, speaking at the Private Fund Forum. “Mutual funds and private funds are different in many aspects, including manpower, market research, investment product design and client base.”

Nevertheless, as the licences are now open for application, he says, PE fund managers should prepare for the new era to come.

Announced in late January by the China Securities Regulatory Commission, the guidelines will come into effect on June 1 and are part of revised rules that broaden the range of firms that can enter the mutual funds business. This now includes private funds, securities firms and insurance companies, as well as private equity and venture capital managers.

The threshold for entry is lower for private fund firms, however. They are not required to have a three-year minimum of profitability – simply a solid financial base and track record. For private fund managers, including private equity and venture capital firms, the minimum AUM requirement has changed from Rmb3 billion ($0.48 billion) to a three-year average of Rmb2 billion.

Others also express concern about the ability of PE firms to crossover.

David Ding, managing director of Shenzhen Co-Win Venture Capital Investment, says it will be attractive for private funds, including sunshine and PE firms, to be able to issue mutual funds.

“In the coming three-to-five years, a lot of sunshine funds or private equity funds will enter the mutual fund market,” he says. “But in my opinion, each organisation should first put emphasis on their own business.”

PE firms will have to “cross market – from primary market to secondary market”, says Ding, and will need to do so step by step.

At least the new rules offer another business opportunity for hard-pressed PE and VC firms. The industry suffered last year, given China’s lack of IPOs and sluggish equity market. And the industry will continue to consolidate this year, says Jin Haitao, chairman of Shenzhen Private Equity Association.