Since 2018, fundraising in China's private equity & venture capital (PE&VC) market has been at low tide. Both the number and amount of funds established each year have continued to decline. For most firms, fundraising is a considerable challenge right now. Success rates have fallen sharply over the past few years, forcing many institutions to extend the expected fundraising cycle from 3-6 months to 9-12 months, or even longer. That being said, some first-tier institutions have successfully closed a large number of funds successively, which alleviates the sharp decline in total fundraising. However, under the 80/20 rule, 80% of fund managers will face a survival crisis and fail to raise funds in the next two years.
At present, the difficulty of fundraising in China's PE&VC market can be ascribed to a combination of factors.
Firstly, the impact of the new rules for asset management has been substantial. In April 2018, ‘Guidance on standardizing the asset management business of financial institutions’(referred to as the new rules on asset management) was officially promulgated, and directly impacted PE&VC fundraising. On the one hand, the new rules of asset management raised the threshold of qualified investors. On the other hand, it limited entry to the market for a variety of fund types. The new rules of asset management put a ban on multi-layer nesting, which has a significant impact on traditional banking and wealth management channels.
Secondly, the difficulty of exiting investments also affects the number of new funds entering the market. In China, the IPO is the most important exit channel. From 2013 to 2014, the scale of the RMB fund market in China grew rapidly, and most funds raised in that period have since gone on to exit. However, the pace of IPOs in the A-share market has since slowed. Moreover, the price inversion of the secondary market and the primary market also affects the exit process.
In the long run, the new rules of asset management will play an important role in regulating the development of the PE&VC industry in China, and will reshape the current fundraising behaviour. The single exit path will always restrict the development of China's PE&VC industry. At this point, the advantages of USD fundraising are revealed. Some GP management teams with experience in this area have started to refocus their attention to USD fundraising. For foreign investors, the rapid growth of China's economy continues to attract their attention. And most USD funds look to exit in foreign exchange markets like NYSE, NASDAQ or HKEX, which are not affected by the pace of the domestic A-share market.
It is worth noting that Shanghai Science and Technology Innovation Board (SSE STAR Market) will officially open on 13 June. There are many system innovations, such as the adoption of registration systems, with no rigid requirements to list company financial indicators, and that allow VIE and red-chip enterprises to be listed, which is good for both RMB and USD funds. The SSE STAR Market provides a new exit mechanism for PE&VC funds.
Beijing Private Equity Association (BPEA) is a non-profit social group, which was established by the equity investment fund industry in a voluntary joint initiative on 20 June 2008. With the tenet of “standardization, marketization and internationalization,” BPEA focuses on providing independent and professional information consultation, investment consulting and fundraising services for all parties in the private equity investment industry in China, through professional training, research consulting, conference services, investment and financing docking and other services which will help the industry to flourish.
Given the respective advantages and considerations of RMB and USD investment in China, Preqin understands that currency-level insight is critical to alternative investment professionals.
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