The Concerns of Industry Players
China’s proposal to significantly increase the investment requirements for private equity (PE) and venture capital (VC) funds is receiving negative feedback from industry participants. They fear that the move could eliminate small funds and restrict financing for startups already struggling in a weak economy.
The country’s securities regulators recently released draft rules that would oblige qualified investors in PE and VC funds to contribute a minimum of 3 million yuan ($418,731). This threshold is triple the current requirement and is intended to safeguard small investors. For funds that primarily invest in a specific company or project, the individual investor threshold would be set at 10 million yuan, up from 1 million yuan.
According to Abraham Zhang, chairman of Shenzhen-based venture capital firm China Europe Capital, which focuses on technology investments such as chipmaking and artificial intelligence, these new regulations would be detrimental to small players in the industry. Consultancy firm Zero2IPO reported a 20% decline in fundraising for newly established PE and VC funds in China during the first nine months of 2023, attributable to the weak economy and volatile stock market. In comparison, smaller venture funds in their early stages rely more heavily on high-net-worth individual investors for fundraising, while larger later-stage funds typically attract institutional funding.
Devastating Impact on Single-Project Funds
Li Gangqiang, a veteran venture capitalist and co-founder of Beijing Potential Shares Technology Co, expressed his concerns about the proposal, particularly its devastating consequences for single-project funds, which are currently popular among individual investors. In a blog post, Li described the policy as extremely unfair to single-project fund managers and small investors. He predicts that approximately 1,000 private fund management firms could be eliminated if the rules are implemented in their current form.
Regulatory Intentions and Industry Reaction
The China Securities Regulatory Commission (CSRC), emphasizing its commitment to reducing financial risks, claims that the rules aim to protect small investors. However, industry professionals like Andrew Qian, CEO of Shanghai-based New Access Capital, which manages over 1 billion yuan, argue that the regulations are discouraging and contradict the government’s support for early-stage technology startups.
Data from Preqin reveals that China-focused, yuan-denominated PE funds have raised $9.7 billion thus far in 2023, a significant decrease compared to $33.7 billion raised in the previous year and $116.6 billion in 2021. Furthermore, no China-focused buyout funds have been raised this year in any currency.
Qian advocates for different regulatory treatment of VC funds, especially those catering to smaller investors such as family members and friends, who are most vulnerable to the new rules. He highlights that overseas, ordinary people have access to angel investments, while China has limited such opportunities for investors.