China’s financial regulator is tightening supervision of private equity managers, including prohibiting retail investors from investing in their funds, in new measures to safeguard investor interest in the wake of a number of scandals in recent years.
The China Securities Regulatory Commission (CSRC) unveiled 14 new measures last week following a month-long industry consultation in September.
Apart from barring retail investors from their funds, private equity managers will, among other things, have to bolster transparency of corporate information and formalise reporting of their fundraising activities.
The CSRC says private equities managers “have been involved in many wrongdoings in recent years”. It says some managers raise funds from unqualified investors, don’t register their funds, and are even involved in embezzlement and illegal trading.
“The new measures are expected to address private equity-related risks and improve the industry’s management level,” the regulator says in a statement on January 8.
Figures from the Asset Management Association of China show that there were 96,800 registered private equity funds with total assets of 15.97 trillion RMB (US$2.39 trillion) at the end of 2020. That was up from 81,739 funds with 13.73 trillion RMB of assets in 2019.
Private equity funds were placed under regulatory control in 2013. Although the market “has been growing strongly and helping promote the country’s corporate financing development” since then, scandals like the one involving JC Capital “have significantly undermined investors’ confidence”, the CSRC says.
Police arrested 21 senior executives of JC Capital, the private equity unit of Jiangsu-based property firm JC Group, in 2019 in connection with illegally taking as much as 30 billion RMB of deposits from the public.
These are the first CSRC rules that target private equity managers, according to Melody Yang, a partner in the Beijing office of London-based law firm Simmons & Simmons.
“We have seen the regulators are listening to the industry’s voice and taking a sophisticated and practical approach to regulate risks whilst enhancing the growth and improving the efficiency of the market,” Yang tells Asia Asset Management (AAM).
The measures are in line with greater regulatory scrutiny of private equity and venture capital globally, according to Ee Fai Kam, senior vice president and head of data and research operations at data provider Prequin.
He says the new rules are “clearly targeted at improving transparency and protecting the interests of investors”.
“The points on retail investor exclusion and ensuring investment activities to match market documents are especially welcome. All these should result in the need for more legal advisory and compliance professionals,” Kam tells AAM.