China's Investment Management Firms Face Tough Winter as Capitals Elude
Duan Qianqian
/SOURCE : Yicai
China's Investment Management Firms Face Tough Winter as Capitals Elude

(Yicai Global) Oct. 11 -- Chinese venture capitalist and private equity firms are having difficulties in raising money this year as the central bank's regulation has become tighter and private investors have applied more prudent investment strategies amid prolonged bear market and the weakening Chinese yuan. 

"Many general partners in Beijing, Shanghai and Shenzhen are sending out all of their staff for fundraising," a Beijing-based financial advisor said to Yicai Global. Before meetings between GPs and limited partners would involve multiple LPs but now only one investment manager participates, the advisor added. 

China's LPs include high net worth individual investors, listed companies, banks and insurers, parent funds and funds guided by the government. The first three categories have become significantly more financially cautious this year while investment from these market-oriented entities is beneficial for setting up successful government-guided funds. 

A Shenzhen-based PE firm spent 18 months visiting hundreds of LPs but has made little progress with just two or three of them. "No money has been received despite over six months of due diligence," a partner from the company said. 

VCs and PEs finished fundraising for 425 funds in the first half of this year, which was a 10.5 percent decrease compared with the same period last year, data from the ChinaVenture Institute shows. The raised sum decreased by almost 75 percent to USD34.1 billion.

Reasons

The central bank's new regulations on asset management business is a significant cause to the capital shortage, said Liu Ming, vice president of HT Cathay Rock Investment Management. "That is what causes the gap." The People's Bank of China issued new rules on wealth management products in July to rein in risks including shadow banking. 

In terms of individual investors, many prefer to put their money into liquid assets, such as overseas currencies, Liu said. The central parity rate of the Chinese yuan against the US dollar hit a 19-month low yesterday, which may partly affect investor confidence in domestic assets.

This year's bear market in the Shanghai Composite Index may imply that companies' shareholders have little cash to invest. "We predict that this trend will continue for the next six months and our investments will decelerate," Liu said.

China has 1,100 funds guided by the government with CNY1.5 trillion (USD216.5 billion), data from the China Venture Capital Research Institute shows. More than 80 percent of these funds were set up in the past three years and thereby are likely to seek funding.

"Many GPs are very anxious now, because they raised 75 percent less capital in the first half of this year than last year and their reserves are decreasing rapidly," Chen Jie, founder and chief executive of ChinaVenture Information, said at the 12th annual China Investment Conference LP Summit.

"We want to set up a cultural industry fund to invest in the e-sports industry," a manager at a municipal fund guided by the government in Yangtze River Delta told Yicai Global. But the problem is that market-oriented LPs are not investing, the manager added.

"We visited 45 GPs until August and have decided or intend to invest in seven or eight, said Liu who manages three equity parent funds worth more than CNY1 billion (USD150 million). "We are slowing down our investments." 

"We are unable to invest in places like the northeastern provinces of Liaoning, Jilin and Heilongjiang, as well as southwestern Yunnan, because these locations lack a robust entrepreneurial environment so we cannot get money from funds guided by the government," a private equity partner told Yicai Global. First and second-tier cities were still easy to find funding for, the partner added.

An increasing number of funds guided by the government have asked GPs to invest a proportion of the proceeds into local businesses to promote digital economy and employment.

Editor: Emmi Laine 

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Keywords: Venture Capital , General Partners, Limited Partners , FINANCING , Industry Analysis , Government Regulations