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THE BIZNOB – Global Business & Financial News – A Business Journal – Focus On Business Leaders, Technology – Enterpeneurship – Finance – Economy – Politics & LifestyleTHE BIZNOB – Global Business & Financial News – A Business Journal – Focus On Business Leaders, Technology – Enterpeneurship – Finance – Economy – Politics & Lifestyle

Finance

Finance

China venture capital, private equity funds rattled by proposed changes

A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang/file photo
A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building ... A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang/file photo
A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang/file photo
A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building ... A Chinese national flag flutters outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing, China July 9, 2021. REUTERS/Tingshu Wang/file photo

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China venture capital and private equity funds rattled by proposed changes. There has been a pushback from industry participants concerned that China’s proposal to dramatically raise the threshold for participating in private equity (PE) and venture capital (VC) funds might wipe out small funds and strangle financing for businesses suffering in a bad economy.

Late on Friday, the country’s securities authorities issued a draft of guidelines requiring a qualified investor in private equity and venture capital funds to put up a minimum of 3 million yuan, equivalent to $418,731. This would be a tripling of the barrier now in place, intending to protect small investors.

The threshold for individual investors has been raised to 10 million yuan, an increase from the previous threshold of 1 million yuan. This change applies to funds that invest most assets in a particular firm or project.

“The new, stringent rules would dig the grave for small players,” said Abraham Zhang, head of China Europe Capital, a venture capital firm in Shenzhen that invests in technological applications such as chipmaking and artificial intelligence. “It’s aggravating sufferings of an industry already shivering in a bleak winter.”

According to Zero2IPO, a consultancy specializing in initial public offerings, newly established private equity and venture capital funds in China experienced a 20% decrease in their fundraising efforts during the first nine months of 2023 due to China’s weak economy and unstable stock market.

According to industry insiders, smaller venture funds in their initial stages of development often rely on high-net-worth individuals as their primary source of fundraising. This contrasts with more considerable venture funds in their later stages, which typically rely on institutional money for financing. According to Li Gangqiang, a seasoned venture capitalist and co-founder of Beijing Potential Shares Technology Co., a fundraising platform for early-stage investors and firm founders, the idea was “devastating” to single-project funds, which individual investors currently prefer. Beijing Potential Shares Technology Co. is a platform for companies to raise cash.

“Such a policy is extremely unfair to single-project fund managers… and to small investors,” Li stated in a blog post. He anticipates that at least one thousand private fund management businesses will be destroyed if the regulations are implemented in their present form.

The China Securities Regulatory Commission (CSRC), which has made several commitments to lessen the risks associated with the financial sector this year, stated that the guidelines were developed to safeguard the interests of smaller investors.

However, venture capitalists believe the new regulations can have the opposite effect.

As stated by Andrew Qian, CEO of New Access Capital, a company located in Shanghai that manages more than one billion yuan and focuses on growth-stage investing, “In a tough fundraising environment, it’s like spreading salt on your wound, and it runs counter to government support toward early-stage technology startups,” Qian said.

According to data provider Preqin, private equity funds that focus on China and are denominated in yuan have raised $9.7 billion this year, contrasting with $33.7 billion raised the previous year and $116.6 billion raised in 2021. This represents the lowest amount raised since at least 2010.

Furthermore, in 2023, no buyout fund will concentrate on China-generated funds in any currency. Compared to the $13.2 billion in 2019 before the pandemic, this is a significant increase from the $210 million in 2022.

According to Qian, venture capital funds should be governed differently than sizeable private equity funds, particularly those targeting smaller investors like family members and friends most susceptible to the new laws. This is especially true for those firms that target smaller investors.

The seasoned venture capitalist stated that “angel investment is accessible” to regular people in other nations, including countries such as the United States. “However, we did not allow such investors to participate. The fundraising process would become much more challenging as a result.


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