Chinese regulators revamped rules governing its 20 trillion yuan ($2.9 trillion) private fund industry to curb irregularities and risks, a move that’s set to benefit bigger managers including foreign players.
Private equity and hedge fund managers will need at least 10 million yuan in paid-in capital to operate, according to measures published Friday by the Asset Management Association of China. That’s about five times the current requirement for funds already in operation. The rules, which take effect May 1, also raise requirements for controlling shareholders and senior management.
The wide-ranging revamp follows a years-long crackdown on irregularities such as insider trading by hedge funds, while stamping out so-called “fake private funds” that take advantage of loose regulations. Private fund assets under management have surged almost eightfold from 2015 to 20 trillion yuan, as wealthy investors sought higher returns.
The move to weed out smaller funds may give a boost to foreign money managers that are struggling to crack the Chinese market. While firms like Bridgewater Associates and Winton Group have amassed more than $1 billion in assets, 27 of the 36 foreign players are running less than 500 million yuan, according to a Shenzhen PaiPaiWang Investment & Management Co. report in December.
“It’s good news, especially for the top players,” Sun Mingqi, a Shanghai-based Shiyi Law Office partner, said by phone. The higher requirements add little pressure on them, while “the number of players will drop, reducing market competition.”
Despite the growing market size, many of China’s private funds are “small, scattered, and weak,” with their funding sources and investment behavior “short-term based,” former China Securities Regulatory Commission Vice Chairman Yan Qingmin told a forum in 2019. Only 397 managers were running more than 10 billion yuan as of Dec. 31, while 27% of the 23,667 players managed less than 10 million yuan, according to AMAC data. Almost 9% of them had no assets under management.
The Securities Commission will make more efforts to resolve risks in key areas including private funds “in a steady and orderly way” this year, according to a Feb. 2 statement following its annual meeting. Private funds, which are reserved for qualified investors, are overseen by the industry association, while mutual funds are regulated by the CSRC.
The revamped rules will have a “relatively big impact,” since almost half of the private equity and venture capital fund managers registered with AMAC have less than the 10 million yuan in capital required under the new threshold, according to an article by Redbud Capital.
The overhaul marks the “opening of a new era” in the sector, Li Shoushuang, a Beijing-based senior partner at law firm Dentons, wrote on Wechat.
Among other changes, legal representatives and senior management are required to own shares or assets in the firm equivalent to 20% of the minimum capital, raising their personal stakes in the business. Qualification requirements for investment-related senior managers will be raised significantly.
The revised rules also prevent controlling shareholders from transferring ownership within three years, and they need to be managing at least 30 million yuan on average in the year before the sale.
That will effectively block the potential sale of “zombie shells,” Shiyi Law Office lawyers wrote in a report Feb. 25, referring to firms that are no longer actively managing assets but still hold licenses. A big number of these firms will be “culled,” they said.