China's top officials stress PE industry discipline

China's private equity industry is 'short sighted', and GPs should adopt a 'flexible' approach to management fees, top government officials said at the Global PE Beijing Forum.

Two of China's top government officials told the domestic private equity industry that they need more regulation and a governing structure in line with international best practices.
“The industry needs discipline,” said Xianglong Dai, chairman of the National Council for Social Security Fund (SSF), in his speech at the 4th Global PE Beijing Forum held in Beijing.

“I know you want to make money, but also think about the risk. No rushing, no pushing.”

As China's largest LP, the SSF committed 19.5 billion RMB (€2.3 billion; $3.1 billion) to 13 private equity funds last year, a tiny portion of the $146 billion in assets under management.  

Some LPs interfere too much with GPs and it lowers their efficiency

Mingkang Liu

Dai said there are plans to increase investment in private equity funds in the next 2-3 years using a “cautious strategy” but he did not provide details.

Addressing an audience of mainly domestic GPs and LPs, Dai raised issues the industry was facing and at times gave what sounded like a lecture to students.

He told GPs to adopt “a sufficient governing structure” and “commit some of their own capital – not the management fee – to their investments.”

He added that some confusion surrounded management fees.

“I understand management fees have to be there to pay someone to manage the fund, but the fees must be flexible, not fixed. I don't think management fees should be a source of revenue or profit or dividends for a private equity firm.”

Dai also took a swipe at princelings – the well-connected sons of high government officials – acting as GPs.

“A GP must be truly capable,” he told the audience. “Some GPs are hired only based on their parents' position in the government and are not capable. You need to develop talent. Find GPs who 10-20 years from now will be the backbone of this industry.”

Mingkang Liu, former chairman of the China Banking Regulatory Commission (CBRC), also had some harsh words for the neophytes in the domestic private equity industry.

“In China, many GPs are focusing on the last three years of profits but are ignoring future development of companies,” Liu said. “Stakeholders are short sighted, and we need regulation.”

LPs, on the other hand, “should not be arrogant,” he continued. “Some LPs interfere too much with GPs and it lowers their efficiency. Don't think you can interfere with the work of GPs just because you have money.”

Liu said China's domestic industry lacks specialisation and venture capital and private equity are “homogenous”.

“[VC and PE] don't position themselves to differentiate stages of investment,” he said. “They ignore the synergies between VC and PE. This all makes the quality of their investments deteriorate.”

China's industry has a short history, he said, and much could be learned from international best practices. He suggested some of the domestic GPs could hire experienced foreign GPs to run their RMB funds.

Liu also warned against banks becoming an LP or a GP because it's “balance-sheet heavy”.

“If they are dependent on that activity, it will consume all their capital. Private equity activity involves real business,” Liu said. “Private equity is not a shadow bank.”