Chinese mutual funds get PE green light

The Chinese regulator will allow mutual funds to invest in RMB-denominated private equity vehicles from as early as next week.

The China Securities Regulatory Commission (CSRC) has finalised a 16-page regulatory proposal that will allow domestic mutual funds to invest in private equity in China for the first time, according to a copy of the regulation released by CSRC.

The “Trial Measures for Fund Management Companies to Provide Asset Management Services for Specific Clients” was originally proposed in 2007 and will finally come into effect on 1 November 2012.

Several articles in the regulatory document seen by PE Asia explicitly extend the investment scope of publicly issued funds in mainland China to equities, including private equity funds.

However, mutual funds in China are all RMB-denominated vehicles meaning only RMB private equity funds will benefit from the new regulation, according to Edwin Zhang, an analyst at Zero2IPO. 

The CSRC has imposed limits on which funds are allowed to invest in private equity, the first time China has put size restrictions on funds, Zhang explained.

For a mutual fund to qualify for investment in private equity, it must be at least RMB30 million (€3.7 million; $4.8 million) in size if managing assets for a single investor; if there are several investors in the fund, each must initially commit at least RMB1 million. Mutual funds involved in private equity must also not exceed the size of RMB5 billion.

The new regulations will allow private equity firms to diversify their investor portfolios, but in the short term they will have a minimal impact on the industry in China, Zhang predicts. Mutual funds involved in private equity will fall under prior regulation preventing certain funds from being publicly marketed.

The regulation will likely continue to be revised after implementation, Zhang explained. Some instructions are not detailed or complete enough, for example how mutual funds should disclose the potential risks of private equity to their investors. Inevitably, Zhang said, “If mutual funds enter private equity, there will be some big risks involved.”

Updates on RMB-denominated funds will be the focus of just one of the many panel discussions at the upcoming CFOs & COOs Forum Asia this December in Hong Kong. Visit the event website for more info.