Paganoni: Fraud hampering China's appeal

Private equity should tamper its enthusiasm for China because of too much corruption, said Roberto Paganoni, head of Swiss private equity firm LGT Capital Partners, during a speech on Tuesday at an industry conference hosted by the Association of the Luxembourg Fund Industry.

Corruption in China “goes right to the top”, said Paganoni, adding that anti-corruption laws on the books are ineffective because bribery is benefiting the very people meant to enforce them.

Recent research supports Paganoni’s concern. Procurement fraud in Chinas has substantially increased in 2013, according to a report from risk consultancy group Kroll.

Respondent companies affected by “vendor, supplier or procurement fraud” (18 percent) were markedly higher than in 2012 (12.5 percent).

Twenty percent of companies in the survey said they had been affected by management conflict of interest in China compared to only 12.5 percent the previous year and respondents citing intellectual property theft (15 percent) doubled from the previous year.

However, the rise in corruption shouldn't necessarily put off GPs from marketing in the country, said Paganoni, who cited Chinese insurance companies as potentially attractive private equity investors.

In October, the China Insurance Regulatory Commission (CIRC) issued rules allowing overseas investment from Chinese insurance companies.

Before then Chinese insurance companies were required to gain regulatory approval for every private equity investment outside China, a process described as “opaque” by industry lawyers.

The reforms allow Chinese insurers to allocate up to 15 percent of their total assets in private equity, which could mean as much as $144 billion up for outward investment based on 2011 numbers published by the CIRC.