The Chinese government published a 17-point guideline focusing on venture capital funds.
The circular, released on Wednesday, aims to promote “high-quality venture capital”. The document set high-level goals to encourage scientific and technological investments, support insurance and asset management firms in investing in VC funds. It also included a list of targets to attract local and foreign VC manager.
“The new theme is making the capital markets serve as the needs of tech development,” Beijing partner Ying White from Clifford Chance, told Private Equity International.
“On the fundraising front, one major improvement is that it will be easier for insurance capital to invest into venture capital funds. Venture investments in “strategic and emerging industries” will receive a more favorable treatment than private equity investments.
White believes that the guidelines are the principles that will guide the improvement of the VC ecosystem. More detailed implementation rules could be coming in the near future.
The Chinese government has made a lot of efforts to boost the private market, including issuing a 62 article PE regulatory update last July and a guideline for heightened IPO regulation which indirectly promotes secondary markets.
The latest document focuses on improving exit mechanisms. This includes diversifying exit channels and “optimising the exit policy for VC Funds”. According to Bain & Co.’s Asia Pacific Private Equity Report, China’s exit values have been hit in recent years, with IPOs remaining constrained.
The guideline stated that the stock exchanges and Science and Technology Innovation Board (STIB) should promote mergers and purchases, bond issuance and list financing for technology-related companies portfolio companies in order to smooth exit processes from VC investments. It also stated that regulators would implement a “overseas registration management system” to manage foreign currency VC funds.
“I think the guideline will be very encouraging for the VC industry and the VC funds.” It focuses on the exits of portfolio investments, said Zhen Chen a partner in the Chinese law firm Fangda Partners. It tries to expand the channels for fundraising as well as the channels for exits. These are the two most challenging points in the RMB funds today.
The Chinese government encourages the development of secondary VC Funds and the enhancement of private equity valuations. The guideline noted that the government would implement a pilot program for distributing shares in kind.
In this guideline it mentions to promote a ‘distribute stock in kind’ pilot program. “We have had two pilot scheme approved before 2022, but no rule has been released on how to request the pilot status,” Chen stated. He added that the guidelines could help provide key ways for VC funds applying for pilot status.
Chen said that the majority of the guideline was not new. It is rather a summary of existing regulations related to venture capital funds. She said that one new concept would be the types of VC funds that are allowed.
She said that the document introduced some new concepts. For example, it stated that the VC fund would be expanded to include equity and debt mixed products. “For this type of product, it listed [three types of investments] – preferential stock, convertible loan and also stock options.” Chen added that the latter option was a new addition, as it had not been explicitly mentioned in previous fund regulations for VC Funds.
Chen, a Beijing-based manager, said that several foreign managers have already inquired about the new regulations, and are waiting for more detailed measures.
Clifford Chance’s White said that the Chinese venture capital industry is dominated by funds run by local and state governments. He added that regulatory updates could be crucial to boosting the sources of funding for VC funds.
“Private contract funds are more geared towards private investors, including international investors. This type of fund has a problem in that it lacks a ‘legal person’ under Chinese law, which can create legal issues for the investee company at the IPO stage,” White said. “Hopefully, China Securities Regulatory Commission (CSRC) will come up with new regulations to specifically address this problem.”