China venture capital, private equity funds rattled by proposed changes

By Samuel Shen and Kane Wu

SHANGHAI/HONG KONG (Reuters) -China’s proposal to drastically raise the bar for investing in private equity (PE) and venture capital (VC) funds is facing backlash from industry players concerned it could wipe out small funds and choke financing to startups struggling in a weak economy.

The country’s securities regulators published draft rules late on Friday that would require a qualified investor in PE and VC funds to put up at least 3 million yuan ($418,731), tripling the current threshold in an effort to protect small investors.

For funds that invest the bulk of their assets in a particular company or project, the bar for individual investors is set at 10 million yuan, up from 1 million previously.

“The new, tough rules would dig the grave for small players,” said Abraham Zhang, chairman of Shenzhen-based venture capital firm China Europe Capital, which invests in technology like chipmaking and artificial intelligence. “It’s aggravating sufferings of an industry already shivering in a bleak winter.”

Fundraising by newly set-up PE and VC funds in China slumped 20% during the first nine months of 2023, according to consultancy Zero2IPO, as the country’s weak economy and wobbly stock market dampened risk appetite.

Smaller, earlier-stage venture funds tend to rely on high-net worth, individual investors for fundraising, compared with larger, later-stage funds that typically tap institutional money for capital, industry players said.

Li Gangqiang, a veteran venture capitalist and co-founder of Beijing Potential Shares Technology Co, a fundraising platform for early-stage investors and company entrepreneurs, said the proposal was “devastating” to single-project funds that are currently favoured by individual investors.

“Such a policy is extremely unfair to single-project fund managers … and to small investors,” Li said in a blog post, expecting at least 1,000 private fund management firms to be eliminated if the rules take effect in the current form.

The China Securities Regulatory Commission (CSRC), which has repeatedly vowed this year to reduce financial risks, said the rules were designed to protect small investors.

But venture capitalists say the new policies could backfire.

“In a tough fundraising environment, it’s like spreading salt on your wound, and runs counter to government support toward early-stage, tech startups,” said Andrew Qian, CEO of Shanghai-based New Access Capital, which manages more than 1 billion yuan with a focus on growth-stage investing.

China-focused, yuan-denominated PE funds have raised $9.7 billion so far this year versus $33.7 billion last year and $116.6 billion in 2021, marking the lowest since at least 2010, according to data firm Preqin.

In addition, no China-focused buyout fund has been raised in 2023 in any currency. That compares with $210 million in 2022 and $13.2 billion in 2019 before the pandemic.

Qian argues that VC funds, especially those that target smaller investors such as family members and friends that are most vulnerable to the new rules should be regulated differently from big private equity funds.

“Overseas, angel investment is accessible” to ordinary people, the VC veteran said, referring to countries like the U.S. “But we shut the doors to such investors. That would make fundraising even more difficult.”

($1 = 7.1749 Chinese yuan renminbi)

(Reporting by Samuel Shen and Li Gu in Shanghai and Kane Wu in Hong Kong; editing by Jamie Freed)