Shanghai pilot to bolster PE, VC exits

The exit channel for private equity and venture capital firms that invest in up-and-coming businesses like startups and small and medium-sized enterprises will be further expanded in China as the central regulator has approved an investment share transfer program in Shanghai.

The China Securities Regulatory Commission, the country's securities watchdog, approved on Monday the launch of a pilot program under which investment shares of PE and VC firms can be transferred. The pilot program will be experimented at the Shanghai Equity Exchange in the hope of expanding exit channels for PE and VC firms.

The regional equity market can be better integrated with PE and VC firms in the pilot program so that the circulation of finance among industries will be smoother, said the CSRC.

The pilot program is part of Shanghai's efforts to help address the mission assigned to Pudong New Area. In a guideline released on July 15 to build Pudong into a pioneer of the country's socialist modernization, the central authorities said that a pilot platform to transfer PE and VC firms' shares in their invested companies should be set up based on past experiences in order to promote the development of a secondary market for such shares.

PE and VC firms, which usually aim to finance startups and SMEs with long-term growth potential, can exit via IPOs as well as mergers and acquisitions, which include secondary sale purchases.

Zhong Yan, managing director of Silicon Valley Bank Capital China, said the secondary market for PE and VC firms' shares in their invested companies is quite small in China at present.

But demand for trading in PE and VC firms' shares in the secondary market is strong. The establishment of such funds peaked between 2014 and 2015 and a large number of them are faced with much difficulty in post-investment exits or are unable to cash out at opportune times.

Although most of the fund investors wish to exit via IPOs, only a very limited number of them can successfully use this exit channel. As a result, there is robust demand for secondary funds in the Chinese market at present, she said.

Experts from Shanghai-based Gopher Asset Management said the secondary market for PE firms' shares will certainly emerge after the expansion of PE and VC firms. Based on experiences in overseas markets, the need to transfer investment shares will emerge when PE and VC firms mature.

The penetration rate of the secondary market for PE firms' shares is said to be 3 percent in overseas markets. Given the current 7 trillion yuan ($1 trillion) value of the Chinese PE and VC industry, the country's secondary market for PE firms' shares could be around an estimated 200 billion yuan.