New PE regulation to advance tech drive

China's first regulation covering supervision and administration of private equity funds unveiled on Sunday will facilitate the industry's high-quality development by better managing risks, and is expected to further advance China's technological innovation and better serve the real economy, said experts.

According to a State Council decree released on Sunday, the new regulation will take effect on Sept 1.The regulation delineates the bottom line of supervision to control risks from the outset. Differentiated supervision will be adopted according to fund managers' business type, asset management scale, compliance, risk control and capability to serve investors, according to the explanation provided by the China Securities Regulatory Commission on its official website on Sunday.

By allowing for industry recognition and meeting expectations based on supervisory history over the past few years, the new regulation will serve as a fundamental mechanism to complete comprehensive supervision over China's PE industry, said the CSRC.

Based on the new regulation, the CSRC will further optimize its management of PE funds' fundraising, investment, capital operations and information disclosure practices.

Jiao Jinhong, CSRC's chief lawyer, said that 10 years of preparations have been made for the new regulation, which provides detailed measures throughout the PE lifecycle of fundraising, investment, management and exit. It has also rolled out strict punishment for violations such as misappropriation and misuse of fund capital.

The new regulation clearly states that the PE industry should serve the real economy and promote technological innovation.

Tian Lihui, director of the Institute of Finance and Development at Nankai University, said that the regulation is introduced at a time when China's fund industry has been making rapid advances. As China heads for high-quality economic growth, the PE sector should seek substantial development amid regulations to nurture more "unicorn "companies with technological specialties, he said.

Private investment funds in the form of contracts, corporations and partnerships are all subject to the new regulation.

In China, the PE sector is further divided into private securities investment funds and private equity funds. The former mainly invests in secondary markets. Private equity funds invest in non-publicly traded companies' equities, with public listing and mergers and acquisitions as the funds' major sources of exits and profits. Venture capital is also part of PE funds.

The regulation also has a special chapter for VC funds by defining their investment scope, investment terms and contract strategies. The VC sector should implement differentiated supervision and self-disciplined management. VCs are encouraged to invest in smaller companies at an earlier stage with technological status at the core of their investment targets.

Guo Shiliang, an independent financial analyst, said that the emphasis on VC funds in the new regulation will guide and encourage more VC funds to invest in growth enterprises and innovative startups. Combined with the registration-based initial public offering mechanism, which has been promoted across the A-share market earlier this year, the new regulation will help PE funds expand exit channels and elevate investment enthusiasm. Companies' financing needs will thus be better met, Guo said.

As of May, there were 22,000 PE fund managers registered with the Asset Management Association of China, with 153,000 funds under management, totaling 21 trillion yuan ($2.9 trillion).