Booming Stock Market Has Helped China’s Private Equity Industry


June 15, 2015

China’s private equity industry has matured quickly in the past few years. With the Chinese stock market surging in recent months, private equity and hedge funds have also started to emerge in an impressive rate. The increase in private equity is changing the country’s investment scene.


Growing Fund Numbers


According to the figures from the Chinese securities regulator, the country had 12,285 private investment funds at the end of May. These investment funds include both private equity and venture capital funds.


Interestingly, the figure has significantly increased from the levels three months earlier. In fact, the last three months have seen over 4,000 new hedge and private equity funds emerge.


Furthermore, the funds’ assets under management have gone up by $75 billion. In total, China’s private equity funds currently have around $433 billion worth of assets under management.
One of the reason’s that has helped the country increase fund numbers so rapidly is the difference in fund structure. Whereas a typical Western hedge fund requires at least a $1 million investment, a Chinese hedge fund only requires a $161,000 investment.


The Booming Stock Market


The increase in private investment funds is largely down to the country’s booming stock market. The Shanghai Composite Index, for instance, closed at a seven-year high last week. It has increased by 150% in the past year.


Even more impressive has been the increase in the technology-focused ChiNext index. The index has increased three-fold in the last year. One company, Beijing Baofeng Technology Co., symbolises the impressive stock market boom perfectly having increased its stock price by 4200% in three months.


For start-ups and businesses the influx of new forms of investments are a welcomed sight. Traditional methods for obtaining capital in China have been under focus recently, as the government has tried to introduce policies that would enhance bank lending.


Easing the Regulations


The rise of private equity firms has also been helped by the government, which has made it easier to register private equity and hedge funds. The registration process used to be filled with bureaucracy, but the new system is much more streamlined.


Overall, the officials in Beijing are boosting a much more entrepreneurial and innovative China. In a Financial Times interview on Sunday, Feng Gang, a chairman of private equity firm WinSure Capital, said, “In the past 14 years I’ve never seen regulators so encouraging of innovation”.


Performance Key Concern


Preqin’s report from February showed private equity funds with a China focus are the most concerned about performance. This is somewhat surprising, since venture capital has “the strongest one-year horizon returns of any private equity fund”.


According to a recent Forbes article, the booming stock market has made private equity managers have to think carefully when to sell. Gabriel Li, managing director at Orchid Asia Group, told in the interview, “About a month ago, we sold one of our investments at 66 times P/E ratio. Last week, (the price) doubled, and now it’s 120 times.”


The opportunities for private equity and hedge funds are currently lucrative in China. Perhaps the biggest question is, how long can the stock boom last?


If you are looking for private equity deals in the emerging markets, check out the DealMarket private equity platform.

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