Chinese private equity appeals for policy support

The country's PE industry calls for the resumption of mainland IPOs and a freeze of taxes to pull it through the current downturn.
PE partners say the shutdown of the mainland IPO market means PE firms must depend on M&A deals to exit the companies in which they invest.
PE partners say the shutdown of the mainland IPO market means PE firms must depend on M&A deals to exit the companies in which they invest.

China’s regulators need to do more to help private equity firms get through difficult times, industry executives said at a conference in Shenzhen on Friday.

The Chinese PE industry, which had been flourishing for 10 years, has stagnated since the second half of 2011. The number and the size of the completed PE investments dropped 31.9% and 31.4% from end-2010 to end-2011 respectively, to the lowest levels since 2009, according to ChinaVenture, a domestic investment consulting firm.

During the past five years, venture capital and private equity capital have invested a combined Rmb700 billion ($114 billion) in 6,647 companies. However, only 610 or 9.5% of the companies have got listed, according to ChinaVenture. IPOs are used as a method for PE firms to exit their investments.

PE partners say the shutdown of the mainland IPO market means PE firms must depend on M&A deals to exit the companies in which they invest.

Meanwhile, during the past year only two Chinese companies have successfully listed in the US stock markets, and none in the A-share market.

“It’s a big mistake to stop IPOs,” says Wang Shouren, the secretary general of Shenzhen Venture Capital Association, at the conference. “We should believe in investors’ own judgment in their investments in listed companies and let the companies go for IPOs,” he says.

PE partners also said possible tax reform has cast a shadow over the growth of PE investments.

Local media last April reported that the State Administration of Taxation was drafting rules to increase taxes on partners in PE firms. Under the new rules, the taxes on the partners could be increased from an average rate of 20% to 35%-40%.

The regulator said it drafted the new rules because the PE industry had developed too fast for regulation to catch up. It also said there were flaws in the previous tax rules, which had seen some individuals take advantage of the benefits the government offered to PE firms.

“Now different cities have different tax calculation measures, as the unified rules are still on the way. However, the uncertainty really hangs over our heads and affects the investment and exit strategies of partners,” says Tian Lixin, a founder managing partner with a private equity firm DT Capital. 

It’s true that the problems of China’s PE industry are mainly caused by the increasing competition in the industry and the slowdown of the country’s economy. However, the PE partners think that the government should give more policy support to them instead of large state-owned companies that easily get funds.

“The government thinks more of the big institutions like big banks than us,” said Xiao Bing, president and executive partner with Shenzhen Fortune Venture Capital. “What really matters to the real economy are the tiny and small-sized companies which are supported by us VC (venture capital) or PE (private equity) firms,” says Xiao.

 

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