Alliance to smooth equity investment funds deal

A new vehicle has been set up in Beijing to make it easier for investors to buy and sell shares in equity investment funds, as the IPO market remains in the doldrums.

The China PE Secondary Market Development Alliance is expected to be made up of a group of venture capital and private equity firms, commercial banks, securities companies and financial service institutions, who can help investors trade shares on the Beijing Financial Assets Exchange.

Talking at the launch on Thursday, Yu Bo, president of the new alliance, and vice-president at Beijing Financial Assets Exchange, said that by the end of 2015, he hopes to have 2,000 member organizations, and for them to have completed 1,000 deals worth 30 billion yuan ($4.72 billion) in the PE secondary market.

Yu said VC and PE investment in China in 2011 hit a record high of 254.3 billion yuan, but in the third and fourth quarters of that year, the country's PE and VC market slumped due to the European debt and global financial crises.

"In China, about 70 percent of exits are made through an IPO, while the percentage in developed economies such as the United States is only about 20 percent," he said.

"So we have to try other new exit channels for the healthy development of the Chinese VC and PE market."

He said the alliance can enable members to better communicate with buyers and sellers. Pricing mechanisms can also be more competitive as it will be easier for traders to deal with those involved.

Wu Gang, chairman of Kunwu Jiuding Capital Co Ltd, a leading domestic PE company, said many limited partner investors in Chinese equity investment funds are individuals who want short-term returns, but that VC and PE investment is really a long-term business.

"The establishment of the alliance for share trading of limited partners in the secondary market is of great importance, because it diversifies the exit channels."

He added the more popular exit channel of mergers and acquisitions in developed economies is difficult to access in China, as many Chinese enterprises are young and are reluctant to allow VC and PE firms to be their controlling investors, leaving them with only small stakes in companies.

Brooke Zhou, executive director at LGT Capital Partners Ltd, added that globally, only about 5 percent of exits are made on the secondary market.

"The funds raised in Chinese VC and PE markets are more than 200 billion yuan, and the current percentage of second market exit is much smaller than 5 percent, so this new alliance has great potential," Zhou said.