China's securities regulator last week lifted its January ban on private equity firms from raising funds on the National Equities Exchange and Quotations, but the latter's new listing requirements could mean not many may be able to list on it.
The new listing norms of the NEEQ, also known as the New Third Board, could mean very few of the PE funds seeking to list would meet the new minimum assets requirement.
The norm stipulates that PE funds should have had assets worth 5 billion yuan ($760 million) under management for the last three years on average. Similarly, venture capital firms should have had assets worth 2 billion yuan under management for the last three years on average.
As for the fund firms already listed on the NEEQ, at least 80 percent of their revenue needs to be in the form of fees for managing their clients' assets. Stated differently, 80 percentage their declared income for listing purposes cannot include capital gains.
They have one year grace time to comply with this regulation. Non-compliance would lead to delisting.
The NEEQ is China's third national equity exchange. It is popular among micro-, small- and medium-sized companies. As on Friday, 7,464 companies are listed on it.
Listing applications of 33 PE and VC firms are waiting for the NEEQ's approval. But only a few of them, such as Legend Capital, CITIC Capital and Sense Gain Asset Management, meet the new minimum assets requirement.
"Many PE and VC companies can't meet the requirement because funds from their investors always come in stages," said Yi Jigang, president of the Beijing-based private-equity firm Orient Jiyi Investment.
More than 20 PE firms are already listed on the NEEQ. Of them, only Shenzhen Cowin Venture Capital Investments Ltd meets the 80-percent-revenue-from-fee requirement. It earned 90 percent of its income from fund management fee, according to its annual report for 2015.
Fund management fee of PE firm China Science & Merchants Investment Management Group accounted for only 55 percent of its total income. For JD Capital, the corresponding figure was nearly 61 percent. They are among the largest NEEQ-listed PE firms.
An industry expert said on condition of anonymity that the new requirements are so strict that fewer than 50 PE and VC firms in China would meet them.
The securities regulator's ban in January came in response to concerns that PE and VC firms misuse funds raised on the NEEQ for speculative trading in the main stock markets, instead of sticking to their stated objective of investing them in high-growth small and medium-sized firms.
For its part, the NEEQ stipulated that funds raised from its market cannot be used to trade in stocks on the Shanghai and Shenzhen bourses, except for shares in invested companies that go public in the A-share market.
Zhang Xiaojun, a spokesman of the China Securities Regulatory Commission, said the NEEQ shall strictly regulate all financial institutions, including PE and VC firms, already listed on it, and shall issue different disclosure norms for each class of companies.
"The CSRC will ensure that the New Third Board is a market serving the real economy, and crack down on illegal activities to protect the interests of investors for the steady development of the market," said Zhang.
In China, real economy refers to products and services, and the businesses that produce or offer them, and excludes firms focused only on capital gains.
Zheng Lichang, an analyst at JT Asset Management, said the CSRC and NEEQ offer PE firms healthy opportunities for listing and fund-raising, and the strict requirements will help prevent speculative trading in stocks.
