CHINA Trends and Developments Contributed by: Ping Zhang, Xining Dai and Moxi Zhang, Zhong Lun Law Firm
Overview of Investment Fund Markets Influenced by changes in internal and external environments, increasingly stringent industry regulations, and market fluctuations, China’s investment funds industry faces significant chal - lenges in various aspects – including fundrais - ing, establishment, investment and exit – which have not been seen in recent years. Compared to countries with mature investment funds markets, China’s investment funds industry has entered the adjustment phase sooner. This adjustment phase is characterised by the following features. Funding sources State-owned capital has become the pre - dominant funding source for investment funds. Investment from insurance funds, pensions and other institutional investors has also significant - ly increased, with the proportion of long-term capital rising further. Local governments actively promote the introduction of foreign capital, lead - ing to a proliferation of qualified foreign limited partnership (QFLP) pilot programmes. Exit channels Exit opportunities are gradually leaning towards venture capital funds. Exit methods are primar - ily concentrated in “agreement transfers” and “corporate buybacks”, while IPO transactions are experiencing a short-term decline. Number of privately offered fund managers The number of new registrations has sharply decreased, with a peak in deregistrations in 2023. Consequently, the number of existing privately offered fund managers has steadily declined, leading to higher industry concentra - tion. Number and scale of investment funds Since 2022, the number of equity funds has been decreasing annually; in contrast, venture
capital funds have experienced growth against the trend. Equity investments The trend of early-stage investments continues, with more than half of transactions occurring in the angel round to Series C. As regards governmental supervision, with the release in the second half of 2023 of China’s first administrative regulation specific to the private funds industry, the Regulation on the Supervision and Administration of Privately Offered Invest - ment Funds , China’s investment funds industry has entered a stage of standardised develop - ment with stringent regulation. Historical and Forward-Looking Trends The practice of investment funds in China began in the 1980s and has evolved over more than 40 years, generally encompassing three phases: In the 1980s, the Chinese government intro - duced the concept of “venture capital” for the first time, in an official document. During the following year, China’s first domestic venture capital company – the China New Technology Venture Investment Company – was established. At this stage, regulations governing investment funds were not yet clear, and the establishment of investment funds was primarily government- led. Rapid development In the early 2000s, the private fund industry experienced significant growth, driven by the influx of foreign privately offered fund managers • emergence and inception; • rapid development; and • enhanced regulation. Emergence and inception
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