A rosy outlook for private funds, strict supervision close behind, and the growing importance of professionalism

According to the Asset Management Association of China, by the end of July this year 20,110 private fund managers had been registered, 58,734 private funds had been filed, and the assets under management were close to RMB 10 trillion. Nationwide, 176 equity private fund institutions had reached the RMB 10 billion level, and the largest domestic private equity fund, raising more than RMB 100 billion at its first closing, had appeared; private equity and venture capital may have entered a golden age.

The good news for private funds has come together with strict supervision. From the beginning of 2016 to now the CSRC and the Asset Management Association of China have issued a series of new supervisory rules one after another, building a self-regulatory system of "seven plus two" that supervises in every direction, from registration and filing, fundraising, internal control and information disclosure to acting as investment adviser, custody and outsourcing, and so regularises the industry from the point of entry. In 2017 supervision has continued to grow stronger. The number of rounds of feedback on a manager's filing has risen markedly, the quality required of rectification has risen markedly, and a large number of firms operating irregularly have been penalised or stopped, so that the intensity of supervision keeps climbing.

Figures show that by the end of July 2017 the private fund industry employed 225,300 people. Compared with December last year, since 2017 the number of private fund managers filed has risen by 2,677, the number of private funds filed by 12,229, and the paid-in scale by RMB 2.06 trillion.

Yet with the market so favourable the number of people working in private funds has been falling steadily: it is 57,000 fewer than the 282,300 shown in the figures for February this year. The turbulence within the industry brought about by strict supervision, while it regularises conduct, has also made some junior staff who joined recently uneasy, so that they move to banks, venture capital and other industries; the loss of talent from private funds is becoming steadily more obvious.

Where the industry's prospects are considerable but it has not yet settled into a properly regularised course, it is not wise to keep the old model of operation and management and let institutions of every quality jostle together, unfair competition and uneven standards among practitioners continue to ferment.

At the fourth 816 Wealth Management Summit held on 16 August 2017 a number of industry figures discussed the matter, exploring "the new direction for private funds under unified supervision", and "integration" and "professionalism" became the keywords of the industry's transformation.

Private funds should understand the industry's characteristics, and their own, thoroughly

In July 2017 the National Financial Work Conference proposed that finance should return to its origin and serve the real economy better, and decided to establish the Financial Stability and Development Committee of the State Council. It is now broadly agreed in the industry that the period of wild growth in private funds is near its end, and that the age of strong supervision and regularisation has arrived.

Xu Jingquan, secretary general of the Qianhai Financial Innovation Promotion Association of Shenzhen, considers that a private fund should first recognise what its own genes are. "There are many private funds now, whether in equity or in the secondary market, and some lay excessive stress on the state's industrial policy and build their positions around it. In my own view that is not necessarily a good thing: if it is not in your genes, if you are very poor at it, you may not achieve a good return. As Li Kaifu said, be the best you can be; the world is different because of you, and different because of me."

"Professionalism, compliance, innovation and integration are the key to the development of private funds at present," said Xiao Shuilong, chairman of Chuangdongfang. Competing with enterprises that have traditional resource advantages, "integration" is equally indispensable. "Because our capacity and our capital are far inferior to those of the traditional large state-owned financial enterprises, what is to be done? Only integration: integration is a means of development for us, and an advantage too."

Chang Hong, co-president of China Science Merchants, said that the capacity to allocate assets should be the core competitiveness of a private fund. "Once your professionalism is there and the precision of your investment has risen, the fundraising follows of its own accord." Yang Ji, managing director of investment banking at Datong Securities, agreed, holding that a private fund must be professional. "Professionalism does not mean that being professional is bound to make a great deal of money, but it guards against risk: when risk is high you can keep yourself alive, and when the next cycle comes, when even investing with your eyes shut makes money, you can win greater recognition from clients and a larger share of the market."

Once the conduct of the private fund industry has been gradually regularised, how to go on managing and operating efficiently, and how to compete with peers and with other financial asset management enterprises, becomes a question a company must think about at once if it is to survive. And on the basis of understanding and recognising that private funds are a comparatively young industry, the way to lasting development is to discover and develop a company's own strengths, make good its weaknesses, fix a sensible "positioning", and raise its "professionalism".

The industry is still unsettled, and the "Gaosouyi phenomenon" appears

Those with real strength are not easily held back from developing by stronger state supervision and guidance.

In June 2017 the Gaosouyi group moved into a stand-alone office building in the Shenzhen Bay Technology and Ecology Park. This was the sixth move since it was founded in 2013, as its scale has steadily grown. Gaosouyi may be said to have developed with such momentum that it has become a "phenomenon", called in the industry the "Gaosouyi phenomenon".

From Chuangdongfang's angel round in 2014 to the A and B rounds in 2016, Gaosouyi has raised five rounds in all. At present the assets under management of its capital business exceed RMB 11 billion. "It is expected that this year Gaosouyi Capital's assets under management will reach RMB 20 billion," said Chen Kang, its head, full of confidence in the company's prospects.

Chen Kang explained that the "secret" of Gaosouyi's success is to treat listed companies as private equity investments, accompanying small and medium-cap listed companies as they grow and develop and enjoying the dividend of that growth. Through the rich product lines the company has developed, it provides small and medium-cap listed companies with equity funds, merger funds, liquidity loans, industry funds and other forms of financing. As an "integrator of one-stop solutions" to the needs of listed companies, it also produces a large and rich product line for clients, with long, medium and short-term options, with both large and small amounts of capital, by way of debt, mezzanine or equity.

"In fact, this responds to the state's need to build a multi-tiered financial system," Chen Kang said. Gaosouyi Capital at present plays the part of a supplement to the traditional financial institutions, and a substitute for private capital.

From this "success story" of Gaosouyi swimming against the current it is not hard to see that it defined its own position, understood the needs of its client group thoroughly and completely, and studied every kind of scheme that could satisfy a client's financing needs while bringing it convenience; integrating resources and persisting in raising its "professionalism" is what enabled it to develop so fast in a little over three years and to keep up that momentum.