<article>China’s securities regulator has launched a new pilot program that enables share distributions by private equity (PE) and venture capital (VC) funds, adding a much-needed alternative exit option for them.</article>

China’s securities regulator has launched a new pilot program that enables share distributions by private equity (PE) and venture capital (VC) funds, adding a much-needed alternative exit option for them.
The program aims to create a straightforward way for funds to distribute shares in one of their portfolio companies to their investors, who are usually limited partners. This type of non-cash payment, known as a distribution-in-kind, is common in overseas markets, but previously was much harder to do in China.
Until now, to exit an investment in a firm using non-cash distributions, Chinese fund managers were “limited by many regulatory requirements,” according to Chinese law firm Haiwen &amp; Partners.
“The current enterprise registration system and the securities registration and settlement system lack corresponding supporting mechanisms, resulting in difficulties in implementing non-cash distribution,” the firm’s lawyers said in a report Monday.
PE/VC funds typically liquidate their position in a company after it floats on a stock exchange, and distribute the cash proceeds to their investors.
The new pilot program “will broaden PE/VC funds’ exit channels and promote a virtuous investment cycle,” the China Securities Regulatory Commission (CSRC) said in a Friday statement.
“Many PE funds traditionally have a five-to-10-year duration, but it usually takes quite a few years for their early-stage projects to go public, so they have strong exit demand,” a PE source told Caixin. “With share distribution, PE funds can avoid selling a listed company’s shares and putting downward pressure on the stock market, while investors who favor the company have an additional way to own the shares.”
The program only targets a listed company’s pre-IPO shares, according to the CSRC. PE/VC funds or fund investors that are a controlling shareholder, the largest shareholder or the actual controller of the listed company are not eligible for the program. Funds that hold company shares subject to sale restrictions are also not allowed to participate.
The regulator said that the program takes into account the different needs of investors and will boost the role of PE/VC funds in supporting the real economy, innovation and entrepreneurship.
The CSRC has been ramping up efforts over the past two years to come up with more mechanisms for fund investors wanting to cash out early. In November, the regulator approved apilot program in Shanghai for a trading platform to enable investors in PE/VC funds to transfer their shares in the funds, which followed a similar pilot launched in Beijing in December 2020.
As of the end of May, the Chinese mainland had 31,569 PE funds managing a combined 10.8 trillion yuan ($1.6 trillion) of assets, and 16,355 VC funds with 2.6 trillion yuan in assets under management, according to the Asset Management Association of China.
Venture capitalists primarily invest in startups at their early stage of development, while PE funds enter during later funding rounds but still before a company has listed. Both types of funds have been playing an increasingly important role in China’s capital markets.
However, finding a profitable way to cash out from investments has become challenging, analysts said.
Weak stock markets on the Chinese mainland and Hong Kong contributed to an unattractive exit environment in the second half of 2021, with China’s exit value plummeting 50% year-on-year, U.S. consulting firm Bain &amp; Co. said in a report published in late March.
“Policy uncertainty and poorly performing public markets left China unable to support the high IPO multiples required for a profitable exit. Those conditions could continue to dampen China’s exit market in 2022,” the report said.
This article was first published in <a href="https://www.caixinglobal.com/2022-07-12/china-pilots-giving-private-equity-and-venture-capital-funds-a-new-exit-option-101912113.html">Caixin Global.</a>

The program aims to create a straightforward way for funds to distribute shares in their portfolio companies to their investors or LPs.

China launches pilot plan to enable new exit option for PE/VC funds

Bring stories like this into your inbox every day.

Sign up for our newsletter - The Daily Brief

China launches pilot plan to enable new exit option for PE/VC funds

Start your deal-making journey now!

Bring stories like this into your inbox every day.

Sign up for our newsletter - The Daily Brief