WITH China’s stock markets and economy in the doldrums, some Chinese investors of means are finding a new place to speculate: private equity funds betting on internet companies.
It’s a trend that has some professional investors worried. A crop of investment firms are wooing these individual investors on online finance sites with promises of outlandish returns.
In a post on personal-finance website Soufoo.com, for example, a firm called Shenzhen Beidouxing Asset Management recently touted plans to raise a fund that promises a return of 200% to 600% in five years on equity investment in the latest fundraising by privately held Meituan-Dianping, China’s top online seller of movie tickets and restaurant bookings.
The post rates the product’s riskiness as "moderate". A Beidouxing executive said the company didn’t want to comment. Meituan-Dianping didn’t respond to requests for comment. Another investment firm, Shanghai New Founder Equity Investment Management, is raising a fund that it says will invest in the pre-IPO shares of Chinese technology and media companies that are listed in the US now but will be taken private and relist in China.
New Founder says in a post on the website of its parent company, Howbuy.com, that Chinese companies’ shares in the US are undervalued, while Chinese investors are eager to give them much higher valuations. It will be "the biggest investment opportunity in a decade", New Founder says. Howbuy.com declined to comment.
It is unclear how successful those firms have been at raising money, but some veteran financiers say they have seen an influx of capital from individual investors of moderate wealth seeking venture-capital and private-equity investments.
"This is middle-class money investing in highly risky businesses," says Fan Bao, chief executive of investment bank China Renaissance Holdings, which was an investor and adviser on some of China’s biggest tech deals last year, including the Meituan-Dianping merger, which valued the combined business at more than $15bn.
Even when the deals involve fundamentally good businesses, he says, it is still risky for most regular investors to make big, long-term bets on a single project. China Renaissance routinely checks the background of investors in its own funds and in companies it advises.
Mr Bao says he used to know about every institutional investor and wealthy individual on the list, but last year more and more new names came up. They checked and found some big institutional investors had syndicated part of their equity quota to smaller firms, some of which then resold the equity to individual investors who were eager to invest in anything related to the internet.
Individual investors have been the driving force over the past two decades behind the volatile Chinese stock market, where trading is dominated by market rumours rather than earnings and growth prospects.
With China’s benchmark Shanghai Composite Index down 45% from its peak last June, many of those investors have sought to put their cash to work in one of the brightest spots in the slowing economy: the internet sector. Some of the Chinese funds chasing this interest are targeting investors who are relatively well off, but not necessarily super rich. They set minimum investment requirements as low as 1-million yuan, or about $150,000, and allow several individuals to pool money to meet those requirements as long as only one person’s name appears on the contract.
That makes for a big number of potential investors. A Bain survey found that the number of China’s high-net-worth individuals who have investible assets above 10-million yuan exceeded 1-million in 2014. Executives in the wealth management industry believe at least 2-million Chinese have investible assets above 1-million yuan.
About 2,970 private equity and venture capital funds raised altogether 784.9-billion yuan in 2015, an increase from 511.8-billion yuan for 745 funds in 2014, according to investment database pedata.cn, which is run by Zero2IPO Research in Beijing. Among them, all but 120 funds were raised in yuan, and 91% of 15,847 limited partners that joined these funds are Chinese.
The concern is that many inexperienced individual investors are ill-prepared for high-risk deals that offer little legal protection, potentially exacerbating the effects of any downturn.
Mr Bao says that there are few disclosure requirements for the sorts of special-project funds that are making outsize return promises, and little legal protection for individual investors in case things go wrong. (He says his firm takes individual investors, but sets the minimum investment requirement at 50-million yuan.)
In a recent commentary in Caixin, a Chinese business magazine, he urged more oversight from regulators of such funds. The China Securities Regulatory Commission declined to make immediate comment. These Chinese funds have little in common with US private equity firms such as Blackstone Group or KKR that are mainly open to institutional investors such as pension funds or endowments and to individuals wealthy enough to commit millions of dollars for as long as 10 years. These Chinese funds typically pool money for a single deal, requiring lockups as short as three to four years.
In China, government policies and rhetoric to boost internet and other innovation-driven sectors have helped fuel the fever for investing in internet-focused funds, investors and venture capitalists say.
Some funds’ marketing materials cite favourable government policies as a reason to invest. Some tech entrepreneurs welcome new sources of funding, especially after the venture capital market chilled significantly last winter.
But others believe a capital influx from average investors distorts the market, allowing lower-quality startups to stick around and compete with good ones for resources and market share.
Ruby Lu, partner at Beijing-based venture capital firm DCM China, says that professional investors provide not only funding but also contacts and boardroom guidance — things individual investors will not be able to supply.
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Picture: THINKSTOCK
WITH China’s stock markets and economy in the doldrums, some Chinese investors of means are finding a new place to speculate: private equity funds betting on internet companies.
It’s a trend that has some professional investors worried. A crop of investment firms are wooing these individual investors on online finance sites with promises of outlandish returns.
In a post on personal-finance website Soufoo.com, for example, a firm called Shenzhen Beidouxing Asset Management recently touted plans to raise a fund that promises a return of 200% to 600% in five years on equity investment in the latest fundraising by privately held Meituan-Dianping, China’s top online seller of movie tickets and restaurant bookings.
The post rates the product’s riskiness as "moderate". A Beidouxing executive said the company didn’t want to comment. Meituan-Dianping didn’t respond to requests for comment. Another investment firm, Shanghai New Founder Equity Investment Management, is raising a fund that it says will invest in the pre-IPO shares of Chinese technology and media companies that are listed in the US now but will be taken private and relist in China.
New Founder says in a post on the website of its parent company, Howbuy.com, that Chinese companies’ shares in the US are undervalued, while Chinese investors are eager to give them much higher valuations. It will be "the biggest investment opportunity in a decade", New Founder says. Howbuy.com declined to comment.
It is unclear how successful those firms have been at raising money, but some veteran financiers say they have seen an influx of capital from individual investors of moderate wealth seeking venture-capital and private-equity investments.
"This is middle-class money investing in highly risky businesses," says Fan Bao, chief executive of investment bank China Renaissance Holdings, which was an investor and adviser on some of China’s biggest tech deals last year, including the Meituan-Dianping merger, which valued the combined business at more than $15bn.
Even when the deals involve fundamentally good businesses, he says, it is still risky for most regular investors to make big, long-term bets on a single project. China Renaissance routinely checks the background of investors in its own funds and in companies it advises.
Mr Bao says he used to know about every institutional investor and wealthy individual on the list, but last year more and more new names came up. They checked and found some big institutional investors had syndicated part of their equity quota to smaller firms, some of which then resold the equity to individual investors who were eager to invest in anything related to the internet.
Individual investors have been the driving force over the past two decades behind the volatile Chinese stock market, where trading is dominated by market rumours rather than earnings and growth prospects.
With China’s benchmark Shanghai Composite Index down 45% from its peak last June, many of those investors have sought to put their cash to work in one of the brightest spots in the slowing economy: the internet sector. Some of the Chinese funds chasing this interest are targeting investors who are relatively well off, but not necessarily super rich. They set minimum investment requirements as low as 1-million yuan, or about $150,000, and allow several individuals to pool money to meet those requirements as long as only one person’s name appears on the contract.
That makes for a big number of potential investors. A Bain survey found that the number of China’s high-net-worth individuals who have investible assets above 10-million yuan exceeded 1-million in 2014. Executives in the wealth management industry believe at least 2-million Chinese have investible assets above 1-million yuan.
About 2,970 private equity and venture capital funds raised altogether 784.9-billion yuan in 2015, an increase from 511.8-billion yuan for 745 funds in 2014, according to investment database pedata.cn, which is run by Zero2IPO Research in Beijing. Among them, all but 120 funds were raised in yuan, and 91% of 15,847 limited partners that joined these funds are Chinese.
The concern is that many inexperienced individual investors are ill-prepared for high-risk deals that offer little legal protection, potentially exacerbating the effects of any downturn.
Mr Bao says that there are few disclosure requirements for the sorts of special-project funds that are making outsize return promises, and little legal protection for individual investors in case things go wrong. (He says his firm takes individual investors, but sets the minimum investment requirement at 50-million yuan.)
In a recent commentary in Caixin, a Chinese business magazine, he urged more oversight from regulators of such funds. The China Securities Regulatory Commission declined to make immediate comment. These Chinese funds have little in common with US private equity firms such as Blackstone Group or KKR that are mainly open to institutional investors such as pension funds or endowments and to individuals wealthy enough to commit millions of dollars for as long as 10 years. These Chinese funds typically pool money for a single deal, requiring lockups as short as three to four years.
In China, government policies and rhetoric to boost internet and other innovation-driven sectors have helped fuel the fever for investing in internet-focused funds, investors and venture capitalists say.
Some funds’ marketing materials cite favourable government policies as a reason to invest. Some tech entrepreneurs welcome new sources of funding, especially after the venture capital market chilled significantly last winter.
But others believe a capital influx from average investors distorts the market, allowing lower-quality startups to stick around and compete with good ones for resources and market share.
Ruby Lu, partner at Beijing-based venture capital firm DCM China, says that professional investors provide not only funding but also contacts and boardroom guidance — things individual investors will not be able to supply.
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