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Zhai Qingmin: Improve the governance of private equity funds, promote economic transformation and upgrading

January 11, 2019 20:07
source: SFC website

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[Zheng Qingmin, Vice Chairman of the China Securities Regulatory Commission: Improving the Management of Private Equity Funds] Promote economic transformation and upgrading, promote the pilotization of Shanghai Science and Technology Board as soon as possible, and promote the reform of basic systems such as issuance, listing, information disclosure, trading, delisting, and investor appropriateness management. (CSRC)

  Improve private placementfundGovernance Promote Economic Transformation and Upgrading——Speech by Vice Chairman Zhao Qingmin at China Private Equity Industry Summit Forum

ladies and gentlemen:

good morning guys!

On the occasion of the 40th anniversary of reform and opening up and the 20th anniversary of the development of the fund industry, new and old friends have come to Nanjing, the ancient capital of Renhuadi and Wuhua Tianbao, to review the past, face the present and look into the future, and explore the road of innovation and risk prevention and control. . Here, on behalf of the China Securities Regulatory Commission, I would like to express my heartfelt gratitude to the Jiangsu Provincial Party Committee and the Provincial Government and the Nanjing Municipal Party Committee and Municipal Government for their long-term concern and support for the CSRC System. I would like to express my warm congratulations on the holding of the Private Equity Industry Summit Forum! I would like to talk about the current situation and the development of the private equity industry, for your reference.

  First, the ability to form innovative capital is the core ability of innovation and development

Since the 18th National Congress of the Communist Party of China, the new development concept and the promotion of high-quality development have become the theme of the new era. How to effectively promote the three major changes in efficiency, power and quality, and improve the total factor productivity and sustainable development has become an important task of the CSRC. Recently, General Secretary Xi Jinping’s important speech at the Central Economic Work Conference emphasized the need to improve the ability of financial services to the real economy and put forward higher requirements for our venture capital and equity investment. General Secretary Xi Jinping pointed out in the 2017 National Financial Work Conference that finance is an important core competitiveness of the country, and financial reform and development is an important part of the country's reform and development. Since modern times, the rise of world powers has been directly related to its financial capabilities, and the core of financial capabilities is the ability to shape innovative capital.

From the perspective of economic and financial development history, the three industrial revolutions have put forward different requirements for the financial system and promoted the evolution of the financial system. The steam technology revolution and the power technology revolution have spawned modern large-scale industries and large-scale production. The scale and specialization of production have created a developed modern banking system; the computer and information technology revolution has spawned a large number of technologically innovative enterprises and promoted the original industries. With continuous transformation and upgrading, capital markets, especially venture capital funds, have achieved unprecedented development.

In the modern sense, venture capital funds can be traced back to the Netherlands in 1774. In the 1980s, the tide of globalization rose and private equity funds ushered in prosperity. The United States is the most active country for innovation activities and the country with the most developed venture capital. From angel investment, venture capital, growth investment toMergerInvestment has formed a full-featured venture capital system. The investment bank venture investment of Wall Street in the United States is integrated with the development needs of Silicon Valley technology companies, making it a new economic source and providing a lasting impetus for US economic growth. In the UK, France, and Japan, there are successful experiences in financial innovation and growth. The common feature of these successful experiences is that whether it is a banking-based financial system or a capital market-based financial system, it must provide initial capital for entity enterprise innovation, and promote innovation through the initial capital to form innovative development capabilities. In order to promote the domestic economy in accordance with the path of innovation, to achieve endogenous growth.

  2. Private equity and venture capital funds are important carriers for the formation of innovative capital

First, provide initial capital for SME innovation. SMEs are the source of innovation and development. The latest statistics show that SMEs contribute more than 70% of China's technological innovation. However, in the past 40 years of reform and opening up, capital shortage has always been one of the key factors that constrain the speed of development and the quality of development. SMEs have disadvantages such as small individual size, strong profit uncertainty, and insufficient capital. They lack historical credit and collateral in the early stage of development and cannot obtain the requiredCreditstand by. Private equity and venture capital funds value the future of the company, determine the current investment in the future valuation of the company, and provide initial capital for SMEs, which can effectively alleviate the problem of insufficient capital and insufficient risk-taking ability of SMEs. As of now, in ChinaStock investmentThe fund industry association (hereinafter referred to as the Association) has filed private equity and venture capital funds in the investment project. The number of small and medium-sized enterprises projects reached 48,300, and the investment capital was 1.50 trillion yuan; the project enterprises invested in the seeding stage and the initial stage The number reached 36,400, and the capital invested reached 1.73 trillion yuan.

Second, promote the conversion of old and new kinetic energy. Science and technology are the primary productive forces. Science and technology have promoted industrial development and created an unparalleled material wealth. The creation of material wealth is inseparable from advanced manufacturing. The core value of private equity and venture capital lies in the combination of technological innovation, organizational innovation and entrepreneurial talents, promoting the creation and growth of new enterprises, transforming technological innovations into real products and markets, and investing funds to obtain equity appreciation after the growth of enterprises. From a macro perspective, private equity and venture capital have reached a certain scale and depth, which is enough to promote the growth of the new economy and eliminate the old economy, and promote a virtuous circle of innovation growth. Up to now, the number of private equity and venture capital funds registered in the association has reached 23,700, and the investment capital reached 970 billion yuan. In terms of industry distribution, China's private equity and venture capital funds invested in 21,500 computer applications such as information technology services, accounting for 29.8%, and invested in 8359 industrial capital goods projects represented by equipment manufacturing, accounting for 11.6%. The number of medical and biological projects was 4,421, accounting for 6.1%, and the number of projects for medical devices and services was 4,453, accounting for 6.2%. Among them, M&A investment is generally invested in mature late-stage enterprises, with the aim of optimizing the organizational structure of the target enterprise and promoting corporate strategic adjustment or assets.Reorganization, across the period of the original corporate life decline, to achieve equity appreciation returns. From a macro perspective, M&A investment can accelerate the diffusion of new technologies and improve the output capacity of the economy through efficiency improvement at the enterprise level. Up to now, the association has filed 4,550 M&A funds, with a management scale of 1.4 trillion yuan, accounting for 21.9% of the total management scale of private equity investment funds, and its status has become increasingly prominent.

Third, to promote the establishment of multi-level capital markets. Private equity funds explore high-growth small and micro enterprises, inject capital, management, and innovation into enterprises, and coordinate various types of enterprises.shareholderThe interest relationship between management, fund investors, and the degree of transparency in corporate operations and the degree of governance and regulation have created and delivered a large number of high-quality investment targets for the capital market. Since 2017, a total of 246 strategic emerging industrial enterprises have achieved IPOs, accounting for 50% of the number of newly listed entrepreneurs, covering key areas such as information technology, high-end equipment manufacturing, new energy, and biomedicine. Since the launch of the Shenzhen SME Board in 2004 to May 2018, the small and medium-sized board companies have 709 high-tech enterprises, accounting for 78%, while the small and medium-sized board enterprises have 70% of the private equity venture background. In addition, private equity investment funds actively participate in mergers and acquisitions and asset restructuring of listed companies, providing financing support for high-tech listed companies in China. According to the association's filing data, as of the end of 2017, China's M&A funds completed a total of 1,627 investment projects with a total investment of more than 304.8 billion yuan. The main industries to be invested include computer applications, medical devices and services, and semiconductors. This year, with the launch of the Shanghai Stock Exchange, the private equity fund will become an important tool to connect high-tech enterprises and capital markets in the early stage of the initial stage.

  Third, there are some problems in the private equity industry

Despite the high results, China's private equity funds still have problems such as extensive management, insufficient support for innovation, and unsound investment ecology.

First, “small, scattered, and weak” means that private equity funds are small in scale, large in number, and not professional. Up to now, there have been 24,400 private equity fund managers registered in the association, 74,600 private equity funds have been filed, and the assets under management have reached 12.8 trillion yuan. Among them, there are 8,787 managers of securities private equity funds, accounting for 93.4% of institutions with a management scale of less than 500 million yuan, an average management scale of 246 million yuan for individual managers, and 14,377 private equity and venture capital fund managers. The proportion of institutions below 500 million yuan reached 82.1%, and the average management scale of individual managers was 606 million yuan. Some institutions have complex shareholding structure, cross-shareholding and multi-layer nesting; some institutions register a number of similar private equity fund managers for scale expansion or internal management needs; some institutions falsely fund or withdraw capital, disrupting industry order; some institutions Equity holdings, avoiding disclosure of major related party transactions, leading to conflicts of interest and interest transfer. Some products abuse the filing of credit, illegal fundraising, decentralized recruitment, centralized operation, disguised development of the "fund pool" business, and so on.

Second, “short and fast”, that is, the short-term funding sources and investment behaviors, and the pursuit of rapid returns. From the perspective of funding sources, China's private equity and venture capital funds have diverse sources of funds, and long-term funds account for a relatively low proportion. Domestic institutions, banksFinancial managementAnd the proportion of investment in various asset management products is as high as 83%, but the total long-term funds such as pensions, insurance funds and social welfare funds account for only 3.1%. In mature markets such as the United States, pension plans at all levels account for as much as 32.7% of private equity investment funds, making up the most important and stable source of funding for private equity funds. From the stage of the invested projects, China's private equity funds are more inclined to invest in real-time application projects with little investment in the basic and technical layers. In practice, most private equity funds and even early investments have made the product's landing and clear marketization scenarios an important indicator of screening projects.

Third, “raising, investing, and retreating” is not smooth. The diversity of the private equity fund industry is not enough. The problems of “funding difficulties”, “investment difficulties” and “exiting difficulties” are highlighted. Although the Fund Law provides a legal basis for the unified regulation of contractual, partnership, and corporate funds, in practice, the market and regulatory parties have different understandings of private equity funds, resulting in the development of private equity funds in terms of supervision and self-discipline. The rules lack internal consistency and in some respects do not meet the essential requirements of private equity funds.

  Fourth, the direction of private fund industry improvement

First, strengthen the capacity building of specialized investment management. Although there are still small, scattered and weak deficiencies in China's private equity funds, a considerable number of private equity institutions have reached the intersection of specialized global competition. Market institutions that rely on relationship financing and resource integration and profitability will not meet the requirements of economic transformation and innovation. . Private equity funds, especially private equity investment funds, must focus more on long-term investment and post-investment management, continuously improve internal governance, optimize organizational structure, performance appraisal, talent management, risk control, and maintain efficient decision-making and organizational operations. Only by continuous professionalization can we continue to enhance the reputation of the organization, enhance the ability to raise funds, attract key investors such as pension funds and sovereign wealth funds, improve the fundraising structure, and form a virtuous circle of fundraising, investment, management, and retirement.

Second, strengthen the construction of the industry governance system. It is necessary to improve the bottom line standards of administrative supervision under the framework of the Fund Law, improve the transparency of registration filing, and provide clear standards for the exhibition industry. On this basis, we will explore and implement the central-local double-layer governance mechanism and build a modern governance system in which the self-discipline-administrative-judicial coordination and complement each other. To promote the supervision and exchange of private equity fund supervision information and local government information, the fund industry association and local industry associations work together to improve the central-local level risk disposal and cooperation mechanism; promote industry self-discipline, administrative supervision and judicial effective connection, Risk monitoring, execution of sentences, investigation and punishment of violations of laws and regulations, etc.

Third, strengthen the construction of a long-term capital system. From the US experience, mature institutional investors such as pension funds, sovereign wealth funds, donor funds, family trusts, insurance companies, and banks are the main players of private equity funds, providing a solid foundation for the long-term operation of private equity investment. The source of such funds and long-term operations are inseparable from mature pension investment systems, developed foundations and family trusts, and tax incentives and deferral systems that stimulate long-term investment. As far as China is concerned, it is necessary to further improve the market-oriented investment management system for the first, second and third pillar pensions and establish a long-term assessment mechanism. To promote the transformation of funds into long-term capital, we must learn from the good experience of the West, but also combine the characteristics of China with China's national conditions. The management of traditional culture is particularly important in our private equity industry. Only by establishing an incentive system that is conducive to long-term operation of funds can we improve the ability of cross-cycle investment and counter-cyclical supervision of investment funds from the root causes, and solve cross-market, cross-industry and cross-cycle development issues.

At present, in accordance with the spirit of the Central Economic Work Conference and General Secretary Xi Jinping at the 40th anniversary of the reform and opening up, the China Securities Regulatory Commission continued to deepen the reform of the capital market and opening up to the outside world, promote the pilotation of the Shanghai Science and Technology Board as soon as possible, and promote the issuance and listing. Basic system reforms such as information disclosure, trading, delisting, and investor appropriateness management; at the same time, deepen the reform of the GEM and the New Third Board, optimize the refinancing system, and deepen marketizationMergers and acquisitionsReform, improve the quality of listed companies, and strive to create a "standard, transparent, open, dynamic, and resilient" capital market. As an important part of the multi-level capital market, private equity funds will surely grow together with the capital market and play its due role in the process of service technology innovation and high-quality economic development.

thank you all!

(Article source: SFC website)

                (Original title: Improving the governance of private equity funds, promoting economic transformation and upgrading - Speech by Vice Chairman Zhao Qingmin at the China Private Equity Industry Summit Forum)

                (Editor: DF075)

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