What do new NEEQ rules mean for PE managers?

By Jiang Fengtao, Hengdu Law Firm
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The China Securities Regulatory Commission (CSRC) orally suspended private equity (PE) firms from listing on the New Third Board in late December 2015. On 27 May 2016, the National Equities Exchange and Quotations (NEEQ) released the Notice on the Listing and Financing of Financial Institutions, which set eight additional requirements for PE firms to list on the New Third Board.

JIANG FENGTAO Managing Partner Hengdu Law Firm
Managing Partner
Hengdu Law Firm

This means that the NEEQ resumes its role of approving qualified PE firms to list on the New Third Board, which had been suspended for half a year. However, the additional eight listing requirements are so demanding that it is difficult for existing private institutions to meet all of them. This article will analyze some of these listing requirements.


At least 80% of the total income must come from the management fee and other performance payments.

This requirement aims to encourage PE firms to return to the major business of investment management.

As per the intention of the regulator, the main income of PE firms must come from management fees and performance fees, instead of direct or indirect investment. However, financial data of the existing PE firms listed on the New Third Board show that their profit is mainly from investment returns rather than management fees.

For example, PE investment management business revenue of Jiuding Group, the first PE firm in the New Third Board, was RMB563 million (US$84 million) in 2015, which accounted for a little over 22% of its gross revenue. The regulator does not want other PE firms to replicate this business model.

There are two ways for PE firms to meet the requirement: (1) increase investment management business income; and (2) separate non-investment management business from current business.

A self-inspection report released recently by Jiuding shows that it has adopted the second approach.

Jiuding declared that since PE investment management business is only a segment of the group, the group would only choose Kunwu Jiuding Capital, its internal operation outlet that conducts that business, as the target for inspection.

However, it is still questionable whether PE firms with large and similar investment management business and non-investment management business should adopt this approach.


A PE firm must have been in operation for at least five successive years and at least one of its managed fund has exited.

This requirement aims to restrict PE firms that lack operational experience or are untested by the market from listing on the New Third Board. As a result, Tianxing Capital, which received listing approval at the end of last year, had to postpone its official listing on the New Third Board until June next year because it had been incorporated for less than five years.


The average annual amount of managed funds (paid in capital) for the latest three years must be at least RMB2 billion and RMB5 billion for venture capital (VC) investment institutions and PE institutions, respectively.

This requirement clearly specifies the assets under management of PE firms. However, it is impossible for most of the existing PE firms to list on the New Third Board, considering requirement II and this requirement. According to the author, as of 27 May 2016, there are only about 40 PE funds that have been incorporated for more than five years with a fund size of at least RMB5 billion, and VC investment institutions that qualify are even less.

It is worth noting that this requirement only refers to VC investment institutions and PE institutions, but private securities investment institutions are not mentioned, which means the regulator still needs to clarify further whether private securities investment institutions can be listed on the New Third Board or not.


The shares or stocks issued by the PE firms have not been subscribed with fund shares before listing; the capital raised has not been used for investing shares of listed companies in the secondary markets of Shanghai and Shenzhen stock exchanges, as well as related private securities funds, excluding the stocks passively held as a result of listing of the investees.

The first condition under requirement VII is aimed at the “debt-for-equity swap” led by Jiuding.

The original intent is to increase the exit channels for fund investors (i.e. limited partners). For fund projects with uncertainties or long periods, fund investors may choose to transfer their fund shares to equities of PE firms and give up the potential high yield of the fund projects, thus receiving more stable dividend rights and capital premium as shareholders.

The shares acquired may be listed for sale to make the investors quit. However, such operation may reduce the proportion of managed funds of PE firms and increase its own funds, which does not accord with the spirit of making PE firms return to investment management, initiated by the NEEQ.

The latter condition under requirement VII expressly prohibits PE firms from investing the capital raised through the New Third Board to buy shares on the secondary market, which also discourage PE firms from financing tremendous amounts through the New Third Board and then investing in stock secondary markets to gain profit.

The author concludes from the above-mentioned interpretations that these additional listing requirements aim to make PE firms return to the major business of investment management, and prevent the funds in the New Third Board from “moving from the real to the fictitious” and flowing into secondary markets. The reason why it’s difficult for most existing PE firms to satisfy these requirements is that the development of these PE firms has deviated from the desired direction of regulators in the past. As long as PE firms resume the development of investment management and serve the real economy, they will still have a bright future on the New Third Board.

Jiang Fengtao is the managing partner with Hengdu Law Firm




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