In China, the term “私募” (sīmù) has a somewhat different meaning compared to private equity funds in the international context. Let’s explore in depth the main differences and characteristics of each.

Private Funds in China

In China, “私募” primarily refers to funds that raise capital from qualified investors. These funds can invest in various assets, including stocks, bonds, and other financial products.

Key Characteristics:

1. Target investors: Private funds can only raise capital from qualified investors. According to China Securities Regulatory Commission (CSRC) regulations, qualified investors must meet one of the following criteria:
   • Institutional investors
   • Individual investors with net assets of at least 3 million RMB
   • Individual investors with average annual income of at least 500,000 RMB over the past three years
2. Number of investors: Each fund typically cannot have more than 200 investors. This limitation is to protect investors and ensure efficient fund management.
3. Regulation: Compared to public funds, private funds are subject to relatively lighter regulation. However, since 2014, the Chinese government has strengthened oversight of private funds, requiring them to register with the Asset Management Association of China (AMAC).
4. Investment strategies: Chinese private funds can have various investment strategies, including:
   • Equity strategies: Primarily investing in stocks in the secondary market
   • Bond strategies: Investing in various bond products
   • Quantitative strategies: Using complex mathematical models and computer programs for trading
   • Venture Capital (VC) and Private Equity (PE): Investing in startups or mature companies’ equity

Examples:

1. “Innovation Capital”, a private fund company in Shenzhen, focuses on investing in technology stocks. They raised 500 million RMB from tech entrepreneurs and high-net-worth individuals in Shenzhen and the Pearl River Delta region through their network. They primarily invest in tech stocks in the A-share market and also participate in pre-IPO rounds of some tech startups.
2. “Shengshi Investment” in Shanghai is a quantitative private fund. They use artificial intelligence and big data analysis to develop trading strategies, mainly operating in the commodity futures market. Their investors include employee stock ownership plans of several large state-owned enterprises and some family offices.

International Private Equity

In contrast, international private equity funds typically have the following characteristics:

Key Characteristics:

1. Investment focus: Mainly buying and selling equity in non-listed companies. These funds usually acquire a majority or all of the equity in mature businesses.
2. Operational model: They often create value through:
   • Financial leverage: Using significant debt to finance acquisitions
   • Operational improvements: Introducing new management teams, streamlining operations, reducing costs
   • Strategic repositioning: Changing the company’s business direction or expanding into new markets
   • Merger and acquisition integration: Achieving synergies and economies of scale through acquisitions
3. Capital sources: Similar to Chinese private funds, they also raise money from institutional investors and high-net-worth individuals. Main sources include:
   • Pension funds
   • Sovereign wealth funds
   • Insurance companies
   • University endowments
   • Ultra-high-net-worth individuals
4. Investment horizon: Usually longer, potentially 5 to 10 years. This time includes:
   • Acquiring companies (1-2 years)
   • Holding and improving companies (3-7 years)
   • Exiting investments (1-2 years)
5. Fee structure: Typically follows a “2 and 20” model:
   • 2% annual management fee
   • 20% carried interest (share of profits above a predetermined return rate)
6. Exit strategies: Private equity funds exit investments through:
   • Initial Public Offerings (IPOs)
   • Sale to strategic buyers
   • Sale to another private equity fund (secondary buyout)
   • Buyback (repurchase of shares by company management or original shareholders)

Examples:

1. KKR, a US-based firm, acquired the automotive services business from Germany’s Bosch Group for $2.4 billion in 2013, forming the NYSE-listed company Cardtronics. KKR enhanced the company’s value by improving operational efficiency, expanding global business scope, and making strategic acquisitions. In 2021, KKR exited the investment by selling to NCR Corporation for approximately $3.9 billion, generating substantial returns for investors.
2. Apax Partners, a UK-based firm, acquired Israeli software company Sophos for about $3 billion in 2016. They helped Sophos accelerate its transition to cloud security solutions, expanded its product line, and increased revenue. In 2019, Apax exited the investment by selling Sophos to US private equity firm Thoma Bravo for $3.8 billion, creating significant returns for investors.

In conclusion, while Chinese private funds and international private equity share some similarities, there are significant differences in their investment focus, operational models, regulatory environment, and market maturity. Chinese private funds tend to focus more on secondary market investments and venture capital in emerging industries, while international private equity concentrates on complete acquisitions and value enhancement of mature businesses. As China’s financial markets develop and regulatory environment matures, it’s likely that the Chinese private fund industry will gradually align more closely with international standards while retaining its unique characteristics.