In China’s rapidly evolving financial landscape, there’s often confusion surrounding the terms “private fund” (私募基金) and “private equity fund” (私募股权基金). While these terms may seem similar, they represent distinct investment vehicles with unique characteristics. This article aims to clarify these concepts and provide a comprehensive understanding of private funds and private equity funds in the Chinese context.

Private Funds in China (私募基金)

In China, “私募基金” (sīmù jījīn) refers to a broad category of funds that raise capital from qualified investors. These funds can invest in various assets, including stocks, bonds, and other financial products.

Key Characteristics of Private Funds:

1. Target Investors: Private funds can only raise capital from qualified investors, as defined by the China Securities Regulatory Commission (CSRC):
   • 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.
3. Regulation: Compared to public funds, private funds are subject to relatively lighter regulation. However, since 2014, they must register with the Asset Management Association of China (AMAC).
4. Investment Strategies: Chinese private funds can have various investment strategies, including:
   • Equity strategies (investing in stocks in the secondary market)
   • Bond strategies
   • Quantitative strategies
   • Venture Capital (VC) and Private Equity (PE)
5. Investment Focus: Private funds in China often focus on secondary market investments, such as publicly traded stocks and bonds.

Example of a Chinese Private Fund:

“Shengshi Investment” in Shanghai is a quantitative private fund that uses artificial intelligence and big data analysis to develop trading strategies, mainly operating in the commodity futures market.

Private Equity Funds in China (私募股权基金)

Private Equity funds, also known as PE funds, are a specific type of private fund that focuses on equity investments in non-listed companies.

Key Characteristics of Private Equity Funds:

1. Investment Focus: PE funds invest primarily in the equity of unlisted companies, often referred to as “original shares” or pre-IPO investments.
2. Exit Strategy: They typically aim to exit investments through future public listings, acquisitions by listed companies, or other means.
3. Investment Threshold: PE funds often have higher investment thresholds, making it difficult for average investors to participate directly.
4. Rights and Influence: PE funds often negotiate significant rights and influence in the companies they invest in, including management participation and veto powers on major decisions.
5. Risk Control: PE funds often use “performance guarantee agreements” to control risk, setting conditions for share transfers or buybacks if certain targets are not met.
6. Exit Options: PE funds have multiple exit strategies, including IPOs, premium buybacks, mergers and acquisitions, and equity transfers.

Advantages of Investing in Private Equity Funds:

1. Access to Original Shares: PE funds allow smaller investors to indirectly access pre-IPO investments that would otherwise be out of reach.
2. Investor Protection: As institutional investors, PE funds have more power to protect investor interests compared to individual minority shareholders.
3. Management Participation: PE funds often participate in the management of invested companies, potentially influencing their development and success.
4. Risk Control: PE funds typically implement risk control measures through agreements with the invested companies.
5. Exit Options: PE funds usually have more diverse and potentially safer exit options compared to individual investors in unlisted companies.

Key Differences Between Private Funds and Private Equity Funds

1. Investment Focus: While private funds can invest in a wide range of assets including publicly traded securities, private equity funds specifically focus on equity investments in unlisted companies.
2. Liquidity: Private funds that invest in public markets generally offer higher liquidity compared to private equity funds, which typically have longer investment horizons.
3. Investor Involvement: Private equity funds often take a more active role in the management and development of their portfolio companies, while other types of private funds typically do not.
4. Risk and Return Profile: Private equity investments generally carry higher risk but also the potential for higher returns compared to many other private fund strategies.
5. Exit Strategies: Private equity funds have specific exit strategies tied to the development of their portfolio companies, while other private funds may have more flexible exit options.

In conclusion, while both private funds and private equity funds in China cater to qualified investors and operate under the broader “private fund” regulatory framework, they have distinct characteristics, strategies, and risk-return profiles. Private equity funds specifically focus on unlisted company investments and tend to have a more hands-on approach, while other private funds may employ a variety of strategies across different asset classes. As China’s financial markets continue to develop, understanding these distinctions becomes increasingly important for investors navigating the diverse landscape of investment opportunities.