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On August 1, the "Operation Guidelines for Private Securities Investment Funds" (hereinafter referred to as the "Operation Guidelines") were officially implemented, involving the initial paid-in fundraising scale of private securities investment funds shall not be less than 10 million yuan, the minimum outstanding scale is 5 million yuan, the double 25% investment requirement, the prohibition of multi-layer nesting, and stricter derivative investment regulations.

According to a reporter from 21st Century Business Herald, private equity funds have recently adjusted their product structures, modified contracts, and conducted corresponding training and management system optimization in order to respond to the "Operational Guidelines."

Industry insiders believe that the new regulations may force small and medium-sized private equity funds to undergo major transformations. Small funds will face the risk of liquidation, which will trigger a wave of industry mergers in the future and promote the survival of the fittest within the industry.

Self-inspection, contract modification and training

On August 1, the "Guidelines for the Operation of Private Securities Investment Funds" was officially implemented.

"The entire industry is facing rectification, including contract modifications and the merger or cancellation of some small-scale products. In addition, there are investment ratio requirements for single stocks." Zhang Kexing, general manager of Grey Asset, told reporters on July 31.

The contents of the "Operational Guidelines" that the private equity circle is most concerned about include: the initial paid-in fundraising scale of private equity securities investment funds shall not be less than 10 million yuan; the minimum outstanding scale is 5 million yuan; a double 25% portfolio investment requirement; prohibition of multi-layer nesting; participation in DMA business shall not exceed 2x leverage; the nominal principal of contracts participating in Snowball structured derivatives shall not exceed 25% of the net assets of the fund; in principle, open-ended private equity securities investment funds shall not set early warning lines or stop-loss lines; strict control of reverse transactions on the same day, etc.

Zhang Kexing said, "If the existing funds need to make rectifications, there is a two-year transition period to complete the rectification. At present, there is still some time for the entire private equity industry to make a buffer, so everyone does not need to rush to make a one-size-fits-all approach now."

Chen Xingwen, chief strategy officer of Heisaki Capital, also told reporters that in response to the implementation of the "Guidelines for the Operation of Private Securities Investment Funds", private equity funds have recently been adjusting product structures, modifying contracts, and conducting corresponding training and optimizing management systems.

He pointed out that for existing funds, if rectification is required, it should be completed within a 24-month transition period to ensure that the modifications to the contract terms and the investment ratio requirements are in substantial compliance.

"In addition, the new regulations also put forward new requirements for information disclosure, internal management and risk control systems. Private equity funds need to conduct self-inspection and adjustments in these aspects," said Chen Xingwen.

It is reported that many private equity funds have recently modified their contracts in batches. For example, Shiva Private Equity recently announced that it would change the relevant contract terms of more than 40 funds under its umbrella in accordance with the requirements of the "Operational Guidelines", and many funds added restrictive clauses involving over-the-counter derivatives investments in their contracts.

In addition, since June, private equity institutions such as Beiyuan Ruize, Hongsike Asset Management, Milshui Capital, and Linglu Private Equity have also announced the addition of investment restrictions related to over-the-counter derivatives.

According to the reporter, many private equity funds have completed relevant business adjustments and modified private equity contracts in batches in accordance with the "Operation Guidelines". Recently, some private equity funds have conducted self-inspections and rectifications in accordance with the requirements of the "Operation Guidelines", such as improving information disclosure and cleaning up non-compliant products. In addition, private equity funds also organize employees to conduct relevant learning and training to ensure that the team has a full understanding of the new regulations.

Accelerate the survival of the fittest

"The promulgation of the "Guidelines for the Operation of Private Securities Investment Funds" has had a significant impact on the private equity industry. This means that the trend towards high-quality private equity has begun, and it is also a cruel process of survival of the fittest in the industry," said Chen Xingwen.

Specifically, the new regulations mainly strengthen fund raising requirements, regulate investment operations, emphasize trustee management responsibilities, promote long-term investment and value investment concepts, and reasonably set a transition period to reduce short-term market shocks. In particular, the new regulations set clear requirements for the fundraising scale and investor suitability of small-scale funds, and regulate over-the-counter derivatives transactions and bond investments, requiring private equity fund managers to improve their professional investment capabilities and diversify investment risks.

After the "Operational Guidelines" are officially implemented in August, Chen Xingwen believes that the following changes are expected to occur. First, the operating standards of private equity funds will be improved, prompting the industry as a whole to improve its professional level; second, by standardizing investment operations, reducing market volatility, and improving market transparency and compliance; in addition, the implementation of the new regulations will help optimize resource allocation and promote the healthy development of the industry. At the same time, it may also trigger a wave of industry mergers and promote the survival of the fittest within the industry.

"Especially for the 80% to 90% of small and medium-sized private equity funds, this means that major transformation must be carried out. In particular, funds with a management scale of less than 10 million may face the risk of forced liquidation, forcing them to integrate resources and form a larger single product." Chen Xingwen said.

The industry believes that the implementation of the new regulations is both a challenge and an opportunity for the private equity fund industry. It will promote the gradual transformation of private equity funds into boutique institutions, encourage long-term strategic investment, enhance professional capabilities and competitiveness, and better serve investors.

Zhang Kexing pointed out that the "Operational Guidelines" have different impacts on large private equity firms and small private equity firms.

He believes that the impact on the top private equity firms will not be too great. However, he points out that the new regulations will have a greater impact on small private equity firms. The reason is that there are currently nearly 7,000 to 8,000 private equity fund companies, and 1/3 to 1/2 of them are small-scale fund companies. The requirements mentioned in the "Operation Guidelines" such as 10 million for newly established products and 5 million for average daily scale are difficult for small fund companies to meet under the current situation.

Zhang Kexing believes that in terms of the number of private equity fund products, private equity companies may reduce the number of products in the future. Compared with large foreign fund companies, they may only have dozens or even a few products because the same investment strategy does not require so many similar products.

In addition to the impact on the number of products, Zhang Kexing pointed out that channels will also be affected. From the perspective of channel development, the scale of a single product must be more than 10 million, which is a lot higher than the fundraising threshold in the past. The future development direction for channels is to choose the best and the largest.

"In other words, whether it is a securities company, bank, trust, or third-party sales company, if the channel does not have relatively strong capabilities, it will be difficult to grow and develop in this market in the future. Therefore, the future channel development strategy is to choose the big and the best," said Zhang Kexing.