private equity industry rocked by fraud scandal

context: Regulations published in July for private investment funds, including private equity and venture capital, signalled the industry’s growing importance and the need to guide its healthy development. The State Council said in June private equity would be the most important future source of tech financing, a critical node in Beijing’s push to build a modern industrial system. A decline in private equity funds could seriously hamper these plans.

China Soft New Momentum, a large Beijing-based FOF (fund of funds), reported it was unable to cash in C¥3 bn worth of products it had purchased from Hangzhou Huisheng, a private equity firm, on 14 Nov 2023. Reports indicate China Soft’s investment was repeatedly re-invested in a number of other funds, a process known as nesting, and Huisheng had run away with the money.

The next day, Yunnan Trust announced it was investigating if its own assets were implicated in the fraud case.

China Soft alerted authorities to the problem on 10 Nov 2023, leading to a number of products being frozen and authorities around the country beginning investigations into the scale of Huisheng’s fraud, reports Cailian. FOF managers are now looking into the activities of funds they have invested in to ensure similar cases have not occurred. There are more private equity and FOFs involved, an unnamed insider told 21st Century Business Herald.

The incident has shaken the wealth management industry, an unnamed industry insider told Yicai. They predict many investors will look to redeem their investments. Combined with two years of poor market performance, this incident may further damage the PRC’s private equity industry, explained a fund manager to Yicai.

Over ten wealthy clients of a large FOF asked managers to investigate where their assets had been invested and the behaviour of other funds they had invested in, reports National Business Daily. A third-party wealth management director told National Business Daily wealthy investors have cooled on FOF investment products due to the incident.