Date
21 July 2017
Buttonwood Capital, founded by chairman Scott Zheng, raised more than 20 million yuan via crowdfunding for its new fund focusing on the mobile internet. Photo: Internet
Buttonwood Capital, founded by chairman Scott Zheng, raised more than 20 million yuan via crowdfunding for its new fund focusing on the mobile internet. Photo: Internet

New agent for private equity: crowdfunding

The development of internet-based businesses has removed the role of the middleman in many sectors. Uber and Airbnb are two examples.

Private equity (PE) and venture capital (VC) used to rely heavily on the networking of a fund’s partners, limited partners (LP) or middlemen to get access to LPs around the world.

Once a deal was successfully made, agents would charge 2 percent or more of the amount of the investment as commission, equivalent to about a year’s management fee for the fund house.

The financing agents would prefer to introduce big LPs to the funds, as it would generate the same commission as that from many small LPs.

However, in the mainland, many PE firms or VCs lack experience of fundraising, and the industry has yet to mature.

On the other hand, the few big mainland institutional LPs, like the National Security Fund, will invest only in big mainland PE firms, like Hony Capital.

So there is little likelihood that the general partners (GPs) will need a financing agent who can handle big deals.

On the contrary, mainland fund houses also welcome individual investors.

Given this demand, some crowdfunding sites have developed a business of helping fund houses to identify investors.

They have been getting quite good results this year.

For example, the crowdfunding unit of JD.com is helping PE firms to raise funds.

QF Capital raised 80 million yuan (US$12.4 million) via crowdfunding, and Buttonwood Capital raised more than 20 million yuan for its new fund focusing on the mobile internet.

This method of fundraising creates a win-win situation for funds and investors, as the fund can raise a larger amount of money than from a single LP, while investors can enjoy lower risk by investing in a fund rather than a single project.

I believe this innovation is promising.

Although mainland regulators have strengthened enforcement of regulations, it can create a better environment for the fintech sector’s development.

Chaotic growth is commonly seen in many emerging businesses at an early stage.

But fintech companies and the regulators should keep learning and evolving to help the industry mature.

This article appeared in the Hong Kong Economic Journal on April 28.

Translation by Myssie You

[Chinese version 中文版]

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MY/DY/FL

Director at Spring Capital

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