Smart hardware, biomedicine and internet finance continued to be favored by private equity investors
On November 14, 2024, Han Kun Law Offices released the Han Kun 2022-2023 Fund Practice Data Analysis Report (the “Report”). The online version of the Report is available on the firm’s website. Link:
https://www.hankunlaw.com/upload/portal/20241114/c8a467d4ec1721975cea09942b3fc99b.pdf
From 2022 to 2023, the international environment proved to be both complicated and severe, with unexpected factors and certain fluctuations in China's economic activity. These negativities notwithstanding, there were some bright spots. One of them was the domestic private funds industry in China, which continued to grow despite the odds. The sector’s resilience was due in large part to the government policy goals of stabilizing growth, promoting reforms, adjusting the development paradigm, and preventing risks and the cornerstone support of government guide funds, which encouraged a broad spectrum of industry investors, such as listed companies and local leading enterprises, to actively participate in fund-related activities.
The extent to which we served our clients was a testament to the resilience of the Chinese domestic fund industry. For example, we acted as legal counsel for several hundred fundraising projects during the 2022-2023 period and provided comprehensive legal services covering the entire life cycle of investment funds from their formation and deployment to their dissolution and liquidation.
The Report analyzes the Chinese private equity fund industry from the perspective of key transactional terms and conditions, all based on the data collected from projects in which we acted as legal counsel during the 2022-2023 period and certain prior years. We believe the evolution of such terms and how they have been used in transactional documents may help readers of this Report to profile the current landscape of Chinese private fund industry and better understand the development in China of the fund industry as a whole. We publish the Report annually with a view toward conveying useful information to our clients, friends, and professionals interested in the private equity market in China.
The Report makes a horizontal and vertical comparison of the private equity fund industry and the highlights during the 2022-2023 period are as follows:
Ø Investment destination: In the 2022-2023 period, certain industries such as smart hardware (including artificial intelligence and augmented reality), biomedicine and internet finance continued to be favored by private equity investors. Funds that mainly invested in smart hardware and biomedicine accounted for over 50% of the total, while funds that mainly in TMT and consumption sectors continued to slide.
Ø Fund terms: Funds with a term of less than five years increased. These funds were generally small in size and focused on late-stage investments or single-project funds.
Ø Fund structures: The percentage of market share of each fundraising structure did not change significantly compared to previous years. Among them, the simple fund structure remained the overall market leader, followed by the feeder-master structure, while the usage of parallel fund structures registered a slight decline.
Ø Management fees: As to the rate of management fees during the investment period, 2% per annum was the market norm in 2022-2023. More and more funds decided to pay management fees on an annual basis.
Ø Distribution mechanisms: The share of the previously dominant partner-by-partner allocation model increased further; in addition, due to the fundraising environment, the share of funds with scheme of by-fund distribution, preferred return and single carry increased comparing to those with scheme of by-deal distribution, no preferred return and tier carry.
Han Kun has long been active in the forefront of the onshore and offshore private equity funds industry. Since 2016, the firm has been writing and publishing Comments on Hot Issues in Supervision and Practice of Private Equity Funds in China. We hope that this Report, like its predecessors, will contribute to a better understanding and development of the private equity fund market.
For further details, please visit our official website at: https://www.hankunlaw.com/en/
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