CHINA’S private fund managers are facing an employee exodus, and some are closing as the government’s clampdown on leverage and financial risk claims more scalps.

Once a booming industry — capital grew by seven times in the three years to 2017 — fund managers have been caught in regulators’ cross hairs for their role helping financial institutions side-step rules and risky dealings.

Repeated attacks by regulators on wealth management products last year slashed funds from banks flowing to private funds.

And in guidelines published in November, permitted leverage will be slashed to 200 percent when some funds were using as much as 2,000 percent. They will also be barred from offering implicit guarantees against losses.

The result, according to employees, head-hunters and analysts, was a rush for the exits.

“Some funds have even started selling their licenses,” said Du Yang, managing director at China Securities International. “We expect more private funds to close up,” Du added.

The number of employees in fixed income leaving local private funds doubled last year compared with 2016, according to Kristina Liang, a senior recruitment consultant at Michael Page.

“Candidates used to hang up on me when the fixed income market was on the high, but now my line is busy with candidates calling me,” said Liang.

The fund industry in China includes asset managers who invest in private equity as well as public markets. Paid-up capital grew from 1.49 trillion yuan (US$0.23 trillion) at the end of 2014 to 11.10 trillion yuan last year.

“I’m expecting to do smaller deals this year, because of the new rules,” said one person on the private equity side of Harvest Fund Management.

Assets at Yaozhi Asset Management, one of Shanghai’s largest private funds, slumped 15 percent last year, said Wang Ming, a partner at the firm.

Some analysts see the crackdown as a necessary move to clean up the industry.

The new regulations “will help create a long term sustainable industry, assuming they are enforced as conceived,” said John Ott, partner with Bain & Company and a leader with its greater China financial services practice. He added that one executive client said “these are the most significant changes he has ever seen.”

The Asset Management Association of China said private fund manager registrations and filings were normal, adding that there was 40 billion yuan worth of growth in the sector every week.

In December 2017, the private fund industry grew 200 billion yuan, an average of around 50 billion yuan a week.

Regulators have focused on asset managers because of their role in the shadow banking sector, where they helped financial institutions invest in risky areas otherwise blocked to them.

“There were a lot of sideways dealing in the industry. The new guidelines have definitely shut it down for now,” said one person in a small fund in Shanghai.

Banks could invest via private equity funds in property companies who guaranteed repayment, according to five private fund employees. The loan to the fund was not considered a property deal which, together with its assured repayment, reduced the money the bank had to set aside against the risk it was taking.

Another route involved lending to developers by investing in fixed income funds, which put the proceeds into developers’ bonds.

Regulators over the past year has begun targeting these investments from the bank side, which was already hurting private fund managers’ profits even before November’s crackdown, forcing many to seek new sources of investment. (SD-Agencies)