Andrew Yan, managing partner of US$4.9 billion-under-management Chinese private equity firm SAIF Partners, has warned that the growth of government-backed investment funds is distorting and potentially destabilizing the market.
"Government-backed funds are not market driven and do not follow market oriented pricing norms. With more government guidance funds and government-backed vehicles, the market will become increasingly disordered," Yan told Chinese media.
The former World Bank economist and ex-executive at AIG Asian Infrastructure Funds also warned of the potential financial risks of government-backed funds. "These funds are all financed or guaranteed by local governments’ fiscal budgets, with some even receiving financing from banks. These type of financial arrangements will eventually face grave consequences (when losses appear)," he added.
Government-backed funds do offer benefits for private equity and venture investors by providing another exit channel, Yan admits, but cautions that the negative impact outweigh the benefit by a large margin.
As to 2017, Yan said that the amount of government capital inflow to the market will determine if valuations continue to rationalize, as they have been over the past year. He refused to provide any predictions as to if and how much new capital the government will deploy into investment vehicles in the future.
"The market will not stay crazy much longer and must return to rationality. Valuations are still high right now, with massive dumb money coming into the market," he said.
SAIF has focused on the smart hardware, artificial intelligence, corporate services and healthcare sectors in its investments in 2016, including backing Chinese genetic start-up GrandOmics.