PE firms compete to emerge as NEEQ market makers

More than 30 private equity institutions have applied to be market makers on the Beijing-based National Equities Exchange and Quotations, the third bourse on the mainland.

The imminent entry of new market makers is expected to improve liquidity on the NEEQ, or the New Third Board, and thus boost the financing of small and medium-sized enterprises listed on it.

Typically, market makers quote both buying and selling prices for stocks, and profit from the bid-offer spread. Their activity makes an exchange more active.

PE players sense that becoming market makers on the NEEQ would afford them good investment opportunities.

Among the applicants are CITIC Private Equity Funds Management Co Ltd and China Science and Merchants Capital Management Ltd.

Ten PE firms are expected to receive the regulator's nod eventually as part of the project to broadbase market makers.

Currently, only securities firms are allowed to function as market makers. In September, the NEEQ said qualified PE institutions, with more than three years' operations and no less than 2 billion yuan ($298 million) in assets under management, would be allowed to join them.

"I believe many great companies will shine at the New Third Board and private equity investors' positive participations show their confidence," said Cheng Xiaoming, director of Beijing Enterprise Nest Holding Co Ltd.

Cheng said the competition among market makers at the New Third Board will be fiercer with private equity institutions' participation.

"The competition will be good for investors as it will decrease the operating fees of market makers," said Cheng.

Zhu Haibin, an analyst at Essence Securities, said companies listed on the New Third Board have low price/earnings ratios. So, it is a good time for investors and market makers to seek investment opportunities.

Gui Haoming, research director at Shenwan Hongyuan Securities, said it is necessary to bring in PE firms as market makers because they can use their expertise to improve the NEEQ's liquidity.

"PE players are more familiar with companies than other investors because they start interacting with companies right from the start. They are also more experienced in capital-related operations," said Gui.