Securitization of PE fund shares: demands and obstacles

Securitization is a financing approach by which an issuer creates tradable securities supported by specific asset portfolio or cash flow. While traditional securities are backed by issuers, securitization schemes are backed by pools of assets.

In addition to asset-backed notes, there are two categories of securitization schemes in Chinese markets, including the ones backed by credit assets and others by corporate assets. In short, securitization mainly functions as a process to transform an asset or a pool of assets with high value, poor liquidity and expectable steady income into liquid, negotiable securities. While providing the originator with access to capital, it enables investors to benefit from future income of the underlying assets or gain proceeds by transferring securities held thereby on capital markets.

Specifically, securitization provides three benefits for an issuer. First, providing the issuer with access to an emerging source of funding with relatively lower cost, it helps the issuer liquidate its long-term assets or beneficiary rights quickly to meet liquidity needs. Securitization outperforms traditional sources of funding such as lending by financial institutions and external investments with lower financing cost, more operational flexibility and fewer challenges in seeking capital.