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PE Fund Development in China

Apr 18-2013   



 

—     On the New Year Seminar of BiMBA Financial Club

 

On Jan. 12th, 2008, the New Year Seminar of BiMBA Financial Club with the theme “PE Fund Development in China” was held on the second floor of Wanzhong Building of Langrunyuan, Peking University. Presently, the establishment, operation and development of private equity fund, a new thing of the capital market, as well as many issues about its current legal and policy environment have all become hot topics within the trade.

 

The Sea of PE

Mr. LI Li, co-founder of Elite Investment Club, kicked off the seminar with his speech entitled “The Sea of PE”. First, he expatiated the concept of private equity fund. According to his introduction, “private equity” is a concept relative to “publicly offered equity”. The difference between private equity and publicly offered equity, or between private equity securities and publicly offered securities, lies in their way of placement, or rather, whether the securities are privately offered to particular investors or publicly offered to the non-definite public. The “private equity fund” or “underground equity fund” is a type of collective investment that is not publicly advertised and is recruited from particular investors. There are basically two types of such equity fund: one is the contract-based collective investment fund formed through investment trust contracts; and the other is company-based collective investment fund formed through jointly investing to establish a joint stock company. The private equity fund that we often talk about usually refers to a type of non-public collective investment privately recruited from specific investors, in contrast to the securities investment funds that publicly issue beneficiary certificates to non-specific investors and are under the supervision and regulation of the regulatory agency of Chinese government.   

 

Next, he briefly reviewed the history of PE development in China. Based on his understanding, PE development in China has mainly gone through 5 stages, that is, the stages of creation, establishment, growth, maturing, and expansion, and has presented different financial features in different stages. For example, in its budding stage between 1993 and 1995, nonstandard trust relations were gradually formed between the securities companies and their customers. In its forming stage between 1996 and 1998, the listed companies trusted their idle money to the underwriters for investment, and numerous consulting companies grew into private equity fund operators. Private equity experienced a stage of blind development from 1999 to 2000, in which many elites in the securities business, attracted by the market popularity of investment management companies, hopped to the private equity sector and greatly boosted its development with their rich professional knowledge and proved marketing skills. In 2001, PE entered a stage of standardization and adjustment, with its investment strategy changing from capital preservation operations to collective investment.

 

Performance of Domestic PE Funds

Mr. CAO Wenlian, Deputy Director General of the Department of Fiscal and Financial Affairs of National Development and Reform Commission, analyzed the current situation of PE in China. According to the data provided by China Renaissance Capital Investment, he said, overseas PE funds have been remarkable in both scale and performance. Till 2006, there were globally over 4000 independent funds with a total scale of USD738.9 billion, of which USD215 billion was raised in the current year, and an average scale of over USD10 billion. On the other hand, a research report by Central University of Finance and Economics indicates that the trading conducted by private equity funds currently accounts for 30% to 35% of the total trading volume of the market and the scale of private equity funds has reached between 600 billion and 700 billion yuan, twice as much as the publicly placed funds.

 

Geographically, Chinese private equity funds are concentrated in Beijing, Shanghai, Guangzhou, Liaoning and Jiangsu, but the focus has been shifting. From November 2001, the trading by private equity funds of Guangzhou quickly climbed and exceeded that of Beijing and Shanghai, presenting a “Strong South and Weak North” distribution pattern.

 

In view of the actuality of PE development, he pointed out that while PE funds bring life to the securities market, they also face risks, being most vulnerable to lack of legal protection. The standardization and regulation of private equity funds have become an urgent task for the governmental. Regulation of private equity funds requires necessary laws, so it is the need of a healthy securities market to speed up legislation on private equity funds and thus help to transform them from underground financial operations into open ones. The main issues involved in this concern are mainly how to define “qualified management”, who has the management “qualifications”, and how to define the legality of raised funds.

 

In accordance with the terms of the agreement that China signed with the WTO, foreign capital currently can account for 33% of the joint-venture fund management companies, and 49% three years later. This means the capital investment funds industry of China will face challenge and competition from overseas funds. Since overseas fund management companies are more familiar with the operations and management of private equity funds, their access to Chinese market will definitely have impact on the domestic fund management industry. Therefore, we need to quicken our steps in standardizing the operation and management of private equity funds and foster the qualified ones into institutional investors. The current private equity funds of China are not strictly qualified. Due to lack of law regulation, the contractual relationships between the internal personnel of equity funds and those between the fund managers and their clients are all subject to some legal risks, which is detrimental to the development of this sector. So, the standardization and regulation of private equity funds have become an urgent problem. Regulation of private equity funds requires necessary laws, so, to build a healthy securities market, it is necessary to speed up legislation on private equity funds and thus help to transform them from underground financial operations into open ones. A survey of the economic laws of all countries in the world shows that although no country has made a specialized law on funds, let alone that on private equity funds (some countries even have only a limited number of clauses on this matter included in other laws), there are still a series of laws to effectively regulate private equity funds.

 

Make Brave Choices and Stand the Test

Mr. SU Weizhou, General Manager of Hina Investment, said that the speeches of the experts allowed the audience to share their precious experiences and contained many sparks of wisdom. All market participants, he continued to point out, are bravely exploring and innovating, and adjusting their strategies according to market changes. In this early stage of the private equity funds, a participant must make efforts to seek new strategies for survival and development, and get ready for the life and death test of the market.

 

In the opinion of Mr. LIU Erhai, General Manager of Lenovo Investment, narrowly speaking, PE corresponds with different development stages of an enterprise. Different trading tactics and different investment tools share the same feature, that is, investing in unlisted equity. Even listed equity is judged by its growth potential. Funds should have the following characteristics: First, there should be the partnership spirit. This requires the internal personnel to be able to control the ethic risks. Second, there should be the trust spirit. That is, while spending others’ money to do good for others, the funds can utilize part of the money to benefit themselves so as to realize the goals of collective wealth management, portfolio investment, and optimized distribution of resources.

 

Following these speeches, the honored guests also shared their views on this issue and related matters. Then, the students attending the seminar held discussions and exchanges on some related hot topics.

PE Fund Development in China

Apr 18-2013   



 

—     On the New Year Seminar of BiMBA Financial Club

 

On Jan. 12th, 2008, the New Year Seminar of BiMBA Financial Club with the theme “PE Fund Development in China” was held on the second floor of Wanzhong Building of Langrunyuan, Peking University. Presently, the establishment, operation and development of private equity fund, a new thing of the capital market, as well as many issues about its current legal and policy environment have all become hot topics within the trade.

 

The Sea of PE

Mr. LI Li, co-founder of Elite Investment Club, kicked off the seminar with his speech entitled “The Sea of PE”. First, he expatiated the concept of private equity fund. According to his introduction, “private equity” is a concept relative to “publicly offered equity”. The difference between private equity and publicly offered equity, or between private equity securities and publicly offered securities, lies in their way of placement, or rather, whether the securities are privately offered to particular investors or publicly offered to the non-definite public. The “private equity fund” or “underground equity fund” is a type of collective investment that is not publicly advertised and is recruited from particular investors. There are basically two types of such equity fund: one is the contract-based collective investment fund formed through investment trust contracts; and the other is company-based collective investment fund formed through jointly investing to establish a joint stock company. The private equity fund that we often talk about usually refers to a type of non-public collective investment privately recruited from specific investors, in contrast to the securities investment funds that publicly issue beneficiary certificates to non-specific investors and are under the supervision and regulation of the regulatory agency of Chinese government.   

 

Next, he briefly reviewed the history of PE development in China. Based on his understanding, PE development in China has mainly gone through 5 stages, that is, the stages of creation, establishment, growth, maturing, and expansion, and has presented different financial features in different stages. For example, in its budding stage between 1993 and 1995, nonstandard trust relations were gradually formed between the securities companies and their customers. In its forming stage between 1996 and 1998, the listed companies trusted their idle money to the underwriters for investment, and numerous consulting companies grew into private equity fund operators. Private equity experienced a stage of blind development from 1999 to 2000, in which many elites in the securities business, attracted by the market popularity of investment management companies, hopped to the private equity sector and greatly boosted its development with their rich professional knowledge and proved marketing skills. In 2001, PE entered a stage of standardization and adjustment, with its investment strategy changing from capital preservation operations to collective investment.

 

Performance of Domestic PE Funds

Mr. CAO Wenlian, Deputy Director General of the Department of Fiscal and Financial Affairs of National Development and Reform Commission, analyzed the current situation of PE in China. According to the data provided by China Renaissance Capital Investment, he said, overseas PE funds have been remarkable in both scale and performance. Till 2006, there were globally over 4000 independent funds with a total scale of USD738.9 billion, of which USD215 billion was raised in the current year, and an average scale of over USD10 billion. On the other hand, a research report by Central University of Finance and Economics indicates that the trading conducted by private equity funds currently accounts for 30% to 35% of the total trading volume of the market and the scale of private equity funds has reached between 600 billion and 700 billion yuan, twice as much as the publicly placed funds.

 

Geographically, Chinese private equity funds are concentrated in Beijing, Shanghai, Guangzhou, Liaoning and Jiangsu, but the focus has been shifting. From November 2001, the trading by private equity funds of Guangzhou quickly climbed and exceeded that of Beijing and Shanghai, presenting a “Strong South and Weak North” distribution pattern.

 

In view of the actuality of PE development, he pointed out that while PE funds bring life to the securities market, they also face risks, being most vulnerable to lack of legal protection. The standardization and regulation of private equity funds have become an urgent task for the governmental. Regulation of private equity funds requires necessary laws, so it is the need of a healthy securities market to speed up legislation on private equity funds and thus help to transform them from underground financial operations into open ones. The main issues involved in this concern are mainly how to define “qualified management”, who has the management “qualifications”, and how to define the legality of raised funds.

 

In accordance with the terms of the agreement that China signed with the WTO, foreign capital currently can account for 33% of the joint-venture fund management companies, and 49% three years later. This means the capital investment funds industry of China will face challenge and competition from overseas funds. Since overseas fund management companies are more familiar with the operations and management of private equity funds, their access to Chinese market will definitely have impact on the domestic fund management industry. Therefore, we need to quicken our steps in standardizing the operation and management of private equity funds and foster the qualified ones into institutional investors. The current private equity funds of China are not strictly qualified. Due to lack of law regulation, the contractual relationships between the internal personnel of equity funds and those between the fund managers and their clients are all subject to some legal risks, which is detrimental to the development of this sector. So, the standardization and regulation of private equity funds have become an urgent problem. Regulation of private equity funds requires necessary laws, so, to build a healthy securities market, it is necessary to speed up legislation on private equity funds and thus help to transform them from underground financial operations into open ones. A survey of the economic laws of all countries in the world shows that although no country has made a specialized law on funds, let alone that on private equity funds (some countries even have only a limited number of clauses on this matter included in other laws), there are still a series of laws to effectively regulate private equity funds.

 

Make Brave Choices and Stand the Test

Mr. SU Weizhou, General Manager of Hina Investment, said that the speeches of the experts allowed the audience to share their precious experiences and contained many sparks of wisdom. All market participants, he continued to point out, are bravely exploring and innovating, and adjusting their strategies according to market changes. In this early stage of the private equity funds, a participant must make efforts to seek new strategies for survival and development, and get ready for the life and death test of the market.

 

In the opinion of Mr. LIU Erhai, General Manager of Lenovo Investment, narrowly speaking, PE corresponds with different development stages of an enterprise. Different trading tactics and different investment tools share the same feature, that is, investing in unlisted equity. Even listed equity is judged by its growth potential. Funds should have the following characteristics: First, there should be the partnership spirit. This requires the internal personnel to be able to control the ethic risks. Second, there should be the trust spirit. That is, while spending others’ money to do good for others, the funds can utilize part of the money to benefit themselves so as to realize the goals of collective wealth management, portfolio investment, and optimized distribution of resources.

 

Following these speeches, the honored guests also shared their views on this issue and related matters. Then, the students attending the seminar held discussions and exchanges on some related hot topics.