subject: The Operation And Exit Of Private-equity Investment In China [print this page] According to the report of TRI.TO TRI.Nthe global news and information provideron July 7th , Chinese enterprises have attracted 2.6 billion dollars Privately Offered Fund Investment in the first half of this year, which accounts for 36 per cent of the total Privately Offered Fund Investment in Asian and Pacific region and China has got the maximum benefit from Privately Offered Fund in Asian and Pacific region ex-Japan. Private-equity Investment carries a great financial support for Chinese Small and Medium Enterprises financing. Many policies, laws and directives have been set in place by Chinese government to encourage Private-equity Investment.
Private Equity, (hereinafter as PE), means to make an equity investment in private enterprises (namely unlisted enterprises) by private form, and during the transaction process, exit strategies are took into consideration, that is, to sale shares to get profits through listing, merger and acquisition, buy-back form by strata of management, and so on. In China, PE mainly refers to the Private-equity Investment of the mature enterprises that have formed a certain scale and had a steady cash flow.
After accession to WTO, Chinas retail trade, financial industry and telecom industry etc. have been open to foreign and private capital. As one member of the BRICs, the sustained and rapid growth of Chinese economy contains a huge opportunity for investment. With the development of the economy, Chinas infrastructure construction is strengthening gradually, the information level is increasing greatly and the hard environment for investment is perfecting. With the revising of Company Law of the Peoples Republic of China and Securities Law of the Peoples Republic of China, the legal system is improving gradually. That the rapid development of China economy and the improving of the investment environment have been a huge driving force to attract PE.
China is improving the investment environment gradually while spurring its economy to develop rapidly during the period of industrial transition. That is a favorable opportunity for PE. Nowadays, PEs major business areas in China include: to provide financial support for the merging and developing of the growing SMEs and private enterprises; to offer Pre-IPO support for Chinese enterprises before they becoming a listed enterprise; to join the reorganization of corporations and banks. In the wave of the reform and privatization of state-owned enterprise, the restriction on PE investment is loosening. There are possibilities that PE investment may develop into obtaining control from minority stake investment. Furthermore, it is a good choice for PE investing in the bad loans and real estates.
There are three main organizational forms of PE investment in China: trust system, limited partnership and the company style among which the trust plan is the typical style of YANGGUAN PE . The PRC Partnership Enterprise Law has become the legal guidance for the establishment and operation of PE. The strategy is more flexible for corporate-style PE and the operation must be more formal and standard under the framework of corporation.
Laws in China Encouraged foreign merchants to invest venture enterprises. A lot of preferential tax laws applied to foreign capital have been enacted. Venture Investment Enterprises may take the organizational form of a non-legal person entity or a company. Moreover, more and more PEs set up offshore company to evade tax or register a hi-tech company to enjoy the preferential tax policy at tax havens.
Capital Market in China is improving day by day, and PE withdrawal mechanism is being improved too. The establishment of SME Board in May 2004 was regarded as a prelude to the Growth Enterprise Market(GEM). October 23rd, 2009, GEM opening ceremony was held in Shenzhen Stock Exchange, which provided a normal withdrawal mechanism for PE. China encourages small and medium sized SOE carry out MBO(management buy-outs). Also, that is a good way for withdraw of PE.
In conclusion, the fast development of China provides foreigners an extensive stage, and laws were encouraging PE to finance SMEs. These are the most important factors to attract huge PE investment on China enterprises. At present, China laws on operation and exiting mechanism for PE are being perfected. We believe that the economic and market environments will continuously get improved. PE shall have a brilliant prospect in China.
