Professional Interpretation

I. Role assignment in the private equity fund in PPP projects 

The participants of private equity funds in PPP projects usually include the governments, the government-guided funds or the governmental investment and financing platform companies, financial institutions and social capital participants. 

1. The governments, the government-guided funds or the governmental investment and financing platform companies 

The governments, as the initiator of PPP projects, are familiar with the government’s public and municipal administration demands, have the right to manage the social and public order, and are responsible for organizing and initiating the projects, putting forward the project requirements and conditions and collecting the resources demanded from social parties. During the project construction and operation, the governments also play the important roles, such as the project policy direction protector and project management department coordinator. 

In order to realize the introduction of the basic funds in the early stage of the projects, lever more social capitals to enter and provide the reassurance for social investors, the government-guided funds and the governmental investment and financing platform companies become the important project security protectors. They usually act as the inferior LPs in the industrial fund financing link of PPP projects, and some of the inferior LPs even need to promise to repurchase the fund shares held by the social investors in the case that the social investors cannot effectively quit in the normal way. According to different purposes of establishing the guided funds, the government-guided funds are further classified as the government-invested funds and the industrial investment funds contributed by the governments. 

2. Financial institutions 

Banks, securities companies and trust companies, as the mainstream financial institutions, are the most important fund providers of PPP projects, and they participate in the PPP projects in different ways: 

Banks can participate in the PPP projects through accommodation of funds, investment banking, cash management, project consulting service and mezzanine financing. 

Securities companies can provide the PPP project companies with IPO recommendation and guarantee, merger and acquisition financing, financial consultant, bond underwriting and other investment banking services and can also get involved through asset securitization and capital management plan. 

Trust companies participate in the PPP project in the direct and indirect manners. Direct participation refers to that trust companies participate in the PPP projects directly in the form of investor and recoup the investment through project dividend. Indirect participation refers to that trust companies raise the funds as a participant in the PPP mode or jointly invest in the project companies as a consortium with other social capitals, and adopt debt in the name of equity and quit through the equity repurchase by other social capitals at the agreed time. 

3. Other social capital participants 

Other social capital participants play different roles according to their purposes of participating in PPP and the resources available. Some large professional social capitals desiderate to expand the business fields and increase the returns on investment by participating, operating and even acquiring the PPP projects; therefore, they tend to directly invest in the project and participate in the project financing, development and construction and operation and management, and there are even the individual cases of acquiring the project companies finally; Some social capitals, such as the scattered investment subjects, only for the purposes of acquiring the returns on investment, only play a role of fund provider in the PPP projects, and their participation mode tends to be acquisition of the returns on investment through the products, such as the fund plan launched through the platforms like the private equity fund or trust. 

II. The benefit orientation of the policy LPs in the PPP projects 

In 2016, the government-guided funds around the country continued the explosive growth trend in 2015, and exceeded the sum of the guided funds around the country from 2013 to 2015 in terms of the quantity of establishment and the total scale disclosed. According to the data, a total of 901 government-guided funds had been founded in China as of the end of 2016, of which the total scale reached RMB 2,396,060,000,000, and the average scale of a single fund was about RMB 2,660,000,000. 

Generally speaking, the cooperative objects of the government-guided funds mainly as the LP investment venture capital sub-funds include the large-scale central enterprises, policy banks, insurance funds, venture capital institutions and fund management institutions. For the cooperation and screening, the government-guided funds shall conduct the fair and scientific evaluation and selection in principle and formulate the scientific application conditions and screening processes. Generally speaking, the interest demands, such as profitability, safety, liquidity and policy are the logical starting points for different LPs and FOFs to choose the GP and private equity fund for asset allocation. The government-guided funds most come from the financial funds, so they tend to put safety in the first place; at the same time, not for the purpose of seeking profits, they shall also consider the policy demands and set restriction on the investment industries, regions and investment stages of funds; therefore, the aforesaid reasons result in that the government-guided funds usually follow the principle of “Safety > policy appeal > liquidity > profitability” at the time of choosing the cooperative objects, so that the following factors become the key evaluation elements when the government-guided funds invest in the private equity: 

1. Reputation of the private equity funds in the industry 

The reputable private equities are a guarantee for the enterprises invested; the high-quality private equity LPs are a guarantee for the private equity GPs, and there is no doubt that the investment of funds guided by the government finance is a favorable “endorsement” for the fund management teams. The packaging reciprocity of such reputation publicity will also bring a win-win situation to the government-guided funds and the private equity during the promotion of PPP projects. 

2. Project selection ability of the private equity management team 

An excellent fund management team should have the mature industry management experience and keen project screening ability as well as the overall planning and building ability after the projects are selected, to improve the core competitiveness and continuously develop the appreciation space for the enterprises. 

3. The post-investment management ability of private equities 

After designing an investment scheme, it is crucial to enable the enterprise to accept it, balance and develop so as to be able to smoothly realize the transaction structure of quit; Especially the listing companies can realize the fund quit through the industry chain upstream and downstream merger and acquisition.  

4. The previous quit performance of the private equity 

The good pervious quit performance represents the comprehensive strength and operation level of private equities to a certain extent. The mature venture capital institution that has survived after the competition of years will certainly be better than the newly established institutions. 

5. The investment directions should be the industries and fields mainly supported by the state, 

Including but not limited to the major infrastructures, shantytowns transformation, new-type urbanization construction and other livelihood projects and major national projects; The enterprises or industries mainly supported by the state, such as the science and technology enterprises, small and micro enterprises and the strategic emerging industries; The industries or formats in line with the extension direction of insurance industry chain, such as the pension service, health and medical treatment service, security service and Internet finance service. 

III. The benefit orientation of the market LP in the PPP projects 

However, the market LPs based on their characteristics of relatively weak political purpose and relatively strong market profitability more emphasize the project investment interests or pay equal attention to the safety and interest at the same time according to their different roles when they get involved in the PPP projects. The writer thinks that they should select the interest, safety, liquidity and policy in the order of “interest > liquidity > safety > policy” or “safety > interest > liquidity > policy”. 

Therefore, in face of the selection of the industry funds, the LPs that want to directly invest and even participate in management will pay more attention to the following information of funds: 

1. The professionality of private equity fund teams in the PPP projects 

Similar to the government private equity LPs, the market private equity LPs also value the professionality of the private equity investment fund teams. In addition to a deep master of the law of economic operation, such professionality also includes the sensitivity of the profitability direction of market operation. 

2. The historical quit performance of such private equity funds 

There is no doubt that the historical quit performance record of a private equity is the best examination to verify the professionality and reputation of such funds. The good historical performance record and even the cases of successful investment and quit in higher probability and the return on equity higher than that in the usual investment mode are nothing else but stimulants for the market private equity LPs. 

3. The project handling experience of such private equity funds 

At the time of examining whether a private equity fund can be called a good investment object, the private equity LPs will also refer to the teams’ experience in undertaking the projects and especially the professional managers’ experience in undertaking the projects based on the relatively equivalent performance and team professionality. On the base of better historical performance, generally, the teams that have the more experience in handling the projects will have better project selection ability and the unsuccessful project experience summary so as to avoid the post-investment and quit errors of the private equity fund investment projects in higher probability. 

4. Whether such private equity fund has any bad reputation record 

The market LPs are relatively weaker than the policy LPs in risk pressure-resistance and public resources, so some of more mature market LPs tend to pay more attention to and more survey the safety of investment while examining other technical indicators of the private equity. The bad reputation record will make the most market private equity LPs more cautious about the investment cooperation of private equity funds. 

For the roles played by the LPs in the funds, it is speculated according to the information investigation and survey data of China Venture, about 50% of the investors are inclined to follow the investment in the proper proportion, and as little as about 8% of the LPs said that they would not follow the investment. According to the analysis of China Venture Institute, the LPs also expect that GPs can provide more opportunity of following the investment, so that they will directly participate in the investment, acquire the high-quality project resources and lock the returns while they act as the contributors. 

According to the information investigation and survey data of China Venture, the biggest obstacle that the LPs face in the Chinese market is “the lack of market-operated FOF”. Compared with the biggest obstacle that “the local LPs generally lack the experience in private equity investment” in 2015, China’s LP market has further developed, and the private equity investment has been increasingly mature after a year. However, the quantity and quality of market-operated FOF with concepts of the local LP investment more oriented by the short-term incomes, the value investment and asset allocation still need to be improved. 

Then, LPs shall pay double attention to the LPs’ GP selection and risk control ability and the quantity of qualified local LP institutions. However, with the emergence of market-operated FOF and the maturity of policy and law environment, the obstacles arising from the factors above are shrinking little by little. 

IV. The game between the policy LPs and the market LPs in the PPP projects 

Generally, the policy-guided LPs mentioned by us refer to the government-guided funds, the government-designated institution management funds and the government parent funds. According to the information investigation and survey data of China Venture, the parent funds, the listed companies and the government-guided funds in 2016 are the most promising. China Venture Institute has thought that the rough reasons are as follows: 

1. The parent funds have their own characteristics of diversifying investment and reducing the risks, and under the background that the private equity investment market keeps heating up, more and more institutions are willing to cooperate with the parent funds. Cooperation with the parent funds has become the most mainstream. 

2. The mode of “listed company + private equity fund” has solved the listed companies’ aspiration of realizing the industrial integration through mergers and acquisitions and the private equity fund investment project quit dilemma, has expanded the quit channels and has optimized the quit quality at the same time. The attention continued to be improved in 2016. 

3. In recent years, the state has successively introduced the corresponding policies, vigorously supporting the local economic development, talent conveying and science and technology capture and has actively cultivated the development of the government-guided funds, and the guided funds will certainly become one of the important targets for the GPs to seek the high-quality institutional investors in the future. 

However, the private equity funds shall consider the relevant state-owned capital supervision requirements when introducing the state-owned capital LPs, including but not limited to: 

1. The decision-making procedures of the state-owned capital LPs for investing in the private equity funds; 

2. The procedure requirements that the state-owned capital LPs should observe at the time of transferring the partnership property shares; 

3. Whether the state-owned share transfer as well as the state-owned property right floor trading at the time of non-listed quit of the invested projects will be triggered after the state-owned capital LPs are introduced; 

4. The local policies and industrial and commercial registration practice related to the state-owned supervision in the location of private equity fund and the location of the invested enterprise for the smooth promotion of the establishment of private equity fund, LP change, fund investment and other matters. 

By contrast, the market LPs have more flexibility and procedure convenience; especially, comparing with the financial institution LPs or the listed company LPs, the common enterprise LPs are more advantageous in many aspects, such as the flexibility, degree of cooperation and the examination and approval process; in addition, they are the potential LP resource groups which cannot be ignored by the industrial funds in terms of capital abundance and will play the important role of capital provider in promoting the development of industrial funds in the future.