Professional Interpretation

I. Dilemma faced by Chinese private equity LPs 

As same as most of financial instruments, the private equity investment fund is also an arrant “imported good” in Chinese market. Until the end of 1980s, the private equity investment fund sprout dominated by government, invested in high-tech enterprise and shaped by venture capital fund was appeared in China. Compared with the U.S. private equity investment fund with practical operation experience for almost 70 years, both the private equity investment fund manager and LP have obtained more mature experience, and the professional level of all relevant groups cannot be matched for Chinese private equity investment fund in later start. 

(I) The professional private equity fund management talents were deficient 

On July 7, 2017, the U.S. Securities and Exchange Commission (SEC) published the statistical report of the private equity industry in the fourth quarter of 2016; up to the fourth quarter of 2016, the United States has filled in a total of 28,290 private equities of private equity monitoring statement (PE statement), with the total assets of USD 11.01 trillion, and the net asset of USD 7.35 trillion. The average scale of single fund was USD 389 million, and each manager managed 10 private equities on average. Compared with China, up to the fourth quarter of 2016, there was a total of 46,029 private equities filed by the fund association, with the year-on-year growth of 136.36%; the paid-in scale was RMB 8.29 trillion, with the year-on-year growth of 138.22%; the average scale of single fund was RMB 180 million; each manager managed 3 private equities on average, and the average management scale was RMB 461 million. 

The rapid rise of U.S. private equity fund in 1980s could not be separated from the function of the fund manager. Reflecting the condition of Chinese fund manager, the quantity and quality were greatly different from those of the United States. According to the data disclosed by Asset Management Association of China, since the Interim Measures for the Supervision and Administration of Private Equity Investment Funds was published, the number of fund managers has slightly rose, and the number of employees has been less than 60,000 up to May 2017. On one hand, because the supervision of the new policy of private equity was upgraded, all private equity management companies were required to register the fund manager; a lot of fund managers were canceled, and the number of the fund managers was not obviously increased; On the other hand, because the development of the private equity investment fund of China was started lately, there were no more operation experience and lessons to be summarized and referred, and the professional experience of current practitioners was also relatively deficient. 

(II) The development of the pension fund was deficient 

The stable fund flow of the U.S. private equity in the development process benefited from the private equity which was allowed to be allocated by U.S. pension fund in 1970s to a large extent, and the institutional investors represented by pension fund were the stabilizer and footstone of the development of private equity industry. The long-term, stable and continuous allocation of multiple kinds of funds through these institutional investors effectively promoted the improvement of the management level of small and medium enterprises in the United States and growth of commercial value, and also provided the important manners for pension fund to improve the earnings. 

One of reasons for the dilemmas in this aspect was the domestic investment idea. Chinese accredited institutional investors were absent and didn’t make breakthrough all the time, so it seriously restricted the breakthrough development of Chinese private equity industry. There were no long-term, stable and continuous accredited investors, and the development of Chinese private equity fund was unavoidable to pursue quick success, and was only absorbed in short-term interests. 

Another dilemma was from Chinese pension. The relevant policies have not been designed completely, so Chinese pension could not bear the heavy responsibility in the private equity allocation aspect. 

II. Opportunity in Chinese private equity LPs development 

(I) The Belt and Road policy support and Asian Infrastructure Investment Bank development 

The promotion of “Belt and Road” cannot dispense with the strongly support of the financing, and except for the traditional financing system represented by bank and other financial institutions, the oriented fund, bond and open financial institutions also become the financing hotspot. At present, the policy investment institutions also occupy the main position; the investment of the pure commercial funds is still less, of which the debt financing of Chinese-funded institutions is dominated, and the degree of participation of countries along the line is not high. Seen from another perspective, the equity financing can still continue to obtain further development, especially the private equity fund with good development momentum in recent years, and the domestic LP shall seize the opportunity to expand own international influence. 

The financing demand of “Belt and Road” is huge, and the annual average fund demand amount of the countries along the line of “Belt and Road” only in the infrastructure field is up to RMB 1.6 trillion to USD 2 trillion before 2020 according to the calculation of the relevant institutions. All kinds of financial capitals must be transferred to realize that “all flowers blood together”, so that “Belt and Road” could obtain more excellent fund guarantee. The fund source of the private equity investment fund is diversified, so that more folk LPs could widely take part in the investment of “Belt and Road”, and practically experience the benefit of the policy in the specific way of not only providing the direct investment of equity for domestic enterprise serving “Belt and Road”, but also providing direct investment of cross-border equity along the line of “Belt and Road”. It can fundamentally change the current situation of too high policy debt financing proportion, improve the marketization degree, form the financing system of collaborative complement and joint development, and motivate the resource force of countries along the line to take part in the joint discussion, co-construction and sharing of “Belt and Road” according to the marketization principle. 

Guiding Principle of Financing of “Belt and Road” clearly points out that the market mechanism shall play a decisive role in the financial resource allocation, and expects the various subjects, such as equity investment fund to provide the fund and other financial services for the construction of “Belt and Road”. In the future, various countries along the line of “Belt and Road” shall further strengthen the international cooperation of the specific field, and create the good external condition for investment of “Belt and Road” of the private equity investment fund. The private equity investment shall develop its own advantages, build more diversified LP structures, and absorb the local high-quality capital of countries along the line of “Belt and Road” to become LPs, so that the fund forms the core advantage in the project stock trading, financing and “Belt and Road” national resource channel implementation and multiple aspects, and ensures the successful boosting of “Belt and Road” strategy in the future. 

Asian Infrastructure Investment Bank (abbreviated as AIIB), is an inter-governmental Asian multi-lateral development institution, which mainly supports the infrastructure construction, and it is established to promote the progress of construction interconnection and economic integration of Asia, and strengthen the cooperation of China and other Asian countries and regions. It is the first multi-lateral financial institution established after being proposed by China, with the headquarter in Beijing, and the legal capital of USD 100 billion. Up to May 13, 2017, Asian Infrastructure Investment Bank has included 77 official member states. Its establishment and development are the important links of powerfully promoting the financing system of “Belt and Road”. 

(II) Cross-border merger and acquisition ripen and expand the local LP 

In 2016, Chinese cross-border merger and acquisition presented the blowout trend. The cross-border merger and acquisition transaction of Chinese-funded enterprise was surged in the global merger and acquisition market, and the transaction scale and quantity were once surprised by the global merger and acquisition market. According to the data of the global financial data provider Dealogic, the amount of the cross-border merger and acquisition transaction which was completed or has been nearly completed as announced by Chinese-funded enterprise in 2016 created a new record up to USD 226.1 billion, which was two times more than the total amount in 2015. Wherein, the transaction scale that ChemChina acquired Syngenta AG, the Swiss seed and biotechnology agribusiness was USD 46.9 billion, and once refreshed the highest record of overseas merger and acquisition scale of Chinese-funded enterprises. 

Because the proportion of the enterprise LP in the local private equity fund was more than 50%, and these LPs fiercely intended to break through the domestic and foreign industry chain layout and try the assets allocated overseas, it was the major force that the local private equity fund was expanded overseas with the cross-border merger and acquisition trend of Chinese enterprises. According to the report of the data center of Zero2IPO Group, as more and more Chinese enterprises went abroad to seek the merger and acquisition subject, it is predicted that the aggregate foreign investment of China is expected to be USD 300 billion by 2025, and the accumulative aggregate foreign investment of China will be increased to USD 3 trillion. In the general trend of cross-border merger and acquisition, the figure of private equity fund LPs dominated by strategic acquisition must be appeared. “Belt and Road” expedites the good news supported by the government of surrounding countries and regions along the line, so it must drive a new round of economic growth, and also attract the enthusiasm of more private equity funds and enterprise LPs for cross-border merger and acquisition, and the good news of the private equity fund investment project will further attract them to become the new members in LP team. With more exchanges and cooperation of local private equity fund and overseas investment institution, the local LP must be increasingly mature in the boosting drill of projects.