Limited Partnership PEs Promoting PE Investment Reshuffle
2008-06-23
Despite staring late, limited partnership PEs are rampant and have quickly become a strong force for promoting China’s PE investment market reshuffle.
Black horses of limited partnership PEs frequent
RMB 500 million yuan! Beijing Huida Jiuding Investment Center recently completed easily its phase III PE investment fund, which was also one of the most recently founded limited partnership PE funds. In the situation that public funds offering and offering of security collection of financial products are faced with coldness, the offering of PE investment funds is still hot.
Since the beginning of this year, limited partnership PE funds are becoming a black horse in the capital market by their fierce offensive: several limited partnership PE funds including Guoshun Investment Fund, Redstone International Venture Capital Fund Center, etc. were established successively, among which Huida Jiuding Private Equity Investment Fund was one of the limited partnership companies enjoying the fastest development.
In China, limited partnership PE is a new form for limited partnership. Only starting from June 1st, 2007, the revised Partnership Enterprise Law of the People’s Republic of China has recognized the organization form of limited partnership. After this, private equity investment institutes have started to keep trying limited partnerships.
It is worth noting that although starting late limited partnership PEs are showing a black horse posture. Take Huida Jiuding as an example, since its registration in last July by three partners, this fund has completed within one year’s time investments in 7 enterprises, which includes several leading enterprises in the respective industries, such as Guangdong Linoya Electronics Technology Co., Ltd., China’s largest cable connection manufacturer, Henan Billions Chemicals Co., Ltd., China’s second largest titanium fine powder manufacturer, Goldcup Electric Apparatus Co., Ltd., Middle and West China’s largest electric wire and cable manufacturer, and so on. More surprisingly to those in the industry, one of the company’s investment portfolios has been reviewed by the Public Offering Review Committed, China Securities Regulatory Commission (CSRC). According to Huida Jiuding’s President Xiaojie HUANG’s introduction, this project was invested last November, and is planning to be listed this September.
In the aspect of capital raising, limited partnership also shows its advantages. Huida Jiuding’s Executive President Lei CAI introduced that actually the fund under the company had successfully raised four phases since last year until now, among which the first three phases were partnership investment funds. At present the fund scale under management by the company has exceeded RMB 1 billion yuan. Fund IV is an equity investment fund having an initial scale of RMB 300 million yuan that was co-initialed with Chengdu Industry Investment Co., Ltd. based on a cooperation agreement. It is actually a government-sponsored fund, whose license value is greatly coveted by those in the industry.
Limited partnership promotes competitiveness
In the capital market, the emerging limited partnership PEs show rapid maneuver capabilities. The development speed of Huida Jiuding is not a single phenomenon. It is said that China’s first limited partnership PE - Nanhai Growth Fund I, within half year since its establishment in June, has invested in 12 portfolio companies to be listed by completing an investment amount of RMB 230 million yuan, among which some companies have filed IPO application documents to the CSRC.
Although having different scales, other limited partnership PEs show a similar proactive style. After their establishments, limited partnership PEs show an obvious offensive. Huida Jiuding’s Vice President Zhongyi ZHAO said: fast investment does not mean radicalness at great risks, instead it is a result of effective operation. Although the company was founded only in July 2007, the core members of the team had thought over their investment business for a very long period, and have made adequate preparations in projects stock, operation procedure and team building.
Limited partnership plays a key role in the expansion. Zhongyi ZHAO believed that limited partnership is the most appropriate organizational structure form for PE institutes. He analyzed that fund-raising by the limited partnership mode arranges ingeniously the rights and obligations between limited partners (fund providers), general partners (manager) and trustee (commercial banks). This mode can not only control risks, but also ensure fund safety of the limited partners as well as efficiency and flexibility of fund operations by finding out the balance point of the two.
Zhongyi ZHAO said, each of our investments needs signature by all the partners. This means that not only professional investors are participating in the investments fund providers are also enjoying supervision rights for the investments, while the fund trustee banks can mobilize the funds only after signature by all the investors. This design provides limited partnership PEs with competitiveness at least at two aspects: (1) to greatly ensure investors’ right to know and thus mobilize the investors’ investment enthusiasm; and (2) to ensure specialization and flexibility of private fund operation while ensuring information transparency by the investment management mechanism.
It is by virtue of the above advantages that most limited partnership PEs are development fast, for example, Huida Jiuding has grown initially from a team of 3 partners to a team of nearly 30 persons, while the development of China’s first limited partnership PE is not inferior. This reporter got information from Shenzhen Nanhai Growth Venture Capital (LP) that the Fund is currently raising its Fund II in Shenzhen; and the other limited partnership PEs that were established relatively earlier are also considering new fund-raising offering plans.
To become the mainstream form in the industry
It is worth noting that although not yet being a mainstream force in the PE investment market, limited partnership PEs are impacting the market with rapid investment strategies.
Besides in Shenzhen, currently limited partnership PEs are emerging in cities like Beijing, Shanghai, Qingdao, among which Beijing is also becoming a gathering center for limited partnership PEs. According to experts in the industry, limited partnership PEs are a very sophisticated organization form for PEs in developed countries, e.g., in the USA, 80% of PE institutes adopt the mode of limited partnership, while currently most of China’s PE funds are company-management-form-oriented, especially so for large PE institutes taking leading competition positions.
The emerging limited partnership PEs have posed furious impacts on the existing market. Junhai LIU, a researcher of Institute of Law, Chinese Academy of Social Sciences, thought the key reason behind is that limited partnership PEs play their role of flexible operation.
Junhai LIU held that limited partnership encourages the rich as limited partners, and the capable as general partners to participate in corporate operation, and unites organically the rich and the capable in a favorable way. The mode of limited partnership is facilitating in reducing risks to the greatest extent, expanding financing scales and strengthening incentives and restrains, thus becoming a new type corporate organization form for venture capital institutes.
As for investors, limited partnership PE is not only possessing a flexible management mechanism, but also enjoying the advantage of low tax rates. Although at present China’s policies towards taxation on limited partnership PEs are still not very clear, the solving of this issue is around the corner.
Those in the industry forecast that: because limited partners can be taxed by personal income tax which has obvious advantages compared with corporate tax rates, limited partnership PEs will meet a new round of development peak once the issue of tax rates is cleared.