The Problems Of The Development Of Chinese Private Equity Investment And The Relevant Countermeasures

Private equity (PE) has developed rapidly since 1980s' ,and maxizing its investment for 192 billion dollars in 2000 after the huge development in 1990s.With the recession of global economy and the burst of dotcom bubble from 2001, the PE development had been going down the next three years as the investment volume went down to 82 billion dollars. However it has increased its investment in Asian market .And PE has resumed its activities with its rapid development in the Asian market since 2004 in which china has become the primary goal of these investments.PE fund have unique advantages . Besides that its investment can last long term and provide capital supplement, it can also bring the management, technology, market and other expertise and experiences that a firm needs. And these benefits can also help the development of the enterprises in China. At first, the speed of technological innovation that now China rashingly wants to quick depends on the development of venture capital which is a form of private equity. However this process can not go without the firm support of policies and market guided by government. And now the various industrial reorganizations in China can be pushed further by the industrial investment fund which is also a form of private equity. A fund can benefit a lot from the investment either in the firms that have mature technologies yet haven't gone public or the enterprises that have gone public yet need more capital to integrate their resources. And PE has been a important financial instrument for the integration of the factor markets in China. The enterprises in China can get a huge development with the functional combination of this instrument and the abundant resources and lots of investors. Being with unique advantage, PE can also be a tool to help Chinese enterprises to compete in the world market.However, the PE development in China has lagged far behind that in America and Europe .It has been restrained by various obstacles .The first restraint is the restriction of capital market which has hindered the PE development and can also make the government bear a lot of risks during financial turmoil. The second restraint is the lack of adequate legislative and tax policies and the ambiguous role played by government in the PE operating process. And also the withdrawal mechanism for PE fund is highly restricted, resulting that many PE fund make IPOs of enterprises overseas. The last obstacle is the lack of adequate talents ,agents and good faith system.The article has outlined the basic concept of private equity, and explore its fundraising , investing and the withdrawal processes and also the relative countermeasures in accordance to the problems of the PE development in China based on the analysis of the institutional economics perspective.This paper consists of seven parts. The first part is the general introduction which briefly introduces the background and significance of selecting the topic, the research contents and methods internationally and domestically, and the general viewpoints of this article.The second part begins with the concept of private equity and presents mainly about the PE organization forms of limited liability partnership and the limited liability company. And the characteristics of these two forms as well as the PE investment mechanism are also analyzed in this partThe third part has analyzed that why the PE has existed based on the analysis of institutional economics perspective, particularly the transaction cost. Generally speaking, transaction cost can propel institutional innovations which in other way can further decrease the transaction cost. With massive scale advantage, the form of PE fund can reduce the supervision cost and guarantee the investment return, leading to the reduction of transaction cost as well.The fourth part of study centers on the PE investors. At first, it has described the current PE development in China and its obstacles which include legal restraints, industrial investment restriction and the double taxation of partnership enterprises. And then the following part has explored the proposals of expediting the development of PE investors. The suggestions include the drafting of PE investment fund , the reforming of double taxation and other legislative obstacles as well as that how we should encourage the development of PE investors such as multinational and local companies, the pension fund, securities firms, commercial banks and wealthy people.The fifth part has primarily studied the forms of investment based on the analysis of information asymmetry and principal-agent theory perspective. The management of fund that is raised by various investors is done by fund manager .So there should be strict incentive and restrictive mechanisms to assure investors' interests. The restrictive mechanisms for limited liability partnership and limited liability company both cover investment, debt sharing, investment term, reputation restraint, decision-making and legal constraints. However, the incentive mechanism for limited liability partnership is mainly about economic reward and status incitement. Meanwhile the incentive mechanism for limited liability company centers on venture capital investment.The sixth part has analyzed the investment process based on the analysis of information asymmetry and principal-agent theory perspective. The management of enterprises that received capital supplements from PE should be highly monitored .So there should be strict incentive and restrictive mechanisms to assure investors' interests. Before exploring these mechanisms, the part had analyzed the obstacles in the investment decision-making process which include legal restraints and market evaluation obstacles. Because of these obstacles, the restrictive mechanisms should be started in caution .Not only the PE fund manager should conduct full investigation before decision-making, but also get a veto in the enterprise board and other measures to assure that the investment get the proper reward.The last part has analyzed the withdrawal mechanism of PE investment. There are many obstacles for withdrawing of PE investment. The withdrawal channels are restricted by the current conditions and policies. In order to develop our PE investment market, we have to improve the withdrawal channels .These measures include perfecting main board and the second board of the country's stock market , the OTC trade market and the property rights market, as well as building carve-out board market.