China Private Equity Financing

In《The Wealth of the Nations》, Adam Smith noticed that Chinese are hardworking, but poor. He thought it was because that China was a stagnant society. But Adam Smith did not give us a deeper explanation for why China stagnated. And recently, we found this answer.First of all, we affirm this fact. It was said that the eighteen century was the famous "flourishing age of Qianlong" in China's history. In 1766, the finance income of Qing dynasty equals to USD114 000 000 today. The whole year's public revenue of Qing dynasty was less than the income of Shangde Company in 2007. But start from reforming and opening-up in 1978 till now, GDP in China increased 15 times in more than twenty years. What was the secret of this change? In fact, Chinese were industrious but poor in the past and Chinese are hardworking but rich today were just that every coin has two sides. All could attribute to one word: "institution".Along with the reform and opening-up policies go deeper, China's economy has made a great progress, but the development of capital market is not keep up with the economic progress. Capital market is not perfect, lacking of relevant financing and investing channels, and as a result, on one side, huge amount capital were resorted in the banks, on the other side, a great many enterprises were stagnated because of lacking money.In America, 90% high-tech corporations were supported by venture capitals. In China, private equity (for short PE) fund has already cultivated many famous companies as Sina, Mengniu, Alibaba and Baidu etc. As an important part of capital market, PE funds provide necessary capitals and management supports for enterprises' development.Comparing to the highly developed US PE industries, which have set a model for global private equity sector in the world, the Chinese PE industry started only in the 1980s, now still in the primary stage.The PE limited partnership as the most import institutional innovation in the history of PE development has been the key organizational form in the US since 1980s. The ERISA and pension funds investment in PE industry is impetus to the setup and perfecting PE limited partnership system, and PE limited partnership system strengthens the efficiency of US pension funds investment. The system innovation, esp. PE limited partnership in pension fund investment has been key to the success of American PE industrial development.We'd better think earnestly about putting American successful experiences of PE industrial system innovation into Chinese application. After studying the related materials, the author noticed that the researches on the innate and natural relationship and co-existence relationship between pension fund investment and the development of private equity limited partnership were limited.This paper takes fund-raising for PE as main research target, starting analysis from demand and supply of private equity, and constructs a structure of PE capital supply-PELP-pension fund investment system-Chinese application, as analysis model.Firstly, applying an economic historical analysis tool into the US PE industrial development with different industrial organizational evolution of PE industries as the main line to find sharp stage division and features in each stage, resulting that PELP has been the most important system innovation and current main industrial organizational form in American PE industries since 1980s, and the reforms in US pension system have been great pushes to the establishment of PELP and development of American PE industries. An experimental analysis of Chinese PE industry shows the weaknesses in the industrial organizational form in Chinese current PE area, and concludes that institutional innovation in Chinese PE industries is the only way to develop.Secondly, after studying the US case with economic theories, the author concludes from three aspects: (1) the system of SBIC has set a base for PELP development, and PELP is the inevitable choice by the PE market evolution; (2) efficiency is the dynamics of PE firm industrial organizational evolution, as an institutional innovation, PELP surpasses the traditional PE industrial organizations, adapts itself to the high development race and high efficiency requirement of PE industry; (3) PELP is the most effective incentive-restrain mechanism ever established in PE industries world-wide.Thirdly, analyzing the pension funds investment with portfolio theory and systems analysis, the author concludes that PELP effectively resolved principal-agent and information-asymmetric problems in direct investment by pension funds. The ultimate great development of social security fund investment in PE industries in China depends upon the industrial policy innovation. At last, the author gives concluding remarks and policy advices, that pension funds investment in PE industry can boost and perfect the PELP institution, and further more promote the development of Chinese PE industries. At same time, Chinese pension funds industries will go the same way of which their American counterpart have gone on the past decades and has demonstrated successful, this way is to invest in PE industries.