Research On Role Of Private Equity Funds In The Reform And Development Of State-owned Enterprises

Finance is the core of modern economy. Financial development is playing a significant role in facilitating the development of real economy. Private Equity Funds has been developing rapidly since1990s and is becoming more and more important to capital markets in developed countries. Western scholars have enhanced their studies on private equity funds to the level of institutional innovation in stead of general financial instruments.With China’s continuous development and improvement of capital markets, native private equity funds grew rapidly in recent years, showing a positive influence on business development. As financial investors, private equity funds make investments primarily in unlisted companies, without seeking a controlling position. Their ultimate goal is to sell or exit their investments on stock markets through an IPO of the portfolio company or to sell the company to a strategic acquirer for a return in excess of the price paid.Private equity funds not only energize the financial markets, but also provide new ideas and inspiration for the reform and development of state-owned enterprises. At the stage of focusing on small and medium enterprises, to sell the state-owned enterprises was the main idea of reform and administrative instructions were commonly applied in the process. Coming to the stage of focusing on large enterprises, the traditional ways mentioned above no longer work, which calls for a market-oriented transformation. But due to the absence of new ideas and methods, the process of layout adjusting and equity diversification of state-owned enterprises has slowed down. New breakthroughs are in an urgent need. In the context of continuous improvement of market mechanism and financial deepening, private equity funds can be a new financial force which will surely promote the reform and development of state-owned enterprises.The author of this paper noticed that, there is an immense number of literatures on theory and practice of private equity funds from scholars domestic and abroad, so is that of research on state-owned enterprises’reform and development. But in the meanwhile, it’s hard to find studies on functions of private equity funds in reform and development of state-owned enterprises, which left a huge space for such kind of the research. Viewing from the perspective that finance can promote the development of real economy, this paper focuses its research on accelerating reform and development of state-owned enterprises by dint of private equity funds. It has great significance to China’s economic activities and certain academic value in filling some theoretical gaps.The logic of this paper is as follows. First, analyze the unique features and advantages of the role and operating mechanism of private equity funds from both theoretical and practical angles. Second, expound the theoretical positioning and the general development trends of state-owned enterprises, focusing on the constraints in the reform and development. Third, elaborate by using theoretical and empirical analysis methods the functions of private equity funds in adjusting of state-owned economy’s layout and structure, mergers and acquisitions, restructuring, industry consolidations, the establishment of modern enterprise system, technological innovation, and optimizing corporate financing structure. Finally, bring up the policies and institutional arrangements for maximizing the effects of private equity funds based on concluding the main points in the paper.This paper is structured by five parts. Contents and main points of each part are as follows.Part one is the leadin which is to bring forward the research topic and to indicate the contents, methods, key findings, innovative points and weaknesses in the research. First, by analyzing the features of private equity funds and the constraints on reform and development of state-owned enterprises, set up the main topic as accelerating reform and development of state-owned enterprises by dint of private equity funds. Second, by summarizing related research literature on private equity funds and state-owned enterprises’reform and development, define the research scope of this paper and to clarify its differences from traditional research. Third, sort out the ideas and logical structure in this paper. Finally, explicate the research method, main conclusions, innovative points and weaknesses in the paper.Part two is to analyze the mechanism of how private equity funds can be used to improve business operation. First, by studying their value creation capabilities, functions on capital markets and mechanism in filling up the gap between asymmetric information, analyze essential characters of private equity funds. Analysis shows that in addition to traditional role as financial intermediaries, private equity funds can also add value to their investments by promoting business growth as investors, thus become the main participants on the market as value creators. Private equity funds are important tools on capital markets to accumulate capital, reduce information costs and transaction costs, control risks, improve corporate governance and promote transactions. Private equity funds control effectively the risk of adverse selection and moral hazard resulted from information asymmetry through filter mechanism, signal system and contractual arrangements. These are their unique advantages and the reasons that private equity funds are playing an increasingly prominent role on capital markets. In practice, venture capital funds promoted technological innovation while merge and acquisition funds accelerated industry consolidations.Second, expound the role of private equity funds in accelerating business growth and improving the functions of their own, as well as constraint conditions for them to be effective in foreign countries. The best organizational form of private equity funds is limited partnership. Unlimited liabilities of general partners show the investors a clear signal about abilities and attitude of fund managers, and in the meanwhile pose a strong constraint to their bad behavior. The financing model of registered capital must be in place quickly under corporate system is not conducive to private equity funds’sub-financing mechanism. This model eliminates the continuous financing pressure on fund managers, thus will greatly weaken the constraint intensity of reputation mechanism. Limited partnership can be a good solution to the following three core issues in private equity investing: the safety of investment, the positioning of investors and managers, the incentives and restrictions to fund managers. Compared to corporate system and trust funds, limited partnership has unique advantages in line with the internal requirements of private equity funds. That’s why limited partnership has become the mainstream private equity funds model globally.Third, analyze the characteristics of Chinese private equity funds and their development opportunities. Part three is to study the coupling between private equity funds and state-owned enterprises’reform and development.First, discuss theoretically the functions and positioning of state-owned enterprises from three angles as the provision of public goods, control theory, the development of chase model nations, and analyze the general trends of state-owned enterprises’reform and development. Considering the functions and the positioning along with the reform and development practice of state-owned enterprises in the world, marketization or giving more market color to the state-owned enterprises bearing some public functions has become a general trend. As a market-based financial instrument, private equity funds can be helpful only if state-owned enterprises’reform and development is market-oriented.Second, by reviewing the theory evolution and the practice of Chinese state-owned enterprises’reform, anatomize the problems and constraints confronted by Chinese state-owned enterprises in reform and development.Third, analyze the financial needs of Chinese state-owned enterprises and how private equity funds can solve the crux in the reform and development of Chinese state-owned enterprises. There is a strong coupling between private equity funds and state-owned enterprises’reform and development. Chinese state-owned enterprises’reform and development created an enormous financial need. Nearly a hundred thousand state-owned enterprises involved in such activities as corporate or incorporate reform, mergers and acquisitions, asset injection and wholly listed. The big gap between the supply and the need for financial services provided not only a huge space for the development of private equity funds, but also endogenous dynamics for private equity funds to accelerate the reform and development of state-owned enterprises. Considering their features and operation mechanism, private equity funds play a unique role in promoting the reform and development of state-owned enterprises while other financial institutions can hardly do.As the most important part, part four is to elaborate private equity funds’ effects in optimizing state-owned enterprises’reform and development.First, clarify the direction and goal of state-owned enterprises’reform and development, which is the premise and foundation for private equity funds to function. The Current three major tasks of Chinese state-owned enterprises’reform and development are:optimizing the layout, speeding up the completion of modern enterprise system, and strengthening technological innovation.In the strategic adjustment of layout and structure, the distribution of state-owned enterprises is to have a reasonable shrink. State-owned enterprises should be positioned in core resource areas and where the market mechanism is difficult to play a role or areas need to be controlled by the state currently, such as infrastructure, basic industries and fundamental services. The more feasible way for state-owned enterprises to gradually withdraw from the competitive areas is to open their shareholding. Meanwhile, in respect of the national strategy of economic development model transformation, state-owned capital should be placed intensively in strategic emerging industries, so that a group of high-tech industries and key enterprises which is able to play the pioneering and leading role in development of national economy can come into being as soon as possible.Equity diversification is the starting point of establishing modern enterprise system and the premise of improving corporate governance mechanism. Only when equity diversification reform is completed, can the mechanism of decision-making, operating and balancing based on interest diversity be formed, and the endogenous dynamics to continuously improve corporate governance be generated.The willingness of the enterprises to be engaged in high-risk technological innovation should be encouraged and the assessment method which is not conducive to technological innovation should be changed. At present, investors of state-owned enterprises tend to assess mainly the current period’s earnings, while technological innovation takes only a small portion in the assessment criteria. Because huge R&D investment can hardly bring economic benefits right in the current period, enthusiasm of technological innovation has been affected.Second, based on cases and data of state-owned enterprises’reform and development, analyze the optimization effects of private equity funds in the following five major aspects:layout and structure of state-owned economies, mergers and acquisitions and industry consolidations, establishment of modern enterprise system, technological innovation, corporate financing structure.Analysis shows that private equity funds can help to fix such problems in layout of state-owned economy as over wide and scattered distribution, industry mismatch, inefficiency, monopolism and unfair competition. They can also help to improve state-owned enterprises’industrial structure, equity structure, and corporate governance structure, to strengthen technological innovation and to enhance core competitive position. Full use of private equity funds will greatly facilitate the reform and development of state-owned enterprises.Part five is to propose policies and institutional arrangements needed to maximize the effectiveness of private equity funds based on concluding the entire paper. The expatiation on how to facilitate the development of private equity funds comes from the following six aspects:seizing the opportunity of industries and finance combination, practicing effective supervision, establishing and perfecting mechanism, making clever use of investment tools, perfecting the multi-layer capital market, taxation and listing.This paper is featured by its unique research angle, methods and perspectives. The breakthrough and innovations are as follows.One is the unique research angle. The study on the functions of private equity funds in state-owned enterprises’reform and development is based on the perspective of how finance can accelerate the growth in real economy. From this angle, it developed a new style of its own in the research of state-owned enterprises’reform and development, exceeding the previous bounds resulted from lack of wide sight and the ignorance of financial impetus to development of real economy.The other is the canonical empirical research. As for the research methods, this paper conducted a regression analysis on correlation of private equity funds versus technological innovation, and private equity funds versus M&A, by the application of time series models and panel models. Detailed data and canonical analysis contributes to the validity of conclusions.This paper brought up the following sharp and innovative points of view.Firstly, to break the current constraints in reform and development of state-owned enterprises is just the advantages of private equity funds. As an organic combination of Capital investment and financial services, private equity funds provide a suited solution to the constraints of state-owned enterprises’ reform and development. It’s both their professional expertise and inevitable choice for pursuit of high returns to provide financial support and counseling in financial services, corporate governance, business development and other areas. The intrinsic properties determined that private equity funds can be the pushing hands in state-owned enterprises’reform and development.Secondly, private equity funds are qualified investors in equity diversification reform of state-owned enterprises. In accordance with the large state-owned enterprises’ demands for institutional investors, private equity funds have the unique advantages. As public collective assets, they bear some public properties, thus can avoid the questioning of privatization to some extent when participating in state-owned enterprises’ reform. As financial investors, they are not to seek the control of enterprises, thus are easy to be accepted by investors and managers of state-owned enterprises. Private equity funds have the ability to raise capital and the financial strength to participate in equity diversification reform of large state-owned enterprises. They are familiar with capital markets and possess outstanding financial skills. With their large network of markets and customers, private equity funds can bring synergy to businesses. The above judgments give a clear response to the questioning that in the state-owned enterprises’reform, the introduction of private equity funds will lead to a loss of state-owned assets and even a privatization wave.Third, private equity funds are the important model and convenient shortcut for the combination of industry and finance. Private equity funds can make up the deficiencies of both financial capital and industrial capital. They can break through the previous limitation when industrial capital can only cooperate with financial capital at the level of individual product or project. They are seeking to form the institutional bases for the combination. The study from this perspective will play an effective role in promoting the theoretical discussion and practice of combination between industry and finance.There are also some deficiencies in this paper. For example, due to the short history in China of private equity funds and the lack of cases on how they participated in state-owned enterprises’reform and development, plus the disclosure of their financial and operational data is not obliged by law, the cases and data quoted in this paper are not sufficient. The limitation on the scale of date may affect the quantitative analysis, resulting in omissions in the research. More data and cases will be collected in the future to improve the research on role of private equity funds in state-owned enterprises’reform and development.