Study On American Private Equity Funds

PE (Private Equity Funds) is an collective investment tool, which mainly makes equity investment to non-listed enterprises through private placement. Investors share the investment income in accordance with its share in fund and bear the investment risk. It is playing an increasingly important role in the modern economy, due to its unique advantages in regards to improving the corporate governance structure, promoting high-tech industry development and SMEs(Small and Medium Enterprises) financing.This thesis tries to explore the successful experiences of American Private Equity Funds through study on it's development process, organizational forms ,operation mechanism, and regulatory characteristics, then it offers some advice on promoting the PE industry of China. The thesis is divided into five parts:The first part explained the concept and related theories of PE. In order to define the concept of PE better, this chapter has not only given the definition of PE, but also summed up the characteristics and several mainstream types of PE. Secondly, the chapter described the theory of Financial Intermediation and Principal - Agent, and briefly pointed out the guiding roles that the above-mentioned theories play to PE. The second part introduced the historical background and development process of PE in the United States. In 1946, the establishment of American Research and Development Corporation (ARD) created a precedent of modern PE industry ,ARD was initiated by Flanders, the president of the American Federal Reserve Bank of Boston of Flanders, Doriot, Professor of Harvard Business School and some American entrepreneurs. Its original intention is to provide funding solutions for new enterprises and small businesses. During the 60 years later, PE have experienced a lot of market volatility, and grew up through the baptism of ups and downs in the industry. In 2007,PE had raised 302 billion U.S. dollars, and invested 105.7 billion dollars , which amounts to 35.6% and 65.8% of the global market.As a core part of this article, Chapter three studied three typical organizational forms and the operation flow of PE in the United States. In America, PE are mainly organized in limited partnership forms and actually, it proved to be the most effective way. On the one hand, it's conducive to avoid double taxation; on the other hand it can also coordinate the dual Principal - Agent relationship well, between investors and fund managers and between the fund managers and entrepreneurs. In addition, some PE are also organized in the forms of corporate system or trust. Next, the article interpreted a complete operational mode of PE, which includes the fund-raising, investment project selection and management, the Fund's earnings models and exit mechanisms.First of all, a successful financing job is the premise for PE to survive and get high-yield. The rapid expansion of PE in the United States has much to do with the long-term and stable financial support from the numerous, sophisticated institutional investors. Therefore, the article first introduced several main funding sources of PE in the United States. Then it introduced some of the basic standards to select investment projects, including: industry conditions, the enterprise's own assets and financial position, management team, etc.; As for the value assessment method of Aim Enterprises, the main options are the Net Present Value (NPV) method and the Option method ; The methods to enhance the value of project often include improving the internal governance structure, improving the management incentives, asset or business reorganization and so on. Finally, this chapter studied the profit model of PE and summed up several mainstream quitting ways in practice, such as public listing, Mergers and Acquisitions, share repurchase ,saling in the secondary market and so on.Chapter four studied the regulatory features and the relative laws and regulations. Apart from the sophisticated organizational forms and operational mode that mentioned in Chapter three, the relatively relaxed and effective regulatory environment also made great contribution to the growth of PE industry.All along, in the United State, the supervision of PE are very relaxed. The Government has not formulated specific laws and regulations or designated specialized regulatory bodies for PE. The main regulation of the industry is that investors are must be eligible. The establishment and operation of PE always invoke the exemption clause of related laws, such as"Securities Act","Investment Company Law","Investment Adviser Law"and"the State Blue Sky Law". Thereby it can avoid the registration and information disclosure obligations, which greatly saves PE a lot of operating costs and thereby promoting the development of the industry. This chapter also made a detailed explanation on these specific exempted clauses.Chapter five provided an overview of the development status quo and existing problems of Chinese Private Equity capital market, combined with development experience in the United States, therefore it gives some recommendations for further development of China's PE industry: First of all, the domestic Private Equity capital market starts relatively late, relevant laws and regulations lag behind the reality and comprehensive PE regulations has not been issued. Several regulatory authorities issued their own regulations, making the monitoring a state of disorder. In order to resolve the status of this disorder, we need to integrate and amend the relevant laws and regulations, promulgated the specific laws as soon as possible and refine the relevant provisions of existing regulations. Secondly, because of the high threshold, the cumbersome approval procedures, the instability of policy and other issues of Shanghai and Shenzhen Stock Exchange; the existing Second Board Market and Property Trading Center is far from sophisticated, should not the exit to create good quitting conditions for PE. Therefore, it seems particularly important to set up a sound multi-level capital market. Thirdly, the lack of long-term, stable financial support of sophisticated institutional investors is naturally limiting the development of the industry. In order to cultivate sophisticated institutional investors, the article recommended that we could allow the pension funds, corporate pensions, insurance companies and commercial banks to make some moderate investment in PE, under the premise of not affecting the main business of these institutions. Finally, at the macro level, the Government regulations on the capital market and mergers and acquisitions seems a little over and blunt, which are in fact the reflection of the Government's failure of function changing in the financial field during the economic transition. The Government Should combat crimes make sure that all the market entities has disclosed adequate information and allow the market players to take their own risk. Maybe it is the only way to really promote the healthy development of domestic financial markets.In this article ,it is considered that although there are kinds of problems in the PE industry in our country at present, what is certain is that, due to our country's sustained rapid economic development and continuous improvement of the capital market, we can seize the opportunity to accomplish a great deal on the PE industry, thereby promoting the further development of both economy and society. As long as we give full play of the later-development advantage, and seriously study the advanced experience of developed countries, combined with in-depth exploration of China's specific national conditions.