On The Choice Of Organizational Form Of Private Equity Fund In China

Private Fund resort to the non-open manner to specific individuals or institutional investors to raise funds to establish a collection of investment activities, the sale and redemption are dependent on the investors and fund managers' consultation. Private fund is in the grey area of the China which has been no legal supervision. Recent years the rapid development of a more private funds, private fund whether need to legal norms is not a problem, the key problem is how to use the law to standardize. In the process of establishing China's legal system of the private the fund, we have to consider the issue of the organizational form of the choice of the private funds. From the private fund of the characteristics of various forms of the organization, the author intends to adopt a comparison analysis, historical analysis, economic analysis, concern about the development of Chinese private fund on the basis of systematical conditions, cultural and social background, explore appropriate organizational forms of the private fund which apply to the present stage of Chinese national conditions, the aim is in order to benefit the legislation of Chinese private fund.This paper could be divided into four parts.Part one the choice of organization forms should be taken into account in the forms of organizations reduced informational asymmetry, the level of risk control, the system designed to reduce the tax burden. From these aspects of the paper, analyze the main organizational forms of the private fund - trust, Corporate, Limited partnership. Trust fund of private system founded on the principle of trust, fund managers and investors reached a consensus on the specific investment strategy, fund managers collect capital to form fund from specific trust investors. At the same time, the investors choose a commercial bank as their Fund trustee which established lawfully and have the qualification of the fund trustees. The operation of trust fund of private system have a lower cost, but incentive and restraint mechanisms, and reduce the information asymmetry mechanism design inadequately. Private fund of corporate system set up the fund resort to issue company shares in non-open ways from specific investors which according to corporate legal system. Compare with trust fund of private system, Private fund of corporate system can protect more benefits of investors. However, the private fund of corporate system is generally higher than private trust fund in the operating costs, if we can solve the problem of the fund's operation costs, the company system will have more developments than the Trust Fund. Private limited partnership fund is a partnership form which was consist of at least one pair of partnership enterprises who enjoy comprehensive management of the partnership debt and assume unlimited liability for the general partner and at least one does not enjoy the right to manage debt and partnership share of the Fund but only assume the limited liability. Investors are limited partners, fund managers are the general partner. The operating costs of private limited partnership fund is lower than the corporate system, the limited partnership is superior to the trust system in the prevention of moral risk of asymmetric information caused by the mechanism design. In view of these, the limited partnership is mainstream forms of organization of private fund of the world.Part two analysis of the social factors that private fund in the United States chooses to organizations form .The United States possesses the most of the private fund in the world, and its main organizational form is limited partnership, so many scholars claim follow it. In my opinion, the United States chose the limited partnership system as the organizational form of the private fund, the reason is not only the institutional strengths of limited partnership, but also many of the social factors closely connected with the United States. The good faith of American is more objective needs than its moral cultivation realm, the United States economic and social credit system involved in all aspects of life, consist of the credit mechanism,credit evaluation mechanisim,credit information release mechanism and dishonesty punishment mechanism, have a comparative complete legal system and fully market-oriented model for credit management, the Government and trade associations are responsible for the supervision and management of credit information. The credit system of the United States provide the external system for private limited partnership fund, the limited partners could regulate the credit of general partner all the time, function the effectiveness of credibility mechanism, rely on the cooperation of credit system and co-ordination mechanism to reduce the limited partnership private funds because of information asymmetry caused by the moral hazard. American business culture provides the soil for the existence and development of private limited partnership fund. Americans have stronger adventurous spirit, so fund managers like to attempt general partner of the high-risk and high yield; Americans advocate individualism, the sense of cooperation is relatively weak, so given the general partner complete decision-making powers in the limited partnerships.Part three based on legal transplantation, the transplantation of law or system require proper institutional environment for their survival, before recognized the private fund as the organizational form of limited partnership, we should consider whether China have the realistic conditions to realize this system. Firstly, the limited partnership system is not yet mature in China, exist such problem as lack of provisions of legal recognition in limited partner status, to the limited partner invests the nature understanding insufficiency, inadequate protection of the interests of creditors and so on, China's private equity fund and the system of limited partnership based system was not available. Secondly, Chinese traditional culture stays in the ethics area to the concern of good faith. The society of the marketing economy needs a new type of fixed information, evaluation and transmission mechanism, make ethic regulate good faith to the system restriction, this mechanism is the credit system. China have made considerable progress in building a social credit system , but there are still many problems, investors get access to credit information from fund managers hardly, the credibility of fund managers is not proportion to the ease and cost of getting capital, lack of the limited partnership private operation of the Fund credit basis. Lastly, china lack of adventurous spirit, the spirit of innovation and cultural tradition of risk awareness, private fund of limited partnership did not have cultural foundation in operation in China.Part four examines the corporate private fund comparative advantages at this stage in our country, and proposed to reform the tax system to reduce its operating costs. Limited partnership promotion in our country in the short-term is not likely. The corporate system is the mainstream of the modern enterprise system, because of the stability of governance structure, operational norms, and mature supporting mechanisms, investors accept it in a high degree. In the incentive mechanism design, private fund of limited partnership is operation Fund which allocated fund managers of equity to stimulate the managers work fully. Private fund of corporate system could also allocate fund interests through agreement of corporation constitution. In the design of restraint mechanism, private fund managers of limited partnership are unlimited liable jointly and severally to fund debt, China has no personal insolvency system, the fund managers who fail in the operation of fund will take a heavy debt burden, these adverse to the benign development of the fund industry, and it is difficult to achieve that general partner with unlimited liability for the system in reality. The restriction mechanism of private fund of corporate system is that investor restraint fund managers' behavior by the shareholder's meeting and board. Managers should invest their capital into the fund management company, in case of loss, the shares that managers owned will be used to pay the participants firstly, private fund managers and the Fund is a unity of interests. Limited partnership enterprises can avoid corporate income tax, corporate enterprises should pay enterprise income tax, which is based on the organizational form of capital to determine the main taxpayers. By means of reform of the taxation system, China adopted the nature of capital, rather than the organizational form of capital, to determine the main tax, these could overcome the double taxation defects of corporation system. On the design of incentive and restraint mechanisms and reducing the information asymmetry moral risk, the private fund of corporation system is better than the private trust funds, tax reform resolve the problem of operating costs in private fund of corporation system, the company system is more conducive than the trust private equity fund in development. Therefore, the author proposes the preferred forms of organization funds should be the corporation system at this stage. To sum up, on the circumstances of the system of limited partnership in China is not mature , the social credit system is not sound, and adventurous spirit of the social culture is yet to the people, the more realistic option is that reform the tax system to lower the corporate private equity fund operating costs. The author is not totally negated the establishment of limited partnership of private fund, the system of limited partnership has its inherent superiority, so we could explore the development of limited partnership of private fund.