Brokerage Buy-out Fund Development Pattern Analysis

Domestic buyout fund is in the development stage, with history no more than10years. CSRC put forwards work objective of greatly developing broker buyout fund,which facilitated market to focus on development of buyout fund.In foreign market, buyout fund mainly engages in leveraged buyout, which canbe traced back to shoelace transaction in Europe as early as the beginning of the20thcentury. The characteristic of leveraged buyout is that buyout fund pays a small partof capitals in the whole purchasing price; merger fund finances from financialinstitutions including banks and insurance organizations with the pledge of assets andfuture cash flow from target enterprises. When buyout fund takes over enterprise,buyout fund requires that management board of target enterprise shall buy a part ofstock rights. In this way, liability constraint of the whole company is transferred tomanagement board of target enterprise. Buyout fund controls the board of directors tomonitor management board, and completes motivation and constraint on managementboard by debt financing and management buyout.When buyout fund creates wealth through leveraged buyout, incidents includingasset striping, business reconstruction, and staff unemployment often take place intarget enterprises, which leads to the dispute among social people that whether it ismoral to achieve profit through buyout fund. According to academic and empiricalstudy, leveraged buyout commonly does not destroy benefit of purchased enterprise.In factor, through leveraged buyout, buyout fund shall focus on the improvement ofoperational status in an enterprise during a long term to realize efficient return oninvestment. Seen from the case that famous buyout fund, Carlyle Group took overAmerican automobile rental enterprise, Hertz and promoted it to be listed in themarket by increasing operational level and improving capital structure, the process ofvalue creation based on buyout fund can be found. In recent years, domestic buyout market develops rapidly. However, domesticbuyout fund fails to have corresponding development. Realistic conditions ofdomestic industrial development environment and financial development environmentlimit the growth of domestic buyout fund. Domestic enterprises are commonly in thestage of crosswise and lengthways buyout, in which enterprises are protagonists.There is no buyout fund completely independent from the industry. Undevelopedasset transfer market is also an important reason limiting development of buyout fund.Meanwhile, another main factor limiting development of domestic buyout fund is thelack of domestic capital support for buyout, especially leveraged buyout. Domesticfinancial regulations also have significant limitation on buyout financing.Brokers have certain strengths in developing buyout fund. For example, as thecore of capital market, brokers have natural advantage in acquiring transactioninformation. Meanwhile, investment bank business of brokers also accumulates a lotof talents for buyout fund. In the future, brokers will issue various financing productsthrough business innovation, which satisfies financing demand of some buyouttransactions. However, in current domestic environment, brokers shall also face thereality when develop buyout fund. Target capital market suitable for buyout fund isstill in the preliminary stage. Domestic regulations also limit the industry of buyouttransaction. Therefore, in the preliminary stage of buyout fund development, brokersshall learn from and imitate successful experience of domestic buyout fund. Buyoutfund of brokers can pay attention to business opportunities including restructuring ofstate-owned enterprises and assistance in integration of leading industrial enterprises.By gradually accumulating buyout experience, buyout fund of brokers can expandbuyout transaction to foreign market. Both industrial buyout and complex leveragedbuyout can be operational modes realized by buyout fund of brokers.