A Study On Protecting The Interests Of Investors In The Limited Partnership Private Equity

The limited partnership has become the most popular and common businessvehicle in the private equity sector of China since it was adopted in the revisedPartnership Enterprise Law of People’s Republic of China (PEL) in2006,and it hasbecome one of the most popular constructive form of private equity besides companyand trust. Private equity that in the form of limited partnership has been developingsince2006and is supposed to continue to behave well.It is admitted that privateequity in the form of limited partnership has its own value and advantages.However, it may not work well in the aspect of protecting the investors’ interestsbecause of the existence of information asymmetry between investors and fundmanagers. The investors do not have the right to execute the partnership affairs.Therefore,Adverse Selection and Moral Hazard may occur. Private contractualarrangements are effective device to constrain general partners’ misbehaviour. It iswidely argued that reputational constraints play a vital role in deterringmismanagement of general partners so as to protect the interest of limited partners.This article analyze the above two devices comprehensively and objectively. Thearticle analyze both the advantages and disadvantages of private contractualarrangements. Then the author give out his own suggestion,that is to construct thelimited partner’s derivative action in China. Art68(7) of the PEL, for the very firsttime, provides a legal standing for the limited partner to pursue a legal action in itsown name to safeguard the interests of the limited partnership “where the executivepartner responsible for the conduct of the partnership affairs has neglected theexercise of his rights”. However, the PEL does not set forth the requirements andprocedurals for bringing such an action. There is some doubt as to whether a singlelegal provision would function effectively in practice. By refering to english materialsand combining the American limited partner’s derivative action with the specialfeatures of the private equity market of China. The author also proposes special rulesto make the limited partner’s derivative action work in China so that the interests between the investors and fund managers can be better balanced and the rights ofthe investors can be better protected.