The Legal Issues Of China’s Private Equity Fund Exit Mechanism

In the past 30 years, Private equity funds has made the important contribution to the rapid development of economy in our country, moreover great changes of China’s private equity industry have also taken place in recent years. Last year, the totally raised $63.129 billion private equity fund is particularly eye-catching, created the record since the nearly 30 years, which made China leapt to be the region’s largest market across Asia’s private equity investment. Private equity fund has the extreme significance in developing small and medium-sized enterprise, strengthening the vitality of the entire capital market, and promoting the optimized allocation of financial resources. In the full process of private equity fund’s raising, investment, management and exit, exit is the last link, and plays a decisive role in the success or failure of the investment.The ways of exit of China’s private equity fund have Chinese own characteristics, which is closely linked by the structure of the capital market as well as the national macro policy. Compared with Europe-US and other countries’ developed capital market, China’s private equity fund development started late, and had the imperfection of the corresponding legal and policy specification. In this paper, it will summarize and compare the advantages and disadvantages of four kinds of exitmanner, with combining the actual and detailed business cases, then deeply analyze a series of exit barriers in China’s private equity fund, and finally put forward the author’s own thinking and suggestions according to different exit barriers.The first chapter introduces the basic theory of private equity funds and exit mechanism, including the concepts, characteristics and operation mode, secondly presents four kinds of different exit channels, namely IPO exit, mergers and acquisitions exit, stock repurchase exit and write off exit, and finally summarizes and compares the advantages and disadvantages of four kinds of exit.The second chapter sketches the development history and the status quo of private equity fund in China. From 1985 on, China’s private equity fund has 30 years development, and in 2014, the total investment reached $53.757 billion. Thereinto the Internet and real estate industry are a heated choice of private equity investment. The following second part narrates cases covering four different choices of exit channel of private equity fund, respectively Carlyle seceding from Ctrip, Oriental Fortune Capital seceding from EF, JD Capital seceding from Rizhao Sanchuan Juice, TDF Capital seceding from PPG, which deeply and concretely expounds the reasons for the choice of four different exit manner, and their advantages and disadvantages.The third chapter demonstrates legal obstacles of private equity fund exit in our country in detail. For IPO exit, the threshold of listing is too high and the lock-up period is too long become the obstacles of private equity funds withdrawal barriers, While merger and acquisition exit faces the problem of anti-monopoly investigation as well as investment agreement effectiveness. For share repurchase exit, the provisions of prohibiting share repurchase in principle in the Company Law hinder the choices of repurchase exit manner. For write-off exit, it needs to meet the stringent conditions, and under the existing regulations of Bankruptcy Law, private equity funds of a shareholder shall not be entitled to apply for bankruptcy.Clasping the third chapter, the fourth one puts forward some legal suggestions to perfect the Chinese private equity fund exit mechanism, with analyzing from legal system aspect and the capital market aspect. The first aspect is to perfect the legislation of private equity fund in China, not only speed up introducing specialized Private Equity Fund Law, governing the hole process of private equity fund in raising, investment, management, and exit, but also comb the current corresponding laws, such as the Company Law, the Securities Law, to reduce the private equity funds exit barriers from the aspect of legal system. Another aspect is to accelerate the construction of multi-level capital market, and develop the over-the-counter market. The construction of a multi-level capital market must first increase the gradient of the capital market construction, to make a clear division of labor between the different markets, and reflect different values. Secondly, the effect of over-the-counter market should be fatherly enhanced, with the establishment of a unified national market. Finally the new three board market should be gradually improved, and its market liquidity should be strengthened, furthermore some suggestions for the future transfer board system should be proposed.