Private equity in China : challenges and opportunities

Content: Preface xiii Acknowledgments xvii  CHAPTER 1 Private Equity: An Introduction 1  Overview 1  Stages of Development of a Company 2   Differences between Private Equity and Venture Capital 5   Differences between Private Equity Investments and Corporate Mergers and Acquisitions 6  Inventis Private Equity Model 8 Structure of a Private Equity Fund 11  General Partners 11   Limited Partners 12   Investment Committee/Advisors 12   Professionals 12  Private Equity Investment Process 13  Planning, Fund-Raising, and Deal Sourcing 14   Due Diligence 16   Deal Structuring 18   Portfolio Management 21   Exit Strategies 24   CHAPTER 2 Overview of the Political, Macroeconomic, and Financial Landscape in China 33  Overview 33  Regulatory Environment 35   Chinese Government Agencies and Their Relevance to Private Equity 37  China\'s Macroeconomic Conditions and Trends 45  Macroeconomic Condition 1: Inflation 48   Macroeconomic Condition 2: Widening Income Disparity 49   Macroeconomic Condition 3: Accelerated Aging Population Structure 50   Macroeconomic Trend 1: Increasing Urbanization 51   Macroeconomic Trend 2: Westward Shift in Industrialization and Development 53   Macroeconomic Trend 3: Strong Growth in Domestic Consumption 54   Macroeconomic Trend 4: Shift Toward Value-Added Industries 56  China\'s Financial Markets 57  Key Phases of Developments in China\'s Capital Markets 58   China\'s Equity Markets 62   Foreign Listings on Chinese Exchanges 65   China\'s Credit Market 67  Trust Financing 72 China\'s Futures Markets: Commodity Exchanges and Derivatives Exchanges 73 Summary 75  CHAPTER 3 Private Equity in China 77  Overview 77 Key Market Trends and Developments 79  Private Minority Placement Quadrant 81   Private Majority Placement Quadrant 82   PIPE Minority Deals Quadrant 83  Private Equity Funds in China 97  Foreign-Owned Private Equity Funds (FOPE) 97   Chinese-Owned Private Equity Funds (COPE) 99   State-Owned Industrial Private Equity Funds (SOPE) 100   Hybrid Foreign/Chinese USD and RMB Private Equity Fund (HOPE) 101  Private Equity Investment Structures in China 102  Red Chip Structure or Round-Trip Investment 102   Onshore Structures 108  Leveraged Buyouts 112 Valuation Adjustment Mechanism 114  VAM in China\'s Private Equity Industry 114   Financial Measures 116   Non-Financial Redemption Measures and Stock Offerings 117   Stock Offering: Expiration of VAM Agreement 119   Challenges of VAM 121  Exit Strategies for Private Equity Investment in China 121  Initial Public Offerings 122   Initial Public Offerings in Domestic Markets 125   Initial Public Offerings in Overseas Markets 129   Trade Sales 130   Secondary Sales 130   Leveraged Recapitalization/Distribution of Dividend 131  Benefits of Private Equity for China 132  The Case for Demutualization of Chinese Stock Exchanges through Private Equity Investments 136   CHAPTER 4 Renminbi Private Equity Fund 137  Overview 137 Setting Up and Fund-Raising in China 138 Investing in China 142  Exit Options for the RMB Fund 143  The Renminbi Private Equity Fund 144  Types of RMB Funds 145   Domestic Limited Partners 149   Private Equity Regulations and Incentives 159   RMB Funds\' Edge in Investing in China 160  Challenges and Opportunities for FOPE-RMB Funds 161  The Future of Domestic Limited Partners 162   Qualifi ed Foreign Limited Partnership Pilot Program 163   Management of Hybrid Funds 166   Onshore Legal Structures of RMB Funds 171   Restrictions for Foreign-Invested Partnerships (FIPs) 175   Treatment of FOPE-RMB Funds: Domestic or Foreign? 176   Exit Options for RMB Funds 177   Domestic Listings on Chinese Stock Exchanges 178   Private Equity Secondary Markets in China 179   China\'s Domestic Limited Partners 180  Impacts of RMB Convertibility on RMB Private Equity Funds 181  RMB Private Equity Outbound Investments 182   CHAPTER 5 Investment Opportunities for Private Equity in China 187  Overview 187 Foreign Acquisition and National Security Review 189 China\'s Five-Year Plan for National Economic and Social Development 191 China\'s Seven Emerging Strategic Industries 195  Energy Saving and Environmental Protection 199   Renewable Energy 205   Alternative Energy Vehicles 210   Next Generation Information Technology 213   High-End Equipment Manufacturing 215   Biotechnology 217   New Materials 221  Investment Opportunities in China\'s Energy Sector 224  Key Energy Security Concerns 224   Strategies to Tackle China\'s Energy Challenges 227   Trends in the Oil and Gas Sector in China 230   Relationship between the Energy Firms and the Government 233   CHAPTER 6 Challenges and the Future of Private Equity in China 235  Overview 235 Fund-Raising 236 Deal Sourcing 238  Good Deals Are Getting Scarce, Valuations Becoming Too High 239   FOPE Funds Are Competing with COPE Funds in Deal Sourcing 239   Moving West 240   Consolidation Opportunities 240   Seeking Uniqueness from Other Funding Sources 241  Due Diligence 242  Reliability of Financial Statements 243   Intellectual Property Rights 245  Deal Structuring 247 Portfolio Management 250  Change from Boss Culture to Management Culture 251   Communication and Timely Information 251   Resistance to Change 252   Fighting for Control 253  Exit 255  Valuation Obstacles 256   China\'s Private Equity Secondary Sales Market Is in the Nascent Stage 257  Foreign Exchange Controls and RMB Convertibility 258  Avoiding the Restriction or Seeking Local Government\'s Aid 258   Gradual Loosening of Capital Inflows, Especially for Private Equity 259   Capital Outflows Are Strict, But Less Stringent than Inflows 259  The RMB Fund Advantage-Artificial and Temporary? 260 Media Reports and Public Perception 262 Guanxi Management 264  One Party to Gain Positive Career Prospects, the Other to Gain Justice Support 265   Private Equity Firms Do Not Invest in Green Fields, So No Need to Build Complicated Relationships 266   The Company Shareholders and Management Team Already Have Guanxi for Running the Business 266   Private Equity Firms Can Engage an External Consulting or Public Relations Firm 266  FOPE-RMB Funds 268 COPE-USD Funds 269 Leveraged Buyouts 270 Private Equity Professionals in China 271  Trend 1: From Foreign to Domestic Private Equity 273   Trend 2: From Investment Banks to Private Equity 274   Trend 3: From Traditional Industries to Private Equity 275   Trend 4: From Entrepreneurs to GPs and LPs 275  Conclusion 276 APPENDIX A Government Structure of the People\'s Republic of China 281 APPENDIX B Key Points in a Private Placement Memorandum 287 APPENDIX C Geography of China 289 APPENDIX D Selected Private Equity Funds in Greater China 293 About the Author 299 Index 301