Public equity in the PRC
By Paul Mackintosh - 18/03/13
China’s Ministry of Railways, noted for its corruption, its sometimes fatal inefficiencies, and its mountainous debt, is finally going to be broken up, with the Ministry of Transportation assuming its regulatory duties and the new China Railway Corp taking over its personnel, assets, and 2.66 trillion RMB (US$428 billion) debt burden. Its demise must close the saga of the China Railway Private Equity Fund, announced in October 2011 with a target of 100 billion RMB, as one measure to try to ease the Ministry’s debt burden and funding problems. In any case, the fund never saw a close.
However, its ilk is still out there in numbers – in the form of so-called private equity funds backed by provincial governments, state-owned enterprises (SOEs) and other state-connected entities to raise money for local or corporate development purposes. And the last thing they are is private. Consider, for instance, the Guizhou Renhuai Jiang Flavour Chinese Spirits Industrial Investment Fund and Parallel Fund, launched with the Guizhou province Renhuai municipal government and a US$13 billion target, or the Blue Economic Region Industrial Investment Fund and Parallel Fund, with a $7.8 billion target. Both of these were set up by Bright Stone Investment Management Beijing, which is developing an alarming concentration of these leviathans under one roof. The firm’s website even boasts the $320 million Beidou Industrial Investment Fund, launched to back China’s fledgling GPS rival satnav technology, “under the support and guidance of the People's Liberation Army General Staff”.
Where these funds have a parallel fund structure, the parallel vehicles exist to get around China’s currency controls and allow foreign investors to participate in the funds – in many cases in sectors still off limits to direct foreign direct investment (FDI). Those parallel vehicles alone are in some cases bigger than entire funds held by independent PE firms – $5 billion for the Guizhou Renhuai fund. And it’s interesting to speculate just how much chance foreign limited partners (LPs) would have of seeing real, objective value-driven investment of any capital committed to such funds, let alone recourse rights against the sponsor.
Yes, there are other PRC funds that are truly well-constructed and well-managed vehicles. Yes, much of the official enthusiasm for private equity funds is born out of fashion and ignorance. But figures, which include these funds, are still cited to show the size of China’s private equity industry and its appeal as an investment destination. And China’s regulators and planners fostered the domestic private equity sector partly in order to remedy the inefficiencies and support the transformation of its many SOEs. Industrial investment funds of this type look more likely to bankroll the same old ills with the same old unaccountability and lack of objective oversight.