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Industry News
NDRC explains how PEs should unpack resources; partnership
发布时间:2012-07-31

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Financial director Jianjun Liu of the Fiscal and Financial Affairs Department at the National Development and Reform Commission (NDRC) responded to PE industry leaders’ queries at the  Information Forum for Implementing and Promoting Equity Investment Firm Standards, which was organized by the Committee on Professional Investment at the China Investment Association of Venture Capital Investment, along with the Investment and Partnership magazine. For the first time, a detailed discussion went underway about controversial investors who have established partnership firms before investing in funds, and how they should open up investment sources. 

 
Jianjun Liu pointed out that opening up the calculation of the total number of limited partnership enterprises in equity investment is not a way to discriminate the partnership itself; it is a last resort for China’s current situation. In accordance with the current Partnership Enterprise Law, registering a partnership enterprise does not require much verification, so it is relatively easy to register a series of partnership businesses. Unfortuantely, criminals can also easily create partnership "trailers" or even partnership "tractors", resulting in a number of public investors who have low risk identification and endurance becoming entangled in a general partnership fund. Illegally raised funds cover a wide range of problems and affect social stability. That is why there needs to be a calculation of the total number of investors and why the number must comply with the provisions of the Partnership Enterprise Law and Enterprises Law. If the final fund is established in the form of a joint stock limited company, the number of investors cannot exceed 200; if the final fund is set up like a limited liability company or partnership, the number of investors cannot exceed 50. In many foreign countries, the limit on the number of the partnership business partners are even more stringent. Typically, partnership companies rely on reputation mechanisms that are based on personal relationships to solve problems of moral hazard. If there are a large number of partners, then the reputation mechanism system will be weakened, making it more difficult to constrain managers.
 
Some PE firm managers have pointed out that the Partnership Enterprise Law does not require a minimum amount of capital, so they have asked why the forum’s PE Notice has set out guidelines for partnership fund requirements. Mr. Liu explained that the Partnership Enterprise Law needs to applies to all types of partnership companies, including general processing trade enterprises. Equity investment firms are different from such general partnership companies, so without a minimum capital benchmark, it becomes more difficult to fight off risks, causing a greater likelihood for short funds. Illegal PE fundraising in some places are the exact reason for these short funds. Even though they do not bring in a single penny, or the sponsor will only contribute a small portion, criminals can register funds in the billions or even hundreds of billions because of the lack of a verification process. This easily allows them to lure investors in under the guise of industrial and commercial registration documents. Therefore, the PE Notice now requires minimum capital benchmarks.
 
However, the PE Notice stipulates that when investors invest stocks into a master fund, it is not necessary to calculate the total number of investors. Some PE firm members have asked how to identify a master fund. Would this open up a can of worms for a higher frequency of large numbers of investors to become involved in a general partnership fund? Mr. Liu, only three conditions are necessary for a master fund: first, the fund must be initiated and managed by a professional management company; second, the master fund investors' qualifications and the number of investors must comply with the PE Notice; third, the master fund must be put on in accordance with the PE Notice. Combined with carrying out archival supervision afterwards, it would be difficult to take advantage of the master fund and create “trailers”.