State-owned enterprises

Mixed ownership reform an opportunity for private equity to invest in state enterprises

But government-led funds will drive change, Beijing forum hears

PUBLISHED : Tuesday, 05 December, 2017, 7:27pm
UPDATED : Tuesday, 05 December, 2017, 10:13pm

Chinese private equity will have more opportunities to invest in state-owned enterprises under the mixed ownership reform, but its initial investment is likely to be in the form of collaboration with state-owned restructuring funds, a recent Beijing private equity forum heard.

Xiong Yang, chairman of the Beijing-based private equity company Wealth Capital, said the mixed ownership reform, which is entering its third pilot scheme involving 31 state-owned enterprises, will provide the biggest investment opportunities for institutional investors over the next two decades.

“State-owned enterprises today enjoy a lot of advantages over the private sector … they enjoy a substantially lower cost of funds than those extended to private enterprises. Yet, they are not showing a satisfactory level of economic efficiency,” Xiong told the 9th Global PE Beijing Forum over the weekend.

Wealth Capital in August formed a 5 billion yuan (US$756 million) investment fund in Beijing targeting state-owned enterprises undergoing mixed ownership reform. The state-backed China Structural Reform Fund, a 350 billion yuan state enterprise restructuring fund backed by shareholders such as China Chengtong Holdings Group, China Merchants Group and China Mobile, has invested in the fund. Wealth Capital is the sole fund manager allocating capital to targeted companies.

Mixed ownership reform will allow investors such as those from the private equity sector to help state-owned enterprises improve their governance structure and implement more market-driven decision-making and higher efficiency, the forum heard.

The China Structural Reform Fund, set up by China Chengtong Holdings in September last year, is backed by the State-owned Asset Supervision and Administration Commission, the parent of China’s state-owned enterprises. The fund took part in China Unicom’s mixed ownership reform and subscribed to shares in the China Unicom A-share listed company in August to become its third-largest shareholder.

Xiong said he and other industry leaders were currently in discussions with the Shanghai and Shenzhen branches of the commission for the setting up of a regional mixed ownership reform investment fund in each city, modelled on his company’s 5 billion yuan fund.

Fang Xiangming, the deputy general manager of Chengtong Fund Management, said the China Structural Reform Fund also directly invests in state-owned enterprises, apart from providing capital to other private equity funds such as Wealth Capital.

The fund’s other direct investments include Cofco Capital Investment, another state-owned enterprise selected to be part of the initial batches of the mixed ownership reform pilot.

“We expect that government-led investment funds will become one of the main pillars driving the mixed ownership reform,” said Wei Lidong, the president and managing partner of Shangrong Capital, a private equity firm in Beijing.

Participation by private equity on its own, however, remains limited. The investment-driven culture and mentality of such investors, particularly their exits from investments after five or eight years, is in contrast with the ethos of state-owned enterprises.

“The question for many private equity investors is how they can exit from their investment. This question has highlighted the chasm between the corporate culture of private equity institutional investors and management of state-owned enterprises,” said Chen Biaochong, a senior partner at law firm Jincheng Tongda and Neal.