Chapter 26 Private equity funds are good for China's economy

In September 2006, financial opening became the focus topic.Domestically, Carlyle’s acquisition of XCMG was criticized by some public opinion; abroad, US government officials said that there may be a turning point in the policy toward China—focuses such as exchange rate and trade will be replaced by financial opening.How do you view this new situation?What will foreign private equity funds bring to China? ◎Reporter: What do you think of financial opening up?Will opening up harm China's interests? Chen Zhiwu: In the past year and a half or so, it is obvious that many companies want to invest in China, whether it is real estate or other industries, and they want to invest in this way to participate in the wealth growth brought about by China's economic growth.This is a very important trend.Some people in China think whether the entry of so much foreign capital will control China's economy. In fact, this is not the case at all. These are normal market behaviors.Mergers and acquisitions of Chinese listed and unlisted companies by companies from the United States, Canada, Australia, and some Asian countries are purely unorganized and disorderly business practices, and no one is organizing them.In fact, it is very difficult for you to organize such behavior (for the purpose of controlling the Chinese economy) in the United States.If you ask American institutional investors to whom they are responsible, their answer must be to their shareholders and investors. They will not simply follow the call of any politician, including Bush Jr., to invest in a certain place.This is different from domestic industrial policy and investment orientation.Because they have a clear contract with the investor, they cannot change the investment method and purpose guaranteed to the shareholders. If they change, they will be sued and have to bear legal responsibility.So don't think that if foreign capital comes, it means a wolf has come.And they are also competing with each other, everyone wants to find their own unique opportunities and don't want others to find out.They come to make money, but objectively it will lead to the improvement of the efficiency of Chinese enterprises.Of course, don't expect them to solve all of China's problems.

In terms of specific investment methods, it turns out that foreign capital often comes from industrial enterprises making direct investment in China, such as Motorola setting up factories in China.With changes in domestic regulations and policies in recent years, mergers and acquisitions of foreign industrial funds have become a new trend.The strong growth of China's economy has made foreign institutional investors, including individual investors, pay more and more attention to China. This has greatly promoted the large-scale entry of private equity funds into China. ◎Reporter: Some enterprises are worthless in the eyes of domestic people, but foreign investors are willing to pay a high price to obtain equity and control rights. Why?

Chen Zhiwu: There are many reasons for this.The main reason is that foreign capital has a global perspective.Under the current domestic structure, many assets have not been utilized efficiently.For foreign capital, although the entity of this part of assets is in China, the value evaluation of assets is from a global perspective. From the point of view.Once integrated on a global scale, the value of the same assets will at least not be lower than that created by local Chinese company-to-business integration in China alone.For example, if we want to sell Oriental Plaza, but we don’t know how much we should sell it for, we should inquire within a certain range, and the principle is to sell it to whoever bids the highest.Then, if we only inquire among the four of us, we may only be able to sell for hundreds of thousands or several million yuan, otherwise we cannot afford it; if we inquire within the entire China, the highest price we can offer will be much higher It must be greater than or equal to the highest price that can be obtained in the whole Beijing.By analogy, if the scope of inquiry is expanded to the whole world, the highest price that can be obtained will be higher.The possible value of the same thing will expand due to the expansion of the scope of inquiry. This is the meaning of globalization, so that all resources can be optimally allocated globally, and all commodities can be obtained at the best price worldwide. .

Talking about national economic security in the context of economic globalization makes it easy for us to go back to the old way.We can't go back to thinking that everything has national security at a time when Chinese exports are filling almost every store in other countries, entering their homes, and Chinese companies are going out. As long as the inquiry process of Chinese enterprises is open and fair, it should be the same regardless of whether they are foreign or domestic.If there is a problem in the bidding process, it is a procedural problem, not a problem of whether it can be sold to foreign capital.

If you don't want the efficiency of Chinese companies and the added value created by the Chinese economy to increase, then keep foreign private equity funds out of the door.If you want to change the business model and profit margin of Chinese companies, the best way at present is to let foreign capital come in and clean up domestic listed and unlisted companies. ◎Reporter: It is rare to see the entire process of foreign acquisitions in China—how to change the enterprise after private equity funds come in. Chen Zhiwu: The lack of clients in state-owned enterprises has been reflected again in this discussion.Originally, if the shareholder voting mechanism is very clear, the board of directors and the general meeting of shareholders may vote to decide who will acquire.The entry of foreign capital into China should not be affected by too many emotional factors like the Boxer Rebellion, and should not be treated differently from Chinese-funded enterprises as long as there is foreign capital.We must recognize Deng Xiaoping's reform and opening up, especially the historical contribution of opening up to China.There should be a clear principle in accepting foreign-funded enterprises: as long as you are registered in China in accordance with Chinese company law, operate legally, and participate in competition fairly, no matter whether the name of the enterprise is Chinese or foreign, regardless of the background behind it Whether the shareholders are foreign or Chinese, they should be treated equally, and should be considered Chinese companies.When considering foreign capital, domestic capital, state-owned capital or non-state-owned capital, which is better, some judgment indicators should be clarified, and "the country is strong and the people are rich" should be used as the evaluation standard.

"National strength" has a lot to do with taxation. It depends on whether an enterprise can create more tax revenue for the country.From the perspective of "people's wealth", there are two indicators.One is employment opportunities.After the reform and opening up, foreign capital came in and created a lot of employment opportunities for China, especially when China's own financial system was not developed enough to provide support for many entrepreneurs.Then let foreign capital come in and let more enterprises and undertakings be established, which is conducive to the emergence of employment opportunities.The other is the income of ordinary people.After graduation, everyone is more inclined to work in foreign-funded enterprises, because they have considered opportunities such as salary and training.What is this indicating?

In the past two years, there have been many discussions about whether foreign capital has entered China to occupy too many markets and industries, and whether the "exchanging the market for technology" in the auto industry has been successful. Now such discussions have risen again.The auto industry's "exchanging market for technology" is very successful! In 1982, all the automobile factories in China produced more than 1,000 small cars, while last year's output was more than 3 million. Isn't this improvement a success?This not only brings a lot of hard technology, otherwise the cars produced in China will not get better and better, but also brings a new production management technology, otherwise the output of automobile enterprises per employee will not increase so many times.Production management is also technology and may be more valuable than science and technology.Production efficiency has improved, how can it be said that technology has not improved?

The entry of private equity investment will be of great significance to the improvement of the production efficiency of Chinese enterprises. This improvement is mainly reflected in the business model and management technology.When Carlyle and Huaping entered China, they integrated the assets of Chinese companies, which fundamentally changed the efficiency of asset use and business profit models.The average ROA (return on total assets) of Chinese listed companies is only about 1%, ROE (return on equity) is only a little over 2%, and many companies only have a few tenths of a percent.In contrast, the average ROA of listed companies in the United States is 7.5%, and the ROE is more than 20%.It can be seen that many companies in China are sitting on too many assets, but they have not created much value.There are two very important reasons: one is that the business model has not changed much; the other is that China's capital market does not play its due role in stimulating enterprises.The two are of course linked.The entry of private equity funds can fundamentally change these two deficiencies.

What private equity funds look at is the maximization of corporate value, rather than simply maximizing corporate profits.Many of the total assets of Chinese enterprises may not have much to do with their main business, and their value has not been realized.For example, PetroChina has a lot of guest houses and hotels across the country. The location and hardware are very good, but the supporting management and operation have not kept up, so these fixed assets have not created much value for the company.The value of its guest houses, hotels, resorts, golf courses and other assets that continue to be operated by PetroChina may not be greater than the value of being sold.If PetroChina or its assets can be acquired by Home Inns, Hilton, or private equity funds, these values ​​can be better realized.There is a recent American case. Bain Capital, KKR and a real estate trust have acquired the largest toy store company in the United States with 685 stores, 314 of which are owned and 371 are leased.After the acquisition, the real estate of these 314 stores may be sold for 8 billion US dollars, while the acquisition of this company only cost 8.8 billion, and its brand value and profitability are far more than 800 million.Clearly, this company is sitting on a lot of valuable assets.So why didn't the original management of the business do it themselves before the private equity fund stepped in?Because they themselves do not necessarily have this kind of motivation, they will only really work hard under the pressure of private equity funds.

Private equity funds are a fundamental impetus to the improvement of corporate efficiency in a country.We all know that the efficiency of state-owned enterprises is very low, why?This is because state-owned enterprises have the highest degree of equity dispersion and are owned by the whole people.When the shareholding is too dispersed, the shareholders will not be able to effectively supervise the management. In a disguised form, the management of the state-owned enterprises can do whatever they want, or do nothing at all, and will not really be under the supervision pressure of the people across the country.They see the enterprise more as the need to keep the iron rice bowl, which is the first goal.When the degree of ownership dispersion is too high, even in the United States, there will be problems faced by Chinese state-owned enterprises.The equity of listed companies in the United States is also very scattered. In order to solve this problem of "doing nothing", private equity funds have emerged.They watch every day whether any company has become a special interest group that does not consider the interests of shareholders. Once they find that any company controls many valuable assets but does nothing, then they will take action to merge.After the purchase, if the resale price of the asset is higher than the value of continuing operation, it is sold.After stripping off assets that are not related to the main business, the assets of the company are concentrated around the main business, which greatly increases the ROA and ROE of the re-listed company after integration.This is the reason why the quality of listed companies in the United States is high.

Many Chinese companies have this problem. They invest in real estate, restaurants, and hotels in the same way. Now everyone is in the mobile phone and financial industries, so that everyone’s return on assets is pitifully low. It is better to save money. Banks buy bonds. On the one hand, many Chinese, economists, and policy makers complain that Chinese companies can only produce products with low added value, but cannot engage in businesses with higher added value in the value chain; on the other hand, they say no to acquisitions by private equity funds.So, what exactly do we want?If you want to change the business model and economic value added of Chinese companies, the best way at present is to let more foreign capital come in, let them participate in the competition of domestic companies, clean up domestic listed and unlisted companies, and give Chinese companies management under substantial pressure.Private equity funds can force Chinese companies to change their business models and improve ROA and ROE. Part of the current opposition to the entry of foreign private equity funds is from the management of domestic companies. They have too many vested interests and they want to keep their jobs.If I were the management of a company, I might also find various reasons to resist the pressure brought by foreign capital to Chinese companies.After the external pressure is blocked back, what is being protected?It is only the interests of the management of domestic enterprises, the interests of those who are unwilling to accept the challenge and improve the efficiency of enterprises.If the competitiveness of the enterprise cannot be improved, the business model cannot be changed, the enterprise cannot be made more profitable, and the salary of the employees will not increase, and the people who will suffer in the end will be the people themselves.Only competition will have the future of Chinese enterprises. We need to distinguish between the interests of the enterprise management itself and the interests of the general public.Because everyone is Chinese, on the surface they are all the same, but in fact they are different.As the boss of a certain computer company said, foreign companies coming to China will make it difficult for our computer companies to make money.His reason is that Intel and AMD are always unwilling to sign agreements with large Chinese companies to guarantee that they will only provide chips to these large domestic computer companies.As a result, Intel and AMD sold chips to all Chinese companies that wanted to assemble computers, which led to an increase in the supply of computers, and the price of computers was cut in half every few months.So, the boss of this big company complained about the irresponsibility of foreign companies, "Why do you make things difficult for Chinese computer manufacturers? Let us not make money?" It is getting lower and lower, so that tens of thousands of Chinese families can buy computers with a little money, so that their children can acquire computer knowledge at a very young age, and make the skills and human capital of the future labor force of Chinese society So a big boost?The liberalization of supply by Intel and AMD certainly made life difficult for these bosses of state-owned enterprises who could have a monopoly position, but it has brought huge benefits to the Chinese people and the country!What is the result of the telecommunications industry, the oil industry, the power industry, etc. being protected under various names?It is ordinary people who pay ridiculously high prices and low quality service. The interests of ordinary people and business management are different.If Chinese enterprises do not face the pressure of competition, they will still stand still.Just like Qianlong did not allow China to open up. After the Opium War was defeated, it was discovered that there was no competitiveness at all, and it collapsed all at once.Doting will protect mediocrity, and the ultimate victim is Chinese society. American corporate management has a hard time because they know that if you control too many assets and don't use enough, private equity funds will come in quickly and drive you out.In contrast, the life of the management of Chinese companies is too easy. One is that state-owned equity cannot be traded, and there are no private equity funds watching them at the door.The average ROE of listed companies in the United States is 10 times that of China, which is not only due to the SEC.The China Securities Regulatory Commission only cares about whether the interests of listed companies have been misappropriated by major shareholders, whether they have made false statements, and whether they have violated laws and regulations, but they absolutely cannot control the inaction of the company's management, and cannot fire the management because the ROE is too low.When the controlling position of the major shareholder is obvious, it can be supervised by the major shareholder. If the shareholding is too dispersed, it can only be supervised by private equity funds. The China Securities Regulatory Commission should welcome private equity funds into China with both hands, and allow these profit-driven funds to supervise China's listed companies. Private equity funds are particularly concerned about the incentive mechanism, emphasizing that the management's income is linked to performance, reducing the original income of the big pot and increasing the part related to performance. ◎Reporter: The Academy of Social Sciences has conducted research, using ROE and ROA as indicators, and found that the competitiveness of listed companies has been inferior to that of non-listed companies since 2001. One of the important reasons is that listed companies have a large amount of funds occupied by major shareholders.Now the China Securities Regulatory Commission has asked listed companies to pay off their debts within a time limit. Chen Zhiwu: It is of course illegal for a major shareholder to embezzle funds of a listed company, and the CSRC can do something.In addition, the China Securities Regulatory Commission should raise its hands to welcome private equity funds into China, allowing these profit-driven funds to supervise Chinese listed companies. Some private equity funds have done very well. They approached the owners of private enterprises and told them: "If you make money in the current way and don't want to make any changes, that's your own business. However, if you want to change the way and achieve a better Gao’s wealth, like Jiang Nanchun’s wealth of more than one billion US dollars, then let us invest some money in, although you don’t need money, but we can help you. After we come in, we will conduct a comprehensive review of the company’s business model and operations Comprehensive adjustments. Some adjustments must be made with pain, such as transferring all the relatives of the management from the company to save money that could not have been spent.” For example, Baidu's current price-to-earnings ratio is 286 times.If the employee spends 1 yuan less, the value of the company increases by 286 yuan.After removing relatives and saving expenses, if the company can go public, if the future price-earnings ratio is 100 times, saving 1 yuan is equivalent to saving 100 yuan, and it is completely possible to use these new wealth to start a new company to arrange relatives.Of course, an entrepreneur may like a person very much, and may be able to spend 1 million for him, but it is not necessary to spend an extra 286 million yuan for him.With this change in concept, value orientation, and business model, the usual lazy style of the entire company has suddenly changed, because at a price-to-earnings ratio of 286 times, it can save 1 million more expenses or increase 1 million profits , which is equivalent to increasing wealth by 286 million. ◎Reporter: How should domestic private equity investment develop? Chen Zhiwu: The most important thing is to let go of this industry.I have a different point of view from some people in the legal field. Whenever there is a new economic activity, they prefer to ask the National People's Congress to legislate specifically for this business, saying that it is used to promote the development of this business.The biggest difference between private equity and public equity is that public equity is open to the public, and there is a lot of room for fraud and fraud. Ordinary people do not necessarily have strong professional knowledge, and they are easily deceived by a few people who can talk.If there are too many such things, it will not be conducive to social stability, and it will put a lot of pressure on the government.Therefore, all countries in the world will have more supervision and legal protection of the public equity trading market.On the other hand, private equity is oriented towards a small number of individuals, who are often very wealthy people. When raising funds, it is completely a contractual relationship. When disputes arise between private equity funds and their investors, they can be settled according to the contract law. solve.When private equity funds invest, they also have a contractual relationship with the invested companies and projects.There is no need to spend a long time developing a dedicated private equity law, and it is difficult for legal professionals to formulate a comprehensive law when the industry is not yet flourishing. ◎Reporter: The concept you just mentioned is very applicable to private enterprises, but is it applicable to state-owned enterprises?There are many state-owned enterprises that are not listed as a whole, but some high-quality assets are divested and listed.The profitability of unlisted assets is extremely poor, but there are considerable personnel or debt burdens. This has led to frequent occurrences in the market that major shareholders encroach on the interests of listed companies through related transactions. Chen Zhiwu: No matter what the original arrangement is, you cannot spin off other (non-profitable or poorly profitable) assets for the purpose of making money, and then assume the responsibility to the major shareholders again after listing. This is not an act in compliance with the law. This is very common in domestic companies, but this is fraud and a breach of contract. ◎Reporter: Poor management of state-owned enterprises is a common phenomenon, which creates conditions for the management to seek personal gain.Take Laiwu Iron and Steel Co., Ltd. as an example. This company recently exposed a scandal in which its chief financial officer embezzled 400 million yuan of public funds.At the same time, Laiwu Steel is also a hot spot for foreign mergers and acquisitions recently.So, why does the management welcome foreign mergers and acquisitions? Chen Zhiwu: One of the reasons may be the option arrangement.Private equity funds are particularly concerned about the incentive mechanism. After they enter the target company, they will make some fundamental adjustments to the incentive mechanism, emphasizing the link between the management's income and performance, reducing the income of the original big pot meal, and increasing the part related to performance. .Options are the best arrangement for linking management income to performance.If so, if I were the management, I would be happy too. ◎Reporter: Paulson, the new U.S. treasury secretary, believes that before China has a modern, open, and sound capital market system and banking system, it is impossible to realize the free convertibility of RMB.Previously, on May 17, 2005, Paulson, as the chairman of Goldman Sachs, spoke at the "Fortune" forum. He believed that the structural problems that China's capital market needs to solve are structural problems. He hopes to speed up the establishment of an effective market mechanism and promote opening up. It’s not just blind and disorderly competition among domestic securities companies.”What is your opinion on this? Chen Zhiwu: The renminbi will definitely appreciate, and the speed may be faster than what has been experienced in the past year, but it will not rise overnight.Indeed, if more private equity funds and Wall Street investment banks can enter China, it can fundamentally change the efficiency of China's listed companies, banks and other related financial and non-financial companies, and in doing so can greatly increase China's capitalization level, Increase the accommodative capacity of the economy as a whole.Judging from the trend, corporate management will feel more pressure to improve, and the efficiency and standardization of listed companies and banks can undergo fundamental changes.After a few years of financial opening and adjustment, China's financial securities market system will improve a lot, and the ability to withstand shocks will increase a lot. This is the case in Japan. After the Asian financial crisis in 1997, Japan's securities, funds, and insurance industries became more open to foreign capital, and many private equity investment funds began to enter Japan to participate in corporate mergers and acquisitions.Private equity funds and many American and European securities firms have slowly entered Japan since then.Today, Japan's financial system has changed from being characterized by banks as the main body before 1997 to being capital market-oriented.The increasing proportion of the capital market in Japan's financial system today has promoted the improvement of the efficiency of Japanese enterprises and the decline of bad debts of banks. This relationship is very close.It can be seen from Japan's experience that if more investment banks, private equity funds, hedge funds and institutional investors are introduced, a country's ability to deal with financial crises in the future will also change.Judging from China's current situation, it will be difficult to fundamentally change China's financial system and improve its ability to deal with crises if more foreign financial institutions and investment banks are not allowed to enter as soon as possible. ◎Reporter: Will foreign capital entering the domestic capital market bring unexpected harm?They are businessmen after all.Lang Xianping wrote about the case of foreign investment banks manipulating stock prices in Hong Kong, and the international accounting firm that was introduced before is now being questioned. Chen Zhiwu: I hope they come here to make money. If they don't come to make money, I don't want them to come.Don't want them to be Santa coming to give free gifts. First, look at foreign-funded enterprises from a relative perspective.No company in any country is perfect, there are bad and good.But just like electricity, life is inseparable from electricity, but electricity will kill people, people still need electricity.The key is to look at random sampling of 100 companies, domestic and foreign, to see which group is better overall, rather than whether both groups are problematic companies.Second, regardless of whether it is Hong Kong, the mainland, or other countries and regions, if there are many opportunities to make a lot of money by exploiting loopholes because of system problems, then anyone may try such opportunities, and don't blame businessmen for going To take advantage of loopholes, we must first hit the board on the system. This is not a question of whether foreign capital is not foreign capital.Third, even if foreign capital does not exploit loopholes in the system, domestic capital will. Foreign private equity companies come to China in order to make money, which can bring about various efficiency changes and corporate value enhancements. These business models and management concepts are a very large fortune for China.The learning of concepts and the accumulation of experience will enable many generations to create wealth faster and more effectively.These intangible assets can benefit future Chinese generations. There are serious double standards in the evaluation of domestic and foreign capital.Foreign capital is an absolute standard, because it is a model, so there can be no flaws, while a relative standard is used for domestic companies.It is also the auditing business. If the Chinese accounting firms do not find any problems or fraudulent audits, it may be a matter of habit, so it will be fine.And if a similar event occurs in the four major firms, it will be great news.In fact, if we compare the frequency of audit mistakes made by domestic and foreign-funded accounting firms, instead of just looking at whether foreign-funded audit firms will also make mistakes, then we can more comprehensively see which one is doing well, and this comparison is more reasonable.