Buyout funds in mixed-ownership reforms of SOEs

The main objective of a buyout fund is to secure control of an enterprise during its growth or mature phase before increasing its value through a restructuring or other such means. Perhaps, from the perspective of supply side structural reforms, the indirect participation in the mixed-ownership reform of SOEs through buyout funds will become the best route for private capital.

Operating model. Currently, the participating entities in Chinese buyout funds are mainly divided into securities house direct investment focusing on acquirers, private equity (PE) firms focusing on projects, and listed companies targeting the industry. Among them, the most mature model is one where a listed entity and a PE firm jointly establish a buyout fund as a partnership or a company.

The mixed-ownership reform of SOEs not only includes cross-shareholding state-owned capital and private capital, but also comprehensive reform, including industry integration, corporate governance, etc. The model in which a buyout fund participates in the mixed-ownership reform of a SOE can be upgraded to an operating method with three parties, namely state-owned capital plus listed company plus PE firm, serving as sponsors. The injection of state-owned capital can attract more private capital, mitigating funding pressures; the participation of a listed company prevents the tying up of excessive own funds, avoiding the triggering of a material asset restructuring, such that regulatory limitations can be surpassed and, based on its market transparency and integration capabilities, the listed company can assist the government in realizing its industry layout earlier; and, with the credit enhancement provided by the state-owned capital and the listed company, the PE firm can fully leverage its advantages in fundraising, post-investment management, value enhancement and locking in of a divestment channel in advance.

Yang Bin is a partner and Lei Yang is an associate at East & Concord Partners