Private equity funds exposed!
Sunnie Wong

Private equity funds can be mysteriously operated and they’re often an insider’s game. As funds that pool large investor contributions to create capital from tens of millions to several billion yuan, they’re big business players only getting bigger in cities like Shanghai and Shenzhen. But so far, they don’t have to disclose what they do, like public companies, and they’re often guided-even invested by-industry insiders.
But with the government seeking to “expose” these funds through new legislation, the countdown to bringing these private equity funds under the spotlight has begun. According to one source, legislation that would reign these funds in is on the agenda of certain government departments.
Those with the most thorough understanding of this often hidden market, even as it begins to open up, should stand to profit the most. Here’s a blueprint to success in this emerging market.
Big gains
“From April through to the end of August, our gains have been close to 60 percent,” said Jiang, a private equity fund operator in Shanghai who requested anonymity. Jiang is an alias.
In Shanghai, private equity fund investors such as Jiang are not hard to find.
“As far as I know, there are now a large number of private equity funds in Shanghai with capital of 50 million yuan or more,” said Jiang. “Private equity funds worth hundreds of million are also commonplace.”
The largest private equity fund in Shenzhen currently manages 5 billion yuan in capital, which is equal to that of a medium-sized public fund.
Meanwhile, after this year’s Spring Festival, the stock market turned bullish after a long bear market. Private equity funds seized the opportunity and recorded dramatic growth. Such funds have garnered interest and investment funds from many experienced stock market investors.
Jiang used to be a certified analyst at a securities investment consultancy. In April this year, he resigned and began to invest in private equity funds. “I started late. The private equity funds that have been operating for a few years have developed surprisingly fast this year,” said Jiang, expressing his regret at his tardiness in beginning his “new enterprise.”
According to estimates from the Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences (CASS), the total of all private equity funds currently operating in China’s A-share markets has reached 500 billion yuan. According to Wang Guogang, Deputy Director of the Institute of Finance and Banking under CASS, the number is even bigger. He estimates that the total domestic private equity fund has already reached between 800 and 900 billion yuan.
Given this volume, the impact of private equity funds on the markets cannot be ignored. But the effect that these rapidly growing private equity funds is having on the securities markets is at odds with their legal status, which is why the calls for legislation covering private equity funds are getting louder and louder.
Demystifying the mysterious
So how do private equity funds serve their clients? Potential clients can join private equity funds in two ways, both of which provide percentage-based returns.
The first way is “control from behind the curtain,” which essentially allows investors to trade themselves under the direction of the private equity fund operator. Newcomers generally adopt this “exploratory” method. According to Jiang, this method rarely achieves good results due to the fact that clients tend to trust their own, more novice judgment, rather than the judgment of the fund manager. And the flow of transactions tends to be interrupted.
The second way is total entrustment to the fund operator. The clients take a back-seat while the fund trades on their behalf.
Private equity funds do not have a minimum investment requirement. But Jiang said that large capital amounts receive different “treatment” compared to small capital investments. For example, transaction frequency might be lower for small capital clients. For large capital clients, on the other hand, private equity funds will help them to optimize their investment portfolios in addition to providing the standard services.
“For clients with capital of over 300,000 yuan, we generally create an investment portfolio,” said Jiang. Investment portfolios refer to an arrangement of short-, medium- and long-term investments.
The private equity fund that Jiang operates is not large, so capital of over 300,000 yuan is considered to be a large investment.
In this investment portfolio: A short-term operation can last for one or two days; a medium-term operation can last from a few months to half a year; and a long-term operation can last from one to two years. Each operation comprises a selection of good stocks that are bought and held for the period.
In an investment portfolio, a combination of long-term and short-term investments helps to reduce the turnover rate. Generally speaking, an investment turnover rate of twice per month is considered large. “For large investments, especially millions of yuan, our ideal annual average return is 30 percent-including the bearish periods,” said Jiang.
Jiang is very confident of his operational ability, and in his view, a good private equity fund operator is more capable than a public fund operator. In fact, the fund that Jiang manages has only recorded a few temporary downturns, even during periods of market consolidation. “Here is my optimistic prediction: We are going to continue to see a bullish market in the coming six years,” Jiang said.
Being “private”
For a long time now, private equity funds have been operating outside the legal market framework. Therefore there are significant legal risks that need to be taken into consideration. In addition, private equity fund investment operations are not public and the commitments provided to clients and the way they operate continues to be something of a mystery to the public. But often the unique characteristics of private equity funds are what make them strong.
“We hope that there will be legislation that will clarify our legal status, but, in terms of disclosure, there should be differences,” said Jiang. Private equity funds can only maintain their advantages as long as their positions and investment direction remain non-transparent. According to him, the key difference between public funds and private equity funds is in regard to transparency, not only in terms of legal status, but also in terms of disclosure.
Public funds must release financial statements to the public each quarter, stating their positions on every investment. Private equity funds are not subject to this requirement.
“We need this information to remain undisclosed in order to continue to operate,” said Lin, another private equity fund investor in Shanghai who wished to remain anonymous. “Lin” also is an alias.
Sharing returns
Public funds only charge investors for management fees and registration fees, and these fees tend to be relatively low. Private equity funds, however, make their profit by sharing the returns with clients-even as much as 50 percent in some cases (although 20 percent is more frequently the case). Private equity fund operators believe that this profit sharing method serves as motivation to operate in as efficient a manner as possible.
“To us, the biggest pressure is not from the market, but from clients,” said Jiang. “Some clients check their account balances frequently and if they are unhappy with the returns, they will complain,” he added. But he added that constant communication between clients and fund operators provides good motivation.
He explained: Generally public funds are owned by the public, investors are not specified and the fund operator’s responsibilities are not clearly defined. With private equity funds, however, each capital injection is from a specific client who can check their investment status at any time and can give direct feedback to their broker if they are unhappy. This direct connection and the profit sharing method ensure that private equity funds work in an efficient manner.
Choosing fund managers
According to Jiang, private equity fund operators are generally big stock investors. They tend to be long-term players in the Chinese stock markets and have a thorough understanding of the market. They know which shares can make good short-term or medium-term investments. There are times when they also predict the long-term trends of the market. Jiang himself is one of those who have been investing in the securities industry for many years.
Because of this, Jiang believes that fund managers who are overseas returnees or who have a background in industry research do not necessarily have the correct view of the market, making it hard for them to survive in the private equity fund field.
Lin’s experience seems to support Jiang’s viewpoint. Before investing in private equity funds, Lin had been investing in the stock market for many years. Back then, he had a small private equity operation, with capital of around 1 million yuan, mostly collected from relatives and friends.
During that period, Lin realized that his sense of the stock markets was more sensitive than that of fund managers.
“Early last year, I selected Nanning Sugar, which turned out to be a stock chosen later by the QFIIs (Qualified Foreign Institutional Investors). Back then, the funds weren’t paying attention to this kind of share,” he recalled proudly.

(The Daily Mail-Beijing Review  Articles Exchange Item)


Frustration among Indian farmers
Raheela Syad

On 29 September 2006, six farmers in Indian state of Maharashtra committed suicide due to sheer frustration. The phenomenon of suicides by Indian farmers has assumed frightening proportions since 1997. These suicides have occurred mostly in prosperous regions of Andhra Pradesh, Punjab, Karnataka and Maharashtra. The farmers committing suicides have come not only from land owning strata but from the fold of the landless too. Undoubtedly, these suicides are symptoms of a deep agrarian crisis.
In 2004, as many as 644 farmers committed suicides in Maharashtra alone. Similarly, debt-ridden farmers have been killing themselves in alarming numbers in three Indian states and government statistics have recorded about 3,600 suicides in Andhra Pradesh, Karnataka and Kerala in the last five years.
There are several reasons behind the increase in this horrible phenomenon. The main reason is the neglect of Indian government towards agricultural sector. Under the guidance of the IMF and the World Bank, successive Indian governments slashed their expenditure on rural development, including expenditure on agriculture, special areas programme, irrigation and flood control, village industry, energy and transport. Since 1985 there has been 60% decline in public investment in agriculture. According to one report by Tata Institute of Social Science, “The causes of suicides may be common occurrences like repeated crop failure, rising costs of inputs, indebtness, etc.; but the root cause is globalization and neglect of the agricultural community.”
The declining public investment in agriculture has led to poor maintenance of the existing irrigation works. Consequently, the dependence on rains continues. There is a marked absence of irrigation facilities in the three areas of Maharashtra. The total failure or insufficiency and non-seasonal rains push the farmers into a deep crisis. So, the lack of interest from the government side has led to the decline in agriculture production. At present it accounts for only 25% of the GDP, though 75% of the population living in rural areas is dependent on it for livelihood. And the 60-70% of agricultural production comes from subsistence farmers.
Another important reason for farmers’ suicide is rapid decline in the fertility of land. But here again the irresponsible attitude of the Indian government aggravated the situation. The problem, which can easily be resolved through the proper use of fertilizers and water, persists. The government policy of slashing the subsidies on fertilizers, irrigation and electricity increased the costs of production and forced the farmers to mobilize more resources. Similarly, in 1998, India opened up its seed sector to global corporations such as Cargill, Monsanto and Syngenta. These corporations replaced farm saved seeds by corporate seeds, which needed fertilizers and pesticides and could not be saved. So, the poor peasants had to buy seeds for every planting season as seed saving is; prevented by patents. Earlier the farmers has sown farm seeds, which were free of cost but now because of government policy they are forced to buy them every year.
To buy seeds farmers usually borrow from village moneylenders at a high interest rate as no institutions are forthcoming to lend money to farming community. So the debt trap is the main cause of certain farmers taking the extreme step of committing suicide and many farmers are compelled to sell kidneys.
The dramatic fall in prices of agricultural production due to the free trade policy of the Indian government is also contributing to the farmers’ suicides. India is following WTO rules for trade in agriculture, which allowed an increase in agribusiness subsidies and prevented countries from protecting their farmers from the dumping of cheap produce. India while endorsing free trade ignored the fact that its poor farmers could not compete with the cheap agricultural products of other countries.
“Among the Indian states Maharashtra suffers the most in terms of farmers’ suicide. Farmers of Maharashtra have failed to procure loans for seed and fertilizers, and those who borrowed money to sow cotton saw their crops destroyed by heavy rains. Many cotton farmers in the state are heavily in debt and hundreds have killed themselves in recent years.
According to Sharad Joshi, Chief of Shetkari Sangathan, a powerful farmers’ lobby in Maharashtra, the rate of suicide now is about three per day. Vidarbha Jana Andolan Samiti, a farmers’ pressure group, said it had counted 110 deaths in August 2006, making it the highest figure since 2001. So unable to pay the loan and finding no way out more than 728 farmers have committed suicide in the state’s Vidarbha region since August last year. In the whole state of Maharashtra more than 900 farmers killed themselves in 8 months of 2006. The rate of suicide has increased from two suicides per day to one suicide every eight hours.
The suicides that have occurred are due to failure of social and economic development of the poor. The rising cost of production and the falling prices of farm commodities are the main reasons of suicides. Both these factors are due to the wrong policies of Indian government and the policies of trade liberalization and corporate globalization. The eminent economists and politicians, who are supporters of free trade, keep silent over the issue as they know the real reason for this. The central issue of farmers’ suicides is the debt trap, which is tightening because of the drastic shifts in the cropping pattern. The endorsement of many polices under WTO regime by the Indian government has exposed its farmers to the volatility of international market and prices. The use of corporate seeds is also damaging the fertility of soil and imbalacing the ecological system. Prime Minister announced over $400 million economic package for the economic uplift of farmers but it is not reaching out to the deserving ones due to corruption”.


A new lodestar for Africa?
Jonathan Power

THE wheels seem to spin in the sand as we hurtle down the bush track mile after mile from Mtwara, the small town on the Tanzania/Mozambique border. The land is parched, waiting desperately for the rains. In the villages we pass, little thatched houses give way to fields stripped bare of their meagre produce. This is truly one of the poorest backwaters of this very poor country. Then suddenly there is a clearing in it and in the middle, well what is? The set for a James Bond film? Or a secret Tanzanian missile site, perhaps rented out to the encroaching Chinese African empire?
The new president of Tanzania, Jakaya Kikwete, jumps out of the lead car of our convoy and briskly walks up to a white man in a white helmet and grabs his hand. Soon all of us are ensconced in helmets and goggles and led past rows of large window-less steel containers labelled bedroom 1, bedroom 2, washroom and on and on to view this steel pyramid where a fantastical, space-age, machine races down from the top and drives a pipe, deep, deep, into the ground. A burly Canadian tells me it is 28 days on, working twelve hours a day, seven days a week and then a free ticket home for 28 days off.
We have in fact arrived at the saving grace of Tanzania’s mounting energy crisis. In a country that has depended until now on plenty of rain, full lakes and cheap hydro electric power, the recent drought has depleted the lakes, slowed the turbines and knocked nearly two percentage points off Tanzania’s until now rapid rate of growth. But God works in mysterious ways. Underneath these coastal sands a Canadian company, Artumas, last year discovered gas — enough to power the electricity supply of Mtwara for 800 years, and more is likely to be discovered. Before Christmas, Mtwara and nearby Lindi will have the gas flowing into the turbines and the electricity into their streets, factories and homes. The nearby villages will also be lit up — no repeat of the mistakes that have plagued Nigeria’s oil rich delta where the locals have been bypassed.
Later came Nyerere’s former press secretary, Benjamin Mkapa, who set Tanzania on the path to political and economic reform, producing handsome economic growth, a primary school in every village and a more open political system.
The gas field behind us, we dash for three days along dusty, potholed, back roads, deep into up country. In every village, the crowd is waiting, in every third village he stops, climbs on top of his car and using the state-of-the-art sound truck that accompanies us ad libs words of encouragement. He cracks jokes about condoms, makes them laugh furiously and outlines a future that visibly makes their juices run. In the evening we of the convoy bed down where we can, eat together informally and chat to the president. Everything seems possible.