Summer is the reason for love,even between sun and wind. Your position:Home->china news-> China Private Equity Stresses the Equity and not Debt
Private equity firms borrow money, buy a company, restructure it, sell it, repay the debt and pocket the difference. Generally, debt propels profits higher. One clear indication of the importance of leverage for PE firms is the fact that business has mostly dried up in the wake of last year's credit crunch. Kohlberg Kravis Roberts founding partner Henry Kravis even found it necessary to declare in January that 'private equity is not dead.' But the leverage model doesn't work in China. That's the view of Zhang Yichen, chief executive officer of Citic Capital Holdings Ltd., a private equity firm under Beijing's Citic Group. Its Web site says it manages around $2 billion in assets on behalf of a stable of foreign investors. Any differences in China's operating environment would be important to private equity firms considering the nation's effort to attract them. Shanghai is offering PE firms new looser business registration requirements, fund raising parameters and tax obligations. In fact, the PE sector is one of the few financial industries that has heard tangible details of how Shanghai is hopes to entice them to locate in the city as part of its drive to build a global financial center., Speaking to an overflow audience on Friday night in Shanghai, Mr. Zhang set out the reasons he believes leverage won't work in China. Citic Capital, he says, even convinced foreign co-investors in its first six deals not to leverage their investments. He said borrowing is important in slower growing economies, since leveraged returns tend to be higher than straight cash deals. But that kicker isn't needed in China, he said. 'China is a country of rapid growth. As long as we can help the enterprise upgrade, the return can be much higher than the return with leverage in foreign countries,' Mr. Zhang said. 'In foreign countries, what underpins the high leverage is the legal framework,' in terms of contractual agreements, cash flow and dividend payments, Mr. Zhang added. The Chinese legal environment is 'far from sufficient' in these regards, he added. 'We should not apply high leverage,' he said. James T. Areddy 
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