Private equity and the state

The Chinese government, in its various levels, has been influential in private equity over the last few years. While the difficulty in acquiring regulatory approval for certain deals remains an obstacle to doing business in China, Beijing recognizes the role that private equity can play in the economy. Consequently, it has facilitated the creation of renminbi-denominated vehicles by foreign firms, allowing them greater freedom in their investments.

It has been almost the opposite in India, where the Securities and Exchange Board of India (SEBI) has been almost laissez faire in its approach. This ended recently with the announcement of proposed regulations for alternative investment funds including private equity, venture capital, real estate and infrastructure funds. The prescriptive nature of the rules has already sparked some debate, with the Confederation of Indian Industry (CII) this week calling for changes.

However, in most countries, tax - or the availability of tax loopholes - has been the major reason for tension between private equity and the state. The Australian Tax Office shocked the industry with its about-turn on the tax treatment applied to capital gains arising from buyout deals and its continued pursuit of TPG over taxes arising from the Myer IPO in 2009 continues to perplex. At least the regulations on these issues are now being made clear and private equity appears to have settled on Singapore as the preferred tax efficient route for capital entering and exiting Australia from offshore.

Finally, in South Korea, Lone Star Funds' is edging towards an exit from Korea Exchange Bank (KEB), the lender it has been trying to sell since 2006. Hana Financial Group is the preferred buyer and South Korean regulators have promised to review the proposed transaction once the courts have addressed allegations that Lone Star manipulated KEB's stock price in 2003 to gain a higher valuation for its exit. A final ruling is expected on October 6. Given that a negative outcome could see the US buyout firm declared an unfit owner and ordered to sell down its stake to 10% or less, don't hold your breath on this one.

These are but examples of where the state and private equity interact. It is an unavoidable clash sometimes but only shows the need for constant communication between the two groups. A number of private equity associations such as the Australian Venture Capital & Private Equity Association, the Private Equity Council, the China Venture Capital Association and a host of others have actively led dialogues.

At AVCJ, we are also playing our part by inviting regulators to speak and attend our various events. Notably, Hong Kong's Financial Services Secretary K.C. Chan will open Private Equity Week - Asia, of which the AVCJ Forum is the anchor event, this coming November.

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• Topics
• Southeast Asia
• Greater China
• Australasia
• Regulation
• SEBI
• Hana Financial
• AVCAL
• Lone Star Funds