What Are the Different Types of Private Equity Funding?

Private equity funds are funds that engage in private equity (non-listed company equity) investments. It mainly includes investment in non-listed company equity or listed company non-publicly traded equity. The pursuit is not equity gains, but profits made by selling equity through equity transfer paths such as listings, management buyouts, and mergers and acquisitions. ^[1]

Private equity funds

Conditions for the establishment of fund enterprises:

The name of "1" shall comply with the "Registration Regulations for the Registration of Names" and allow investment enterprises that have reached the scale to use the word "investment fund".

The term "2" may use the words "venture investment fund, venture capital fund, equity investment fund, and investment fund". "Beijing" as an administrative division allows the use between trade names and industry terms.

"3" Fund type: "The registered capital (amount of investment) of the investment fund company shall not be less than 500 million yuan, all of which shall be contributed in the form of currency, and the paid-in capital (actually paid) shall not be less than 100 million yuan when it is established; During the year, the registered capital will be fully committed in accordance with the company's articles of association (partnership agreement). "

"4" The investment amount of a single investor is not less than 10 million yuan (the general partners in a limited partnership enterprise are not covered by this restriction).

At least 3 executives in "5" have experience in equity investment fund management operations or related business experience.

The business scope of "6" fund-type enterprises has been approved as: investment in non-securities business, investment management, and consulting. (Fund-type enterprises may apply to engage in other business projects outside the above business scope, but shall not engage in the following businesses:

(1) Disbursing loans;

(2) Publicly traded securities investments or financial derivatives transactions;

(3) Raising funds in an open manner;

(4) Provide guarantees to enterprises other than invested enterprises. )

"7" managed fund company: Investment fund management: "The registered capital (the amount of capital contribution) is not less than 30 million yuan, all of which are contributed in the form of currency, and the paid-in capital (the actual amount of capital contribution) was paid upon establishment"

Ordinary public equity funds invest for the middle class, and private equity funds invest for institutions and the rich. Second, Wang Wenshengyi, one is

Since the introduction of the concept of venture capital in China in 1984, China's private equity investment has experienced 30 surges. While international private equity investment funds are swarming in, local private equity investment funds are also growing rapidly. China's private equity investment industry has gradually grown from a "newborn" and has begun to take a solid step.

Similar to the development of private equity investment in the United States, the exploration and development of private equity investment in China also began with venture capital. The attempts of venture capital in China can be traced back to the 1980s.

In the "Decision on Scientific and Technological Reform" issued by the Central Committee of the Communist Party of China in 1985, the issue of supporting venture capital was mentioned. Subsequently, the State Science and Technology Commission, the Ministry of Finance and other departments established China's first

At present, China's private equity funds are in the early stages of development and are gradually receiving attention. Private equity funds are a professional investment management service and financial intermediary service created by the United States. Its first property is private equity. Private equity has three connotations: First,

In the US, there are usually three exit channels and mechanisms for private equity funds and venture capital: First, through

Company

As the name implies, corporate private equity investment funds are legal person funds, which are mainly based on the "Company Law" (revised in 2005), "Regulations on the Administration of Foreign Investment Venture Capital Enterprises" (2003), and "Interim Measures on the Management of Venture Capital Enterprises" (2005 ) And other laws and regulations.

In the business environment, because the concept of a company lasts a long time, the corporate model is clear and easy to understand, and it is easier for investors to accept.

Under this model, shareholders are the investors and the ultimate decision makers of the investment, and each of them allocates voting rights based on the proportion of investment.

Trust

A trust-based private equity investment fund can also be understood as a private equity trust investment, which means that a trust company invests funds obtained under a trust plan into equity investments. Its establishment is mainly based on the "Trust Law" (2001), the "Administrative Measures for Trust Companies" formulated by the CBRC in 2007, the "Administrative Measures for Trust Company Collective Fund Trust Plans" ("Trust Two Regulations"), and "Private Equity of Trust Companies" Operational Guidelines for Investment Trust Business (2008).

The advantages of adopting a trust-based operation model are: you can use the trust platform to quickly consolidate a large amount of funds to play a role of capital amplification; but the shortcomings are: the trust industry lacks an effective registration system, and the trust company, as the sponsor of the company's listing, cannot be identified Whether there are any issues such as the holding relationship and related shareholding, and the regulatory authorities require disclosure to the actual holders of the trust.

Limited partnership

The legal basis of a limited partnership private equity fund is the Partnership Enterprise Law (2006), the Interim Measures for the Management of Venture Capital Enterprises (2006), and related supporting regulations.

According to the "Partnership Enterprise Law", a limited partnership enterprise is established by two or more than 50 partners and consists of at least one general partner (GP) and limited partner (LP). The general partners bear unlimited joint and several liability for the debts of the partnership, while the limited partners do not perform partnership affairs, and they do not represent the limited partnership outside the company. They are only liable for the debts of the partnership to the extent of their contribution.

At the same time, the "Partnership Enterprise Law" stipulates that general partners can make capital contributions for labor services, while limited partners cannot make capital contributions for labor services. This regulation clearly recognizes the value of the intellectual capital of the general partner as a manager, and reflects the advantages of the limited partnership rich money and strong power.

In operation, a limited partnership enterprise does not entrust a management company to carry out fund management, and the general partners directly perform asset management and operation of corporate affairs. The main advantages of adopting a limited partnership are: (1) the property is independent of the personal property of each partner, the rights and obligations of each partner are more clear, and the incentive effect is better; (2) only the partners are taxed to avoid double taxation tax.

"Company + Limited Partnership" Model

In the "company + limited partnership" model, the company means that the fund manager is a company and the fund is a limited partnership. This mode is a more common operation mode of equity investment funds.

As the risk of natural person as a GP executing partnership affairs is high, and private capital's concept and understanding of the limited partnership system are different, it undoubtedly enhances the challenge of natural person GP.

At the same time, in the Partnership Enterprise Law, there is no requirement for a general partner in a limited partnership to be a natural person or a legal person.

Therefore, in order to reduce the personal risk of the management team, the "company + limited partnership" model is adopted, that is, an investment management company is established through the management team, and the company is used as a general partner to set up a limited partnership equity investment with natural and legal LPs. fund.

Because the company system implements a limited liability system, once the fund faces an adverse situation, the management company as a limited liability can become a risk barrier, thereby reducing the personal risk of the manager.

In this model, the fund is managed by the management company, and the LP and GP work together to follow the established agreement and make decisions through the Investment Decision Committee. Currently well-known in China

A research report from the Central University of Finance and Economics shows that private equity funds account for 30% to 35% of investors' trading funds, and the total size of funds is between 600 and 700 billion yuan, which is more than double the size of public funds. In terms of geographical distribution, China's private placement funds are mainly concentrated in Beijing, Shanghai, Guangzhou, Liaoning, and Jiangsu, but the main areas are dynamically evolving. Since November 2001, the transaction volume in Guangzhou has been rising rapidly, and has surpassed Shanghai and Beijing, forming a pattern of "strong south and weak north". However, it is difficult for China's private equity funds to be in line with international standards for the time being, the main reason is the problem of regulatory implementation. Private equity funds have grown stubbornly in the bloody winds of market development. Despite the existence of fraud and many irregularities, and since the day they were born, private equity funds have always been dodging and are in an "underground" working state. . However, there has been an increasing number of private equity fund institutions that have always been in the "underground" state. They have spontaneously "grown up" entirely from market demand, and their tenacious vitality is remarkable. Private equity funds that lack compliance status are a double-edged sword for small and medium investors with relatively weak awareness of self-protection. On the one hand, the flexible operation methods and successful operation levels of some private equity funds have brought greater investment opportunities for investors; on the other hand, small and medium investors generally lack the ability and effective means to protect themselves. Even if there is a sense of self-protection, when their rights and interests are damaged, a joint collective is formed to compete with the harmer, but it will also be due to its decentralized individual combination, due to lack of effective organizers, expertise, and high joint costs. As a result, their rights cannot be protected. Since 2011, private equity funds have actively innovated to break the bottleneck. Target return, industry / theme, and targeted hair style have become the focus of private equity. According to the latest statistics, private equity fund innovations also include hedging strategies, risk buffers, and semi-structured types. In addition, in order to get rid of the restrictions on stock and futures accounts, the issuance of partnership products is also accelerating.

The development of China's private equity funds is still in its infancy. There are many issues that need to be studied: First, vigorously develop local private equity funds or speed up the introduction of foreign funds. From the perspective of domestic excess liquidity and the priority of sharing the fruits of economic growth, priority should be given to the development of domestic funds. but

On August 12, 2012, 25 equity and venture capital associations, co-signed to the Standing Committee of the National People's Congress, opposed the inclusion of equity investment funds (that is, PE funds) under the supervision of the Securities Investment Fund Law.

25 equity and venture capital associations "letter of writing" opposed the inclusion of PE funds in the new fund. This is the biggest change in the Securities Investment Fund Law amendment (hereinafter referred to as the "Revision Draft") after it entered the NPC review process in June. .

25 industry associations, led by the China Investment Association's Equity and Venture Capital Professional Committee (hereinafter referred to as the "China Venture Capital Board"), include entrepreneurial associations in Beijing, Shanghai, Shenzhen, and Tianjin. They have pointed out in their proposals that: The inclusion of PE funds in the supervision of the new fund law "will have a serious adverse impact on China's entrepreneurial and innovative undertakings."

Securities investment funds are mainly supervised by the CSRC, Sunshine Private Equity Fund is supervised by the CBRC, and the supervision power of PE funds is mainly exercised by the National Development and Reform Commission. Once the amendment is passed, it is shared by the Development and Reform Commission and the Securities and Futures Commission.

Some inconvenient industry insiders pointed out that they jointly signed the letter and opposed the supervision of PE funds by the China Securities Regulatory Commission. The joint leader, China Venture Capital, was established under the leadership of the National Development and Reform Commission.

A number of well-known PE funds have refused to make a public statement on the matter: "Do not care who supervises, set the focus as soon as possible, and unify legislation so that practitioners can follow the law." ...

On June 26, 2011, Wu Xiaoling, deputy chairman of the Financial and Economic Committee of the National People's Congress, stated at the "2011 China Equity Investment Fund Development Forum" that large-scale private sun and private equity funds will be included in the fund law being revised. The following week, the fund law was being revised. The supervision of PE has become the focus of attention. On the 29th, Wang Zhongmin, vice chairman of the National Council for Social Security Fund, officially announced that the Social Security Fund will invest 10 billion yuan in the People's Insurance of China. Social security funds, which have always been regarded as the benchmark of market investment, are entering the PE market step by step;

Fund Law Adjustment Scope

On June 26, 2011, Wu Xiaoling, deputy chairman of the Financial and Economic Committee of the National People's Congress, revealed at the "2011 China Equity Investment Fund Development Forum" that large-scale private sun and private equity funds will be incorporated into the fund law being revised, and said that the revised bill has been The local people's congress financial and economic committee and more than a dozen ministries and commissions of the central government are soliciting opinions, which will be discussed by the whole committee of the financial and economic committee of the people's congress and will be submitted to the state council for formal comments after approval.

Wu Xiaoling mainly expressed the following three aspects:

1. Unlisted equity is also considered "securities"

Article 2 of the Securities Law provides that this Law shall apply to the issuance and trading of stocks, corporate bonds and other securities recognized by the State Council in accordance with the law within the borders of the People's Republic of China.

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Assist promoters and investors in setting up various private equity funds, including

At present, the investors of China's private equity investment funds are mainly private companies and wealthy individuals; under mature foreign market conditions, the sources of funds for the private equity investment industry are mainly institutional investors, including pension funds, securities funds, and financial institutions, Insurance agencies, etc.

On the other hand, there are few ways for Chinese residents to invest and low investment returns. Residents' traditional investment methods are still savings, government bonds, funds, stocks and real estate. Broadening the source of funds for the private equity investment industry will help provide more options for residents to increase their property income.

The source of funds for the private equity investment industry has gradually established a diversified funding source system including financial institutions, foreign capital, insurance funds, social security funds, corporate annuities, corporate funds, wealthy individuals and social idle funds, which has enriched China's multi-level The construction of the capital market system will better serve the transformation and upgrading of the national economy.

The operation mode of the private equity fund is equity investment, that is, to obtain shares of unlisted companies through capital increase or share transfer, and to gain profits through share appreciation transfer. The characteristics of equity investment include:

1. The return on equity investment is very generous. Unlike the debt-based investment, which earns a dividend of a few percentage points of the invested capital, equity investment earns dividends from the company's income based on the proportion of capital invested. Once the invested company is successfully listed, the profit of the private equity investment fund may be several or dozens of times.

2. Equity investment is accompanied by high risks. Equity investment usually needs to go through several years of investment cycles, and because the investment in the development or growth period of the company, the development of the invested company itself has a lot of risk. If the invested company ends up in bankruptcy, the private equity fund may also cost money. No return.

3. Equity investment can provide a full range of value-added services. When private equity investment injects capital into target companies, it also injects advanced management experience and various value-added services, which is also a key factor in attracting companies. While meeting corporate financing needs, private equity investment funds can help companies improve their operational management capabilities, expand procurement or sales channels, harmonize the relationship between enterprises and local governments, and coordinate their relationships with other companies in the industry. A full range of value-added services is the highlight and competitiveness of private equity investment funds.

The profit model of private equity investment funds is the same as that of securities funds. Buy low and sell high, buy for sell, and obtain long-term capital appreciation gains. Specifically, the profitability of industrial funds is divided into five stages:
Value discovery stage: It is to find high-quality projects with investment value through project seeking, and to reach consensus on investment cooperation with project parties.
Value holding stage: After the fund manager completes the due diligence on the project, the fund completes the investment in the project company, becomes a shareholder of the project company, and holds the value of the project company.
Value enhancement stage. Fund managers rely on their own capital aggregation advantages and resource integration advantages to comprehensively improve the project company's strategy, management, market, and finance, so that the fundamentals of the company can be improved and optimized, and the intrinsic value of the company can be effectively improved.
Value amplification stage. After the value of the projects invested by the fund is raised, after 2-3 years of cultivation, the value will be amplified by publicly issuing shares in the capital market or selling them to industrial groups and listed companies at a premium.
Value realization phase. After the fund invests in a project listed on the capital market, the fund manager must choose the appropriate timing and reasonable price, sell the project company's stock in the capital market, and realize the final realization of the value.