What Is a Private Investment In Public Equity?

Private Equity (referred to as "PE") is also known as private equity investment. From the perspective of investment methods, it refers to the equity investment in private companies, that is, non-listed companies, through the form of private equity. In the implementation of the transaction, future exits are also considered. Mechanism, that is, through the listing, mergers and acquisitions or management repurchase, the sale of shares to profit. ^[1]

Private equity investment

Private equity investment (PE) refers to the use of private equity funds for unlisted companies.

The operation of private equity investment refers to the overall operation process of the establishment and management of funds by private equity investment institutions, project selection, investment cooperation and project exit. Each investment institution has its own unique operating mode and characteristics. Its operation is usually low-key and mysterious. To a certain extent, the different operating modes of private equity investment directly affect the level of return on investment and are exclusive and cannot be leaked. confidential. Although we may not be able to know many details of individual investment institutions in specific investment operations, usually private equity investment has some common basic processes and basic methods.

The main participants

The market entities participating in the private equity investment operation chain mainly include investee companies, funds and fund management companies, fund investors, and intermediary service agencies.

1. Investee

Invested companies have an important characteristic-they need capital and strategic investors. Enterprises at different stages of development need funds of different sizes and uses: companies in the start-up period need start-up funds; companies in growth stage need to raise funds necessary for scale expansion and improvement of production capacity; The injection of restructuring funds. Enterprises facing financial crisis need corresponding working capital to get through the difficulties; relatively mature companies need a certain amount of capital injection before listing to meet the corresponding requirements of the stock exchange market; even companies that have already listed may still carry out various forms of reprocessing as needed. Financing.

2. Fund management company

Private equity investment requires the use of funds as a carrier of funds. Usually, fund management companies set up different funds to raise funds and then transfer them to different managers for investment operations. Fund managers and managers are the main components of fund management companies. They are usually professionals with rich industry investment experience, specializing in certain industries and enterprises at specific stages of development. After investigation and research, they rely on A keen eye will invest the fund in the equity of several companies in order to withdraw and obtain capital gains in the future.

3 Investors in private equity investment funds

Only investors with private equity investment funds can successfully raise funds to set up funds. Investors are mainly institutional investors, and there are a small number of wealthy individuals, usually with higher investor thresholds. In the United States, public pension funds and corporate pension funds are the largest investors in private equity investment funds, and their investment accounts for 30% to 40% of the total funds of the fund. Institutional investors usually promise a certain amount of investment to the fund management company, but the funds are not injected at one time, but are injected in batches.

4 Intermediary service

With the development and maturity of private equity investment funds, various intermediary service agencies have also grown and expanded. These include: (1) Professional consultants. Professional consulting companies look for private equity investment opportunities for investors in private equity investment funds. Professional consultants provide them with insights on corporate operations, technology, environment, management, strategy and business. It has won the trust of customers; (2) Financing agents, financing agents manage the entire financing process. Although many investment banks also provide the same services, most agents operate independently; (3) marketing, public relations, Data and survey agencies. In terms of marketing and public affairs, some groups or experts provide support for private equity fund management companies. The increasing complexity of marketing and social strategies constitutes the role of private equity fund management companies in data and research. Huge demand; (4) human resources consultants, with the development of the private equity investment industry, its service needs for human resources are increasing, these agencies are engaged in recruiting members of the investment company management team or fund management company fund managers, etc. The work of the supervisor; (5 Stockbrokers, in addition to the services of companies listing and selling equity, stockbroking companies also provide financing services for private equity investment funds; (6) other professional service agencies, private equity investment fund management companies also need property or real estate, etc. Services of agents and consultants, fund custodians, information technology service providers, professional training institutions, pension and actuarial consultants, risk consultants, tax and audit firms and other professional institutions. The role of intermediary service agencies in the private equity investment market is becoming more and more important. They help private equity investment funds to raise funds, match companies and funds that need funds, and evaluate the performance of private equity investment funds for investors. Intermediary services The existence of institutions has reduced the information costs of all parties involved in private equity investment funds.

Second, the operation process of private equity investment

Private equity investment activities in general can be divided into four phases:

1. Project search and evaluation

2. Investment decision

3 Investment management

4 Four stages of investment exit

Each stage has been refined to many operational practices, such as the project search and project evaluation in the first stage, including: 1. Project source; 2. Project preliminary screening; 3. 3. Due diligence; 4. Valuation and more.

Unlike most other forms of capital, it is also different from borrowing or investing in the stocks of listed companies. While private equity fund managers or managers bring capital investment to companies, they also provide management technology, corporate development strategies, and other value-added services. A long-term investment with the original intention of strategic investment, of course, its operation process will also be a long-lasting process. The operation mode of domestic private equity investment funds and overseas venture capital funds are basically the same, that is, after the fund manager raises funds through non-public methods, the funds are invested in the equity of non-listed companies, and the company invested and managed makes the company the largest Add value to the limit, withdraw funds after the company is listed or acquired, recover principal and gain. Its investment operation is basically completed according to a series of steps, starting from the discovery and determination of the project, and then going through negotiation and due diligence to determine the final contract terms, investment and completion of the transaction, and through subsequent project management, until the investment exit is obtained income. Of course, different private equity investment funds have different characteristics and will have slightly different work processes, but they are basically the same.

1. Finding items

An important basis for the success of private equity investment is how to obtain good projects. This is also the most direct test of the ability of fund managers. Each manager has its own professional research industry, and a more detailed survey of industry companies is found One way for good projects. In addition, contacts with senior management of various companies and extensive social networks are also one of the sources of outstanding projects. Various professional service agencies such as investment banks, accounting firms and law firms may provide many valuable services. information. Of course, the most direct way is usually to get a business plan submitted directly by the project owner. After obtaining relevant information, the private equity investment company will contact the target company to express investment interest, and if the other party is also interested, a preliminary evaluation can be performed.

2. Preliminary assessment

After the project manager has claimed the project, the preliminary judgment of the project should normally be completed within a short period of time under normal circumstances. During the initial judgment phase, the project manager will focus on the following aspects: registered capital and approximate equity structure (which can be ignored if the company is not established during the seed period), the development of the industry in which it operates, the competitiveness of major products or the characteristics of the profit model, the general operating conditions of the previous year, Initial financing intentions and other business conditions that help the project manager judge the value of the project investment. Preliminary judgment is the basis for further discussions with the company's management and due diligence. During the initial evaluation process, it is necessary to communicate with the target company's customers, suppliers and even competitors, and refer to the research reports of other companies as much as possible. Through these efforts, private equity investment companies will have a deeper understanding of major concerns such as industry trends and business growth points of investment targets.

3 Due diligence

After passing the preliminary assessment, the investment manager will submit a Project Proposal, and the project process has also entered the due diligence stage. Because the success of investment activities will directly affect the future development of the investing and financing companies, investors must clearly understand the details of the target company when making decisions, including the target company s operating status, legal status, and financial status. The purpose of due diligence is threefold: to find problems, to find value, and to verify the information provided by financing companies.

At this stage, in addition to hiring an accounting firm to verify the financial data of the target company, check the company's management information system, and carry out audit work, the investment manager will also carefully study the technology, market potential and scale of the target company, and the management team. Appraisal. This process includes engaging with potential customers, consulting with industry experts and holding meetings with management teams, and conducting audit assessments of assets. It may also include talking to corporate creditors, customers, and related personnel, such as former employees, whose opinions will help investment agencies draw conclusions about corporate risk.

4 Design investment plan

After due diligence, the project manager should form a research report and investment proposal proposal, and provide financial opinions and audit reports. The investment plan includes valuation and pricing, board seats, veto and other corporate governance issues, exit strategies, and determining the list of contract terms. Due to the different starting points and interests of private equity investment funds and project companies, the two parties often have differences in the negotiation of the valuation and the list of contract terms. The technical requirements for resolving the differences are high and negotiating skills and the assistance of accountants and lawyers are required.

5. Transaction Construction and Management

Investors generally do not inject all investments at one time, but rather adopt a staged investment method. Each investment is based on the premise that the company meets the pre-set goals, which constitutes an agreement oversight of the company. This is a necessary means to reduce risk, but it also increases investor costs. In this process, different investors choose different supervision methods, including adopting reporting systems, monitoring systems, participating in major decision-making, and providing strategic guidance. In addition, investors will also use their networks and channels to help companies enter new markets and find strategic partners. Increase synergies and reduce costs to increase revenue.

6. Project exit

The withdrawal of private equity investment means that the fund manager sells the equity of the invested enterprise it holds in the market to recover the investment and realize the investment income. The exit of the private equity investment fund is the last link in the private equity investment link, which is related to the recovery of its investment and the realization of value-added. The purpose of private equity investment is to obtain high returns, and whether the exit channel is smooth is an important issue related to the success of private equity investment. Therefore, the exit strategy is a factor that private equity investment funders need to pay attention to when they start to screen companies.

From the beginning of the project search to the end of the exit project, complete the entire process of a private equity investment project. In real life, investment institutions may run several projects at the same time, but basically each project goes through the above processes.

Private equity investment is a high-yield investment method. High-yield is accompanied by high-risk. With the continuous development of the private equity investment industry, many effective risk control methods have been formed.

(1) Contract constraint mechanism

It is agreed in advance that the responsibilities and obligations of all parties are legally effective risk aversion measures that all commercial activities will take. In order to prevent the company's actions that are not favorable to the investors and protect the interests of the investors, the investors will elaborate various clauses in the contract, such as positive and negative clauses, conditions for adjusting the proportion of shares, clauses for remedies for breach of contract, and priority for additional investment. Rights clauses, etc.

(2) Segment investment

Segmented investment refers to private equity investment funds to effectively control risks and avoid waste of funds by companies, and to conduct segmented control of investment progress, only provide funds necessary to ensure that the company develops to the next stage, and reserve the right and priority to abandon additional investments Purchase of the right to issue shares for additional financing of the enterprise. If the company fails to reach the expected level of profitability, the investment ratio in the next stage will be adjusted, which is a way to monitor the operation of the company and reduce operating risks.

(3) Share adjustment clause

As with other commercial activities, private equity investments can include share adjustment clauses in the contract to control risk. Share adjustment is an important risk control method in private equity investment. The adjustment of the conversion ratio between preference shares and ordinary shares will change the proportion of equity between investors and enterprises accordingly, in order to restrict the investees from making objective profit forecasts and formulating reality. Performance goals, while also motivating corporate managers to be diligent and responsible, and pursue the maximum growth of the enterprise, so as to control investment risks.

(4) Composite securities instruments

Composite securities instruments usually include convertible preferred stocks, convertible bonds, and subscribeable bonds, which combine the advantages of debt investment and common stock equity investment, which can effectively protect the interests of investors and share corporate growth.

1. Private equity investment helps reduce transaction costs for investors and improves investment efficiency

Modern economics

In the ten years from 2001 to 2011, China's entrepreneurial ecosystem has continuously changed, and various preferential policies have inspired the combination of entrepreneurs and capital; the private equity investment market has been directly affected by policies, the threshold for raising funds has been continuously opened, and investment space has gradually been released The exit channels are more smooth, and as securities companies, insurance companies, etc. have been approved to enter the PE market, the private equity investment industry has become the most active component of the Chinese economy. In the ten years from 2001 to 2011, in addition to gradually getting on track in terms of policies and regulations, the most noticeable development of China's private equity investment industry is the rapid growth of the market size. Whether it is fund raising, investment or exit, the Chinese PE market has shown The situation of rapid expansion has even led to the madness of "National PE". Looking at the current situation of China's private equity investment market, China is also at a critical period of transition from quantity to quality. The sustained and rapid growth of the Chinese economy has made China the most active private equity investment market in Asia, and the next decade has been recognized as the golden decade for the rapid development of China's private equity investment. ^[2]

In 2011, the number of large-scale private equity investment transactions (a single transaction value of more than 10 million US dollars) reached 437, an increase of 18% year-on-year, a record high. The scale of private equity fund transactions has also continued to increase. Compared with 47 transactions in 2010, a total of 50 transactions in 2011 had a transaction value of more than US $ 100 million, with a total transaction value of US $ 20 billion, a year-on-year increase of 33%. The total amount of private equity fund transactions disclosed reached US $ 33 billion, a record high. Since 2011, China's economic development has clarified the acceleration of economic structural adjustment and the transformation of development methods. However, due to the long-term pressure of high inflation and the tightening of credit policies, a considerable number of companies, especially small and medium-sized enterprises and high-tech companies, are facing rapid development and difficult financing, which provides an excellent opportunity for direct financing. Development opportunities. Facing the complicated internal and external environment and situation, China's equity investment fund industry should fully analyze the new changes and new features of the domestic and international economic situation, seize and use the important strategic opportunity period of China's development, and promote China's equity investment funds. Rapid and healthy development of the industry. ^[2]

In 2012, with the decline in investment yields, the attractiveness of the PE market to investors declined significantly. In the third quarter, a total of 45 domestic private equity investment funds completed the fundraising, a year-on-year decrease of 47.1%, a total of US $ 2.669 billion, a year-on-year decrease of 79.3%; the average fund raised by a single fund was approximately US $ 59.31 million, the lowest since 2010. In terms of investment, under the background of the domestic macroeconomic downward pressure, the financial data of some unlisted companies are no longer dazzling, and it is becoming more and more difficult to make money solely on the growth of the project, which has also led to the slowdown of PE institutions. Investment footsteps. Judging from the investment situation, the total investment in the PE industry reached a high of 10.563 billion US dollars in the second quarter of 2011, and then showed a significant decline; the total number of investment cases also fell for four consecutive quarters, a fall of 56.1%. In the third quarter of 2012, the PE market only completed 94 investment transactions, a significant drop of 56.1% year-on-year and a decrease of 21.0% month-on-month. It was the first time since the second quarter of 2010 that it had fallen below 100. At the same time, it is becoming more difficult for PE investments to exit through IPOs. Today, IPO is still the main channel for PE institutions in China to withdraw. From the fourth quarter of 2009 to the fourth quarter of 2010, China's corporate IPOs experienced a "honeymoon period" of more than a year. In the fourth quarter of 2010, the number of domestic and overseas IPO listed companies supported by VC / PE reached 91, the highest value since the international financial crisis. However, from the first quarter of 2011 to 2012, the number of IPOs of Chinese companies has shown a significant downward trend. ^[2]

Private equity investment drives entrepreneurial development

After entering the new century, China's thriving economy has increasingly attracted Chinese students studying abroad to return to China for entrepreneurship and development. A high-tech project, a small entrepreneurial team, and a small startup capital. This is the situation when most returnees start their businesses. Not to mention that Internet companies such as Baidu and Sohu are communication companies like UT Starcom. At the beginning of their business, they were just three or two people with seven or eight guns. However, because of the continuous financing of venture capital funds (a form of private equity investment funds), these companies finally stand out from a large number of similar.

Overseas students' venture capital career has experienced the development of nearly ten years, and the scale has grown. Today, there are more than 40 Chinese companies listed on the NASDAQ, with a total market value of more than 30 billion U.S. dollars. Among the Chinese companies listed on the NASDAQ, most of the executives have overseas education background; Chinese companies are promoting the development of new technologies and traditional industries, creating a new model for companies to develop in China and raise funds overseas.

In addition, Chinese companies listed on NASDAQ have broken through the scope of Internet and high-tech companies. There are companies from multiple industries and fields landing on NASDAQ. In response, Xu Guangxun, Nasdaq China's chief representative, stated, "These companies are listed on NASDAQ, and the Chinese concepts they bring are also accepted by the international market. . This is undoubtedly a good thing for Chinese companies. Of the Chinese companies listed on Nasdaq, senior management mostly have a background of studying abroad. "

Take Beijing Zhongguancun Science and Technology Park as an example. Among the Chinese companies listed on the NASDAQ from Zhongguancun Science and Technology Park, there are many returnees. These returnee companies listed on the NASDAQ are expanding from promoting the development of domestic new economy, new technology, and the Internet to the development of China's traditional industries.

A group of overseas Chinese entrepreneurs represented by Baidu, Sina, Sohu, Ctrip, and Home Inns has brought back a large number of venture capital to China. This new financing method has greatly catalyzed the growth of SMEs. ^[2]