Private placement refers to the non-public issuance of shares by a listed company to a small number of qualified investors. Regulations require that the issuance targets should not exceed 10 people, and the issue price should not be lower than the average market price of the 20 transactions before the announcement. 90% of the shares cannot be transferred within 12 months of issuance (within 36 months of becoming a controlling shareholder or having actual control after subscription).

In the "Refinancing Management Measures" (Draft for Comments) launched by the China Securities Regulatory Commission in 2006, regarding non-public issuance, in addition to stipulating that the number of issuance objects shall not exceed 10 people, the issue price shall not be lower than 90% of the market price. There are no other conditions except that the shares cannot be transferred within 12 months of issuance (36 months if subscribed by major shareholders), the purpose of raising funds must comply with national industrial policies, and the listed company and its executives must not commit any violations. This means that, There is no profit requirement for non-public issuance, and even loss-making companies can apply for issuance.

Private placement includes two situations: one is when large investors (such as foreign capital) want to become strategic shareholders or even controlling shareholders of listed companies. There were no private placements in the past. They usually had to purchase shares from major shareholders (for example, Morgan Stanley and International Finance Corporation jointly acquired 14.33% of Conch Cement's shares). The money from new shareholders went into the pockets of major shareholders. Strengthening listed companies has little direct effect. The other is to acquire others through private placement of funds and quickly expand the scale.

Fixed-increase hedging

Fixed-increase hedging refers to using the combined positions of stock index futures to track and close the risk exposure on the stock side in real time to achieve the purpose of maintaining or even increasing value.

As one of the important ways of equity refinancing, one of the characteristics of private placement that has attracted widespread attention from the outside world is that the price of the additional issuance often has a higher discount compared to the market price at the time of the additional issuance. The average discount rate for private placements conducted in cash since 2008 is 20.65%. However, according to our calculations, the 20.65% discount rate after the lifting of the ban only achieved an average return of 11.1%. The important reason is that the Shanghai Composite Index has dropped from more than 5,000 since 2008. Points fell below 3,000 points, and systemic risks eroded most of the profit margins from participating in private placements.

Hedging of private placements of individual stocks: We calculated 247 private placements of cash to institutional investors since 2008. The strategy after using equivalent hedging is better than the strategy without hedging, which is mainly reflected in the average return rising from 11.1% to 16.7%, and the proportion of profitable companies rising from 44.32% to 54.55%; on the other hand, the standard deviation of the overall return is from 0.354 dropped to 0.342, and the income was more stable. However, the method of using stock index futures to hedge private placement of a single stock is not perfect. There are shortcomings such as low correlation between a single stock and stock index futures and unstable beta.

Hedging during the private placement of multiple stocks: We designed a case of using 200 million funds to participate in the private placement on a rolling basis, using four strategies: equal value hedging, beta hedging, timing hedging, and no hedging. Strategy. The final results showed that timing hedging achieved the best returns, followed by no hedging strategy, equal value hedging and beta hedging were the worst; but on the other hand, the risks of equal value hedging and beta hedging were lower than the former two.

Conclusion: Using stock index futures for hedging is a better way for institutional investors to lock in returns and reduce risks when participating in private placements. We recommend that investors selectively participate in multiple private placement stocks, build a spot portfolio to diversify non-systemic risks, and use stock index futures to hedge systemic risks and lock in the gains from private placements.