According to the contract theory of modern economics, transaction, as the basic unit of economic activities, has expenses or costs. The so-called transaction cost is "the price or cost that the economic system needs to pay". As far as investment activities are concerned, huge risks and uncertainties are often accompanied, which makes investors pay the cost of finding, evaluating, verifying and supervising. As a collective investment method, private equity investment fund can share transaction costs among many investors, so that investors can share economies of scale and scope. Compared with direct investment, investors can get the benefits from the transaction cost sharing mechanism by using private equity investment, which is the fundamental reason for the existence of private equity investment.
2. Private equity investment is conducive to solving the problems of adverse selection and moral hazard caused by information asymmetry.
There is a serious information asymmetry in private equity investment activities, which runs through every link from project selection before investment to supervision and control after investment. As a professional investment intermediary, private equity investment fund can effectively solve the problems of adverse selection and moral hazard caused by information asymmetry. First of all, the managers of private equity investment funds are usually composed of industrial and financial elites with considerable professional knowledge and experience in specific industries. They have strong computing ability and cognitive ability in a complex and uncertain business environment, can have a keen insight into the risk probability distribution of investment projects, and have strong information search, processing, processing and analysis capabilities in the preliminary investigation and management of investment projects. As a special outsider, they can minimize information asymmetry and prevent adverse selection. Secondly, the institutional arrangement of private equity investment is also conducive to solving the moral hazard caused by information asymmetry. The most common organizational form of private equity investment fund is limited partnership company, which is usually composed of general partners and limited partners. As a general partner, once the investment project agreement is signed, the senior managers will actively participate in the management of the enterprise as shareholders, and control and support the development of the investment enterprise. Therefore, compared with the shareholders of ordinary companies, the shareholders of private equity investment companies can more accurately understand the advantages and potential problems of enterprises, provide a series of management support and consulting services for enterprises, and realize the maximum value-added and benefit sharing of enterprises. In this way, the institutional arrangement of private equity investment effectively solves the principal-agent problem, which is another reason for the rapid development of private equity investment.
3. Private equity investment can give full play to the advantages of risk management and provide added value.
Modern financial economics believes that portfolio can reduce the non-systematic risk of economic activities, thus becoming an important means of risk management. But for a single investor, diversification will bring additional costs to investors. For example, investors may have to reduce the proportion of investment in an enterprise, thus weakening their control over the enterprise, or they will have to spend more energy and cost to supervise and manage different investment projects. The private equity investment fund adopts the way of collective investment, and spreads risks by investing in projects at different stages and projects in different industries. Therefore, investors can not only enjoy the benefits of cost sharing, but also share the benefits of diversifying investment risks through private equity investment funds as investment intermediaries, thus gaining value.