For ordinary investors in Chinese mainland, private equity investment funds entered the investors' field of vision on a large scale on 20 10. Prior to this, only a very small number of professional investors participated in this industry. Even today, there are still a few investors who can't correctly distinguish the concepts of private equity investment funds, private equity investment funds and hedge funds.

At a recent communication meeting, we were also asked by investors such a question: "How is the stop-loss line of this fund (private equity investment fund) set?" Investors are unfamiliar with this issue because of the characteristics of the private equity investment industry itself, such as non-public transactions and high requirements for information confidentiality. For the contracts of private equity investment funds, many investors are "discouraged".

For ordinary investors, there are three main reasons why the fund contract of private equity investment fund is difficult to read: the contract is too long, the cross-checking relationship between the terms is too complicated, and the logic of private equity investment is not understood.

This paper hopes to help readers "read thin" the contract by combing and summarizing the basic structure and ideas of private equity investment fund contracts, that is, to master the core terms and elements of private equity investment funds more effectively and quickly.

In order to master the basic framework and ideas of the private equity investment fund contract quickly, it is necessary to cross-read the introduction materials of the fund and the agreement text. The introduction materials are often the introduction of the basic investment logic, fund structure and management team of the fund, while the agreement is more about the scope of powers and responsibilities of all parties. The two are interrelated, but the contents are not completely coincident, and to a certain extent, the introduction materials are written to explain the important information that cannot be included in the contract.

Specifically, we can divide reading the contract into three steps:

1 Understand the basic investment logic of basic funds.

Many times, this step is the most critical, core and easily overlooked step in reading the contract. As an equity investment fund, investors will not understand why some funds have such a short term (2-3 years) and some funds have such a long term (8- 10 years and above). I don't understand why some fund contracts make investment projects very specific and clear, and some fund contracts simply can't see the names of specific projects; I don't understand why some funds have share repurchase arrangements in their agreements, while others don't see specific agreements such as the withdrawal of funds. Some investors even use the differences in the above terms to judge the quality of the underlying fund, which is a common and very harmful "common sense".

The reality is that in the field of private equity investment, the real common sense is that different investment strategies correspond to different contract frameworks, and the arrangement of contract frameworks is not directly related to the quality of funds.

The basic logic of private equity investment is that in the private equity market, investment professional institutions understand or predict the trends and opportunities in the market that other investors have not yet understood or can't grasp through long-term research and ecological circle construction, so as to invest in such opportunities and profit from them.

Under normal circumstances, it is impossible for private equity investment funds to elaborate their own pre-judgment and research results in the agreement or fundraising materials, and usually they will not make a clear agreement on the target to be invested. After all, this is the "secret" weapon of the fund, and it is also the foundation on which the fund depends.

Accordingly, in private equity funds, two factors are absolutely necessary to transform the "pre-judgment" formed by research into investment income. One important factor is "time". Since it is a "pre-judgment", the arrival of reality will inevitably require a period of waiting or contribution, which is why most private equity investment funds need to set a long closed period, so that the value of innovative enterprises invested by funds can have enough time to "ferment" and eventually lead to a good wine.

Another important factor is "dispersion", because it is "pre-judgment", and it is bound to face the risk that the trend of pre-judgment will not come (or will not come in a pre-judgment way). In order to reduce the risk of this "pre-judgment" as much as possible, private equity investment funds need to diversify their investments. Some funds invest in different sub-sectors, and some funds diversify their risks by investing in companies at different stages. This basic investment logic determines that when the fund is raised (under normal circumstances), it will not stipulate specific investment projects in the agreement, nor will it make arrangements for fund repurchase or specific projects.

For specific private equity investment funds, different funds correspond to different investment strategies, and correspondingly, they will also be reflected in the design of terms to a certain extent. Investors should first understand the basic strategic framework of the underlying fund and read the agreement based on the corresponding strategic framework, so as to achieve a relatively efficient understanding.

It is not difficult to understand the basic strategy of the underlying fund, as long as we grasp its basic investment scope, investment stage and expected investment exit mode (these contents may not be directly written into the contract, but will be explained in the fund introduction document). Reading the agreement directly without strategy is often irrelevant and cannot correctly understand the structure and terms of the agreement.

2. On the basis of understanding the investment logic of funds, understand the investment structure of basic funds.

The difference of fund investment structure may lead to the difference of fee terms, investor voting mechanism and fund term. For example, investors need to know whether the fund subject they invest in is a parent fund or a direct investment fund; Whether it is a main fund or a linked fund.

Different fundraisers of the same fund may have differences in terms of fees and fund term. For example, the structure of main fund+linked fund is also adopted. Some foundations arrange expenses in the main fund, and the linked fund level does not charge other fees except the necessary operating expenses; However, some foundations adopt the structure that the main fund and the linked fund charge separately.

Accordingly, investors who invest in the main fund level and those who invest in the linked fund level will see certain differences in the fund contract. Investors need to know the structure of the funds they invest in, so as to accurately understand the specific conditions of relevant terms, rights and responsibilities and expenses.

On the basis of understanding the fund strategy and structure, read the contract structure separately.

Generally speaking, in the fund contract, for investors, the content that needs to be focused on can be divided into four parts:

1. Basic information of the fund, mainly including the investment scope, investment objectives, term (including the setting of investment period and extension period), payment method and time requirements of the fund. One of the most important things that investors easily ignore is the "interpretation" of funds. Generally speaking, the Interpretation will focus on providing clues to the key words of fund contracts, which is very helpful for investors to quickly query the essential information and key terms of funds.

2. The fund's expenses and income distribution order mainly includes the fund's operating expenses range and upper limit agreement (if any), custody fee (if any), follow-up investor compensation price difference and distribution mechanism, management fee collection and income distribution order of the fund. Among them, the terms of income distribution order of equity investment funds may be more changeable and complicated than other types of funds in the market. This situation is determined by the operating mechanism of the equity investment fund itself, and it is difficult to discuss the specific distribution order here. However, it is a fact easily overlooked by investors that even the same distribution order, different investment strategies, different investment stages and different investment styles may have completely different final actual distribution effects.

3. The agreement on breach of contract, including the breach clauses of fund investors and fund managers, and pay attention to the breach clauses of fund investors. This is to understand under what circumstances investors will constitute a breach of contract, what kind of punishment they will face and the follow-up procedures; Paying attention to the default clauses of fund managers (including key personnel clauses) is to understand under what circumstances and by what means investors can change fund managers or require the fund to be liquidated in advance.

4. The terms of obtaining the fund report, including the time of the annual report of the fund, the frequency of information disclosure and the content framework. The contents of these clauses are standardized and easy to understand.

The clauses in the above four parts are not all of the contract, and the clauses in the contract are mainly around these core parts. Mastering this core content framework can help investors read contracts purposefully and improve reading efficiency.

The above is a summary of our reading ideas and methods for fund agreements, hoping to benefit readers. This article repeatedly mentions "reading the contract quickly and effectively", which is by no means intended to provide a "shortcut" for reading the contract, but only hopes to provide a framework and guidance for investors who read the contract for the first time and help investors grasp the main points of contract reading.

To fully understand the contract, investors need to combine the contents of the contract with the information outside the contract, cross-read and check, not just read through the contract.