PE investment has an inherent investment income cycle. Generally speaking, the 3~5 years after the establishment of PE fund belong to the investment period. During this period, the task of PE fund is to find and discover investment opportunities, and then conduct business negotiations with the invested enterprises, form investment intentions, and sign relevant legal documents. , that is, to complete the project investment. Therefore, during the investment period, PE funds need to pay management fees, various investment costs, and even occasionally need to give up or quit the invested enterprises with poor performance. At the same time, the project enterprises invested by PE funds have generally not seen the return on investment. Therefore, during this period, the income of PE funds will generally be negative, that is, the cash outflow will continue to be greater than the cash inflow.
After that, with the private equity fund's investment projects beginning to withdraw, that is, the invested enterprises have IPO (initial public offering), mergers and acquisitions, liquidation and other capital operations, PE funds began to show real income, and the fund's expenditure-income curve began to form a trend and change that gradually extended upward. Moreover, after the investment period, the main task of PE fund is post-investment management and project withdrawal. Generally speaking, what is the management fee of the fund during this period? It should be lower than the management fee of the investment period, and even in the last few years of PE's existence, it may no longer be necessary to pay the management fee to the management company. At the same time, with the growth of PE fund duration, more and more invested enterprises withdraw from the fund, and the fund income also shows an accelerated growth trend, that is, this "J curve" will be more "steep".
Of course, if it is influenced by the macroeconomic environment, or the PE fund's own management ability is insufficient and the operation effect is not good, then from the chart of "J curve", we will see that the "J curve" is not very steep, but rather "flat". This generally shows that the performance of private equity funds is not ideal, the net cash inflow of funds is relatively limited, and the income obtained by LP is relatively low.
From the above introduction, we can see that the so-called "J-curve influence" means that the cash outflow of PE funds continues to be greater than the cash inflow before maturity, and LP can hardly get any income. On the contrary, LP needs to wait three to five years to get the benefits of PE funds. In order to minimize this "J-curve effect" and make LP gain the benefits of PE funds faster, fund managers can buy some relatively mature private equity investment shares or relatively mature invested enterprises invested by private equity funds through the PE secondary market, so as to adjust the term of portfolio companies held by fund managers as a whole and make the overall "J-curve" of portfolio rise as soon as possible, that is, generate benefits as soon as possible. As Capital Dynamics, a famous American PE investment institution, said, it generally takes five years for private equity funds to complete 80% of the investment promised by LP. Therefore, buying the investment share of mature private equity funds can accelerate the realization of the first income of funds and improve the liquidity of the overall portfolio investment company, which is also the reason why private equity secondary market funds can realize the fund income relatively early. ?
It can be seen that the "J-curve effect" of private equity funds makes it a realistic need for private equity funds to optimize their asset structure, while the PE secondary market enables private equity funds to optimize their asset structure by purchasing shares of mature funds. Of course, direct purchase of private equity fund shares through PE secondary market can also be a shortcut for investors to enter PE assets, so that investors without any PE assets can realize the optimal allocation of asset structure as a whole.
(B) to tap market opportunities
Inefficiency is an institutional feature of private equity secondary market, which has not been well solved from its birth in the world to today. Of course, it is precisely because of this institutional problem that there are rare investment opportunities in the PE secondary market. The so-called "inefficiency" means that the PE secondary market is non-public, and the trading information and product price evaluation of this market are in a state of private and private communication. Information asymmetry makes this market contain undervalued goods, that is, there are high-quality investment opportunities. Moreover, this market belongs to a typical "buyer's market", that is, the relationship between supply and demand in this market is oversupply, which will inevitably lead to the phenomenon that the goods in this market are undervalued. To this end, Taobao in this market will have the opportunity to harvest "good quality and low price" products, so that "Taobao" can obtain greater investment income than ordinary private equity funds. ? This is also the cause of the fund that focuses on the operation of the private secondary market.
In addition, because the PE secondary market is a buyer's market, sellers are often willing to bear certain discounts or other preferential conditions in order to sell their fund shares, and they are also willing to accept complicated trading arrangements to further reduce the investment risk of buyers. Therefore, investment in PE secondary market can often achieve lower risk and higher return.
According to the statistics of PREQIN, a famous American private equity data provider, the average internal rate of return (IRR) of private secondary market funds established between 2000 and 2005 is between 20% and 30%, which is higher than that of primary market funds (ordinary private equity funds). The survey released by Probitas Partners, a famous American private equity fund management company, on June 5438+065438+ 10, 2009 shows that … more than 50% of investors think that the IRR of the secondary market funds operated by the secondary market fund managers will exceed 20% in the first quarter.
(3) Asset purchase is clear.
The characteristic of private equity fund is that investors invest to set up a fund, and then the fund is looking for projects and making investments. Therefore, in ordinary private equity funds, when investors actually take out money, it is not clear what projects the fund can invest in the future. They can only rely on the professional judgment of fund managers to realize the investment in specific projects in the future.
On the contrary, when investors invest in the private secondary market, generally speaking, they are very clear about the invested enterprises at the moment they take out the money, and then they can judge the future growth and current value of these invested enterprises by themselves or through other professionals, so as to determine whether the investment is reasonable and feasible. This feature of the private equity secondary market enables the investment in the secondary market to further prevent the occurrence of investment risks, because no matter how excellent and outstanding the investment analysis and decision-making ability of fund managers is, they can only estimate and predict the future development of the invested enterprise at the beginning of investment, and this estimation and prediction will eventually be biased or even fallacious with the actual operation of the invested enterprise. Private equity investment in the secondary market can prevent this deviation as much as possible, because when investors buy the investment shares of funds in the secondary market, the rights and interests corresponding to these investment shares have been realistically reflected in the invested enterprises.
(d) Establish GP relationship.
In foreign mature private equity countries, excellent fund managers are a scarce resource, that is, most investors want to hand over their funds to these excellent fund managers for management, but the amount of assets that excellent fund managers can manage is limited. Therefore, this inherent relationship between supply and demand will lead to "fund manager market", that is, excellent fund managers are in an advantageous position, and investors all hope to establish business ties with these excellent fund managers.
The private secondary market provides these investors with a way and a bridge to establish cooperative relations with excellent fund managers, that is, investors first purchase the assets that these excellent fund managers need to sell or the capital contribution share in the funds managed by the managers through the secondary market, thus establishing cooperative relations between the two sides, and then through continuous understanding and familiarity, these investors can have the opportunity to participate in other funds managed by these fund managers in the future. (A) ease the financial pressure
Since private equity investment is a long-term investment, LP may be financially capable of meeting the requirements in the Limited Partnership Agreement of Private Equity Fund and other relevant legal documents at the beginning of the establishment of private equity funds and fulfilling its promised capital contribution obligations. However, in the specific operation process after the establishment of private equity fund, LP may lose its ability to fulfill its original investment commitment due to changes in social and economic conditions or changes in its own situation. In this case, LP may want to use the secondary market to realize its share of capital contribution, thus solving the problem of capital pressure.
Of course, this category can also be subdivided into the following two situations:
First, there are serious problems in the economic situation of LP itself. It needs to sell its fund share to get cash to solve its economic difficulties, that is, LP has become a so-called "embarrassing seller". This situation is the most common situation in which LP uses the secondary market to obtain liquidity.
Second, LP can't actually fulfill the promise that is about to expire. In order to avoid default, it must transfer the unfunded commitment or unfunded commitment together with the share of the funded fund. In the field of private equity funds, there is often an application of over-commitment strategy, that is, at the beginning of the establishment of private equity funds, LP will intentionally subscribe for the promised capital contribution beyond its normal payment capacity, and then LP will pay its commitment to the fund with the allocation of the funds it invests in and other relatively mature private equity funds. Over-raising strategy is even considered by some private equity investors as a method to obtain ideal target income. ? However, when the external economic environment is improving, LP may continue to get considerable returns, so that LP can fulfill its remaining investment commitments by using the returns of this fund and other funds, and realize this kind of funding arrangement similar to "robbing Peter to pay Paul". However, as long as the overall socio-economic situation declines or encounters various unexpected problems, LP may not be able to fulfill its investment commitment to the fund, because the return of the fund and other funds may be reduced or even not returned for a long time. In this case, LP needs to sell the share that has not fulfilled its capital contribution obligation separately, or sell the share that has not fulfilled its capital contribution obligation together with the fund share that has been contributed to other investors with the ability to pay.
(2) Actively manage assets.
If the LP of private equity fund is a mature investor, then private equity investment may only be an investment asset of LP, and LP may need a series of active portfolio management to achieve the goal of maximizing the overall asset return of LP. The operation of active asset management often needs the cooperation and assistance of private equity secondary market. This positive asset management method can be reflected in the following aspects:
First, when a private equity fund has achieved good performance, that is, the value of the fund share may have been relatively high at this time, in order to lock in the current performance of the fund? In order to prevent the future decline of fund performance and affect the final investment income, LP will hope to adopt the strategy of "taking it as soon as possible", collect the immediate and quite satisfactory income as soon as possible, and at the same time hand over the future appreciation expectation or impairment risk contained in the fund shares held to the buyers.
Secondly, a mature LP may invest in several private equity funds of several GPs at the same time, and then LP will regularly analyze the situation of these invested funds, so as to take some positive measures to adjust its investment share in these invested funds, in order to achieve the purpose of obtaining the best investment income, that is, LP needs to rebalance the investment companies within the PE asset category. For example, LP may make adjustments and arrangements within the scope of all PE assets according to the geographical location, industry field, investment year, changes in team management personnel, asset categories and other factors of the projects invested by the funds, combined with the operational effects and macroeconomic situation of each fund. One form or way of this arrangement is to transfer non-core assets through the secondary market.
Thirdly, in addition to adjusting PE assets to achieve the best investment effect, LP may also need to dynamically adjust all asset categories it invests in, so that the ratio of PE assets to other assets always conforms to the established investment rules, thus ensuring that it can achieve the established expected returns to the greatest extent. The so-called "denominator effect" is to describe this phenomenon of asset changes.
Specifically, institutional investors who participate in PE investment generally have their own strict asset allocation rules. For example, they may allocate 5% of their assets to private equity funds, 60% to publicly issued stocks and 65,438+00% to real estate. If the valuation of publicly traded securities drops sharply due to the sharp changes in the market, then the investor's entire portfolio, that is, the denominator, will begin to shrink. At the same time, PE investment generally remains unchanged. Of course, it doesn't mean that its intrinsic value remains unchanged, but because they are not publicly traded, some LPs only revalue PE assets regularly, while others don't revalue PE assets at all. As a result, the allocation ratio of the original 5% private equity investment may suddenly rise to 20% or even higher. For those LPs that need to abide by the pre-set asset allocation rules, that is, LPs that need to deal with and deal with this denominator effect, there is only one effective measure or choice, that is, selling some PE assets, even if this asset treatment generally causes LP to suffer certain losses, such as discount or price reduction. For example, the California Pension Plan sold 30% of PE assets at 20 10, and the Harvard Endowment Fund was also reported to have sold1500 million US dollars of private equity funds. This way of dealing with denominator effect is generally realized through private secondary market.
(3) Disposal of problem funds
If LP finds that the managers of the fund companies it invests in violate the contents of the Limited Partnership Agreement and other legal documents or other illegal acts when operating the funds, LP will want to withdraw from the problem fund in order to safeguard its own interests and prevent or reduce losses, and one of the ways to withdraw from the problem fund is to transfer LP's share of investment through the PE secondary market.
In addition, even if a fund invested by LP may not be in breach of contract or illegal, if the actual operation effect of the fund is not ideal and its operation ability is poor compared with other similar funds, LP may want to quit the fund at this time in order to concentrate its capital on a few fund managers with strong operation ability. This can not only increase lp's fund merger income ability, but also help LP to track and maintain the limited fund manager relationship, thus facilitating control and communication and reducing the overall management cost and related management expenses of the fund.
(D) to adapt to regulatory changes
Changes in laws, regulations or industry rules that regulate and restrict the operation of private equity funds, or updates or changes in legal normative documents that regulate and restrict the daily operation of investors, may affect the number and proportion of private equity funds held by LP. In order to meet these new regulatory requirements, LP may need to reduce the proportion of PE assets held, so it needs to transfer PE funds in its hands through the PE secondary market.