Classification of private equity investment
Generalized private debt equity
In a broad sense, PE refers to the equity investment covering all stages before the initial public offering of an enterprise, that is, the investment made by the enterprise in each stage of seed stage, initial stage, development stage, expansion stage, maturity stage and Pre-IPO. Related capital can be divided into venture capital, development capital, buyout/buy fund, mezzanine capital and working capital according to the investment stage. Pre-IPO capital (such as bridge financing) and others, such as private investment of public equity (PIPE), differential debt of non-performing loans and real estate investment.
Narrow sense private debt rights and interests
In a narrow sense, PE mainly refers to the private equity investment part of mature enterprises that have formed a certain scale and generated stable cash flow, mainly refers to the private equity investment part in the later stage of venture capital, in which M&A funds and mezzanine capital account for the largest part of capital scale. In China, PE mainly refers to this kind of investment.
Edit the characteristics of private equity investment in this paragraph.
Brief characteristics
1. In terms of fund raising, it is mainly raised by a few institutional investors or individuals by private placement, and its sales and redemption are carried out by the fund manager through private consultation with investors. In addition, the investment method is also carried out in the form of private placement, which rarely involves the operation of the open market and generally does not need to disclose the details of the transaction. 2. More equity investment is adopted, and debt investment is rarely involved. Therefore, PE investment institutions enjoy certain voting rights in the decision-making management of the invested enterprises. Reflected in investment instruments, common stock or transferable preferred stock and convertible bonds are commonly used. 3. Generally investing in private companies, that is, unlisted companies, and rarely investing in publicly issued companies, will not involve the obligation of tender offer. 4. It is more inclined to a molding enterprise that has formed a certain scale and generated stable cash flow, which is obviously different from VC. 5. The investment period is long, generally reaching 3 to 5 years or longer, which belongs to medium and long-term investment. 6. The liquidity is poor, and there is no ready-made market for the transferor of a non-listed company to directly reach a deal with the buyer. 7. There are many sources of funds, such as wealthy individuals, venture funds, leveraged M&A funds, strategic investors, pension funds and insurance companies. 8.PE investment institutions mostly adopt limited partnership system, which has good investment management efficiency and avoids the disadvantages of repeated taxation. 9. Diversification of investment exit channels, including IPO, transaction sale and merger and acquisition; A), the target company management repurchase, etc.
Elaboration of characteristics
Chinese translation includes private equity investment, private capital investment, industrial investment fund, private equity financing and direct equity investment. These translations all reflect the following characteristics of private equity investment to a certain extent: ● Equity investment in unlisted companies is regarded as long-term investment because of poor liquidity, so investors will demand higher returns than those in the open market ● There is no listed transaction, so there is no ready-made market for the transferor and buyer of unlisted companies to directly reach a transaction. Investors with money to invest and enterprises that need to invest must rely on personal relationships, industry associations or intermediaries to find each other. There are many sources of funds, such as wealthy individuals, venture funds, leveraged buyout funds, strategic investors, pension funds, insurance companies, etc. ● There are three main ways of return on investment: public offering, sale or merger, and enterprise capital reorganization. For attracting enterprises, private equity financing not only has the advantages of long investment cycle and increased capital, but also if the investors are large-scale well-known enterprises or well-known financial institutions, their fame and resources will also help enterprises to raise their listed stock prices and improve the performance of the secondary market in the future. Secondly, compared with the volatile and unpredictable open market, the equity investment capital market is a more stable source of financing. Third, in the process of introducing private equity investment, competitors can be kept secret, because information disclosure is limited to investors, not as public as listing, which is very important. Enterprises can choose financial investors or strategic investors to cooperate, but enterprises should understand the characteristics, advantages and disadvantages of financial investors and strategic investors, as well as their different requirements for investment targets, and choose suitable investors according to their own conditions. Strategic investors-enterprises in the same industry or related industries that attract foreign investment. If the attracting enterprises want to get the support of investors in corporate management or technology while reducing financial risks, they usually choose strategic investors. This will help to improve the company's credit reliability and position in the industry, and at the same time, it can obtain the complementarity of technology, products, upstream and downstream business or other aspects, thus improving the company's profitability and profitability. Moreover, when enterprises need further funds in the future, strategic investors have the ability to provide further funds. The investment period of strategic investors is usually longer than that of financial investors, because any equity investment made by strategic investors must conform to their overall development strategy, out of comprehensive consideration of production, cost, market and other aspects, rather than just focusing on short-term financial returns. For example, many multinational companies have made industrial investments in China in recent years because they have taken a fancy to China's market, research resources and cheap labor costs. Therefore, strategic investors will have greater control over the company, have more requirements for the proportion of the board of directors, and will participate more in management, which may increase the difficulty of running-in between management and corporate culture. One risk that foreign-invested enterprises need to pay attention to is that strategic investors may become potential competitors. If a multinational company shares several enterprises in China, it may be contrary to the long-term development strategy or goal of the foreign-funded enterprise to arrange its own products and markets or set up a wholly-owned enterprise for the overall consideration of the headquarters. In addition, strategic investors can also set up the "preemptive right" when the company is sold in the investment terms (that is, investors have the right to buy the shares to be transferred by the original shareholders under the same conditions) and other terms to protect their investment interests. Therefore, foreign-funded enterprises need to understand the real intentions of investors and use negotiation skills to strive for favorable conditions for long-term development. Financial investors refer to private equity investment funds. Funds are not necessarily industry experts. Some investment funds have industry tendencies and have rich industry experience and resources. Financial investors and strategic investors have different requirements for the invested enterprise in the following three aspects: ● Control over the company ● Importance of return on investment (relative to other long-term strategies such as market share) ● Requirements for withdrawal (duration and method) Most financial investors only contribute capital, generally do not participate in the daily management and operation of the enterprise, and are unlikely to become potential competitors, except for participating in major strategic decisions of the enterprise at the board level. Once investing, it is difficult for financial investors to control their own investment, so it is very important to choose investment objects with good management, high growth and reliable management team. In China, many foreign funds often ask themselves to appoint the chief financial officer of the joint venture company to ensure their understanding of the real financial situation of the enterprise. Financial investors pay attention to the medium-term (usually 3-5 years) return of investment and take listing as the main exit mechanism. Only in this way can the funds they manage be liquid. Therefore, when choosing investment targets, they will examine whether the performance of the company can meet the listing requirements after 3 to 5 years, which market its shareholding structure is suitable for listing, and their financial experience and contacts are also conducive to the company's future listing. Types of private equity investment funds-There are four types of private equity investment funds invested in China: one is specialized independent investment funds with diversified sources of funds. Second, investment funds under large diversified financial institutions. Both of these funds have the nature of trust, and their investors include pension funds, universities and institutions, wealthy individuals, insurance companies and so on. Interestingly, American investors prefer the first independent investment fund, thinking that their investment decisions are more independent, while the second fund may be interfered by the parent company; European investors prefer the second type of funds, thinking that they are safer because the parent company has a good reputation and sufficient capital. Third, after the promulgation of the Regulations on Sino-foreign Joint Venture Industrial Investment Funds this year, some newly established private equity investment funds. The fourth is the investment fund of large enterprises, whose investment serves the development strategy and portfolio of their group, and the funds come from within the group. Different sources of funds will affect the structure and management style of investment funds, because different funds need different investment purposes and strategies and have different risk tolerance.
Edit this investment operation process.
Project selection and feasibility verification
Due to the long-term and low liquidity of private equity investment, investors usually put forward the following requirements for investment targets in order to control risks: ● High-quality management is particularly important for financial investors who do not participate in enterprise management. ● At least 2 to 3 years of business record, huge potential market and potential growth, and convincing development strategy planning. What investors care about is the "growth" of profits. High growth brings high returns, so we are particularly concerned about the development planning of enterprises. ● Requirements of industry and enterprise scale (such as sales volume). Investors pay attention to different industries and scales, and financial investors will examine the significance of an investment to their portfolio from the perspective of portfolio diversification risk. Most private equity investors will not invest in high-risk industries such as real estate and industries they don't understand. ● Requirements for valuation and expected return on investment. Because it is not so easy to withdraw from the open market, private equity investors demand a higher expected return on investment, at least higher than the return on investment of their listed companies in the same industry, and expect to obtain a "China risk premium" for their investments in emerging markets such as China. A return on investment of 25-30% is usually required. ● The possibility of listing after 3-7 years, which is the main exit mechanism.
Legal investigation
Investors should also conduct legal investigations to find out whether the enterprise is involved in disputes or lawsuits, whether the property rights of land and real estate are complete, and the duration of trademark patent rights. Many foreign-funded enterprises are emerging enterprises, and there are often some legal problems. Both parties will gradually clean up and solve these problems in the project inspection.
Investment scheme design
The investment scheme design includes corporate governance issues such as valuation and pricing, board seats, veto power, exit strategy, determination of contract terms list and submission to the Investment Committee for approval. Due to the different starting points, interests and tax considerations of investors and investors, differences often arise in the negotiation of valuation and contract terms list. Solving these differences requires high technical requirements, not only negotiation skills, but also the assistance of accountants and lawyers.
Exit strategy
Exit strategy is a factor that investors are very concerned about when they start to screen enterprises, including listing, selling, stock repurchase, selling options and so on. Among them, listing is the exit mode with the highest return on investment, and the income source of listing is the profits and capital gains of enterprises. Because the domestic stock market is small, the listing cycle is long and it is difficult, many foreign foundations register a company overseas to control the joint venture company, so as to list overseas with overseas registered companies as the main body in the future.
manage
Statistics show that only 20% of private equity investment projects can bring rich returns to investors, and the rest are either loss-making or flat. Therefore, investors generally don't invest all at once, but invest in stages, and each investment is based on the premise that the enterprise reaches the preset goal. Implementing active and effective supervision is a necessary means to reduce investment risk, but it requires the investment of human and financial resources and will increase the cost of investors. Therefore, different foundations decide the appropriate degree of supervision, including adopting effective reporting system and monitoring system, participating in major decisions and giving strategic guidance. Investors will also use their networks and channels to help joint ventures enter new markets, find strategic partners to exert synergies, reduce costs and increase profits in other ways. In addition, in order to meet the requirements of future public listing or international mergers and acquisitions of foreign-funded enterprises, investors will help them establish appropriate management systems and legal frameworks. (Huaou International Securities Co., Ltd.)
Foreign system
In foreign countries, most financial investors invest in preferred shares (or convertible bonds), guarantee the minimum return on investment through fixed dividends agreed in advance, and have the right of distribution prior to ordinary shares in enterprise liquidation (the status of preferred shares is not clear in China's company law, so investors cannot invest in preferred shares). In addition, the common terms of foreign private equity financing also include put options and share conversion terms. The put option requires that if the investment promotion enterprise fails to go public at the agreed time, it must buy back the equity formed by the investment promotion at the agreed price, otherwise the investor has the right to sell the company, which will force the operator to work hard for listing. The conversion clause means that investors can convert preferred shares into common market results in a certain proportion when listing.
Edit the main organizational forms of private equity investment in this paragraph.
1, limited partnership
Limited partnership is the main organizational form of American private equity funds. On June 1 day, 2007, China's "Partnership Enterprise Law" was formally implemented, and a number of limited partnership equity investment enterprises such as Qingdao Hao were established one after another.
2. Trust system
Equity investment through trust plan is also a typical form of private equity investment in Yangguan.
3. Corporate style
The corporate private equity fund has a complete corporate structure and its operation is more formal and standardized. At present, it is convenient to set up private equity funds (such as "certain investment company") in China. Semi-open private equity funds can also operate conveniently in a flexible way, and their investment strategies can be more flexible without strict approval and supervision. For example: (1) set up an "investment company" whose business scope includes securities investment; (2) The number of shareholders of the "investment company" should be small, and the investment amount should be relatively large, which not only ensures the nature of private placement, but also has a large scale of funds; (3) The funds of the "investment company" are managed by the fund manager. According to international practice, managers charge fund management fees and interest incentive fees to enter the operating costs of "investment companies"; (4) The registered capital of the "investment company" is re-registered once a year at a specific time, and nominal capital increase and share expansion or capital reduction and share reduction are carried out. If necessary, investors can redeem their capital contribution at a specific time every year, and at other times, investors can transfer their shares by agreement or trade in the OTC market. "Investment company" is essentially a private equity fund of enterprises, which can be raised at any time, but only redeemed once a year. However, corporate private equity funds have a disadvantage, that is, there is repeated taxation. The ways to overcome the shortcomings are: (1) register private equity funds in tax havens such as Cayman and Bermuda; (2) Register the enterprise private equity fund as a high-tech enterprise (which can enjoy many preferential treatments) and register it in a place with relatively favorable tax; (3) Backdoor, that is, in the establishment and operation of the fund, joint or acquisition of an enterprise (preferably a non-listed company) that can enjoy tax incentives, and take this as a carrier. The advantage of private equity investment is that it is more flexible than public offering, which realizes the capital appreciation of enterprises and lays a solid foundation for the listing of enterprises.
Edit the selection of private equity investment mode in this paragraph.
Private equity investment mainly has the following modes: (1) investment mode of increasing capital and shares. Capital increase and share expansion means that the company issues some new shares and sells these newly issued shares to new shareholders or original shareholders, which will lead to an increase in the total number of shares of the company. (2) Equity transfer investment method Equity transfer refers to the civil act of a company's shareholders transferring their shares to others, making others become shareholders of the company. [1] (3) In addition to the above two investment methods, other investment methods can also be combined to set up the target enterprise in the form of physical and cash investment together with bond investment.