Corporate finance examines private equity funds from the following 10 aspects:
1. management team: experience, stability, depth, combination and rationality.
2. Company strategy: suitability and flexibility of target market, and judgment of industry trends.
3. Investment style: financial and industrial; Early and late stage
4. Market: Positioning and Potential
5. Historical performance: project withdrawal rate, internal rate of return and return multiple.
6. Project: Source, Quality and Valuation
7. Investment process: project decision-making mechanism and risk control mechanism.
8. Value-added services: Can it bring support beyond funds to enterprises?
9. Conditional terms: key person terms, repurchase and gambling terms.
10, legal compliance: whether the investment company and funds are legal and compliant, project selection and feasibility verification.
Due to the long investment cycle and low liquidity of private equity, 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 common shares in enterprise liquidation (the status of preferred shares has not been clearly defined 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.