The way of private equity fund to extract performance compensation has recently become a hot topic. In the past few years, Sunshine Private Equity has mushroomed, and high-net-worth investors have also actively participated. Until recently, the way and method of performance compensation made investors re-examine the products they invested in. So what are the ways to calculate the performance of private placement, and which way is fairer?

Basic principle: consistent interests

As we all know, the performance reward of private equity funds is generally 20% of profits, and some private equity may reach 30%. Generally speaking, investors should distribute 20% of the profits to the managers of private equity funds, which is also the usual standard for the performance commission of private equity funds in the world.

For this problem, a senior hedge fund person in the United States once explained to reporters that they believe that this investment method with the goal of obtaining absolute returns is similar to the idea of investors investing in industry. When investors invest in a business, they usually give part of the profits to the actual managers. So 20% or 30% performance compensation is acceptable, provided that it is profitable.

Before the sunshine of private equity funds, the fixed management fee of private equity industry was usually quite low, generally none or around 0.5%. However, after the sunshine, due to the certain cost of the custodian bank's participation, the management fee of private placement has increased. At present, the management fee of stock private placement is usually around 1.5%~2%, which is greater than or equal to the management fee in Public Offering of Fund. Because most private placements are obscure and usually small, it is difficult to survive only by management fees.

The biggest source of income for private equity fund companies is to extract performance rewards. Higher salary can also keep good talents.

Theoretically, although 20% of the performance reward has been transferred to investors, such transfer will make the interests of private placement consistent with their own interests, and let the focus of private placement return to striving for positive returns. Therefore, usually excellent private placement pays special attention to the control of downside risks, because once the net value falls, performance rewards cannot be accrued. At the same time, if the retracement is too large, it will lose the trust of investors at any time.

Because the collection of performance awards usually adopts the way of "high water mark", even if it rebounds after falling, it is impossible to extract performance awards unless it rebounds to a higher historical net value.

So at the same time, in order to better make the interests of private managers and investors converge, many private managers will also buy a certain share of their own funds. Whether through trust or brokerage channels, in the past, many established private equity products, private equity managers often bought 10% shares to show investors' risks-such private equity managers are relatively more worthy of investors' trust.

Early Sunshine Private Equity, such as the private equity issued on SZITIC platform in the past, generally required the private equity manager to buy at least one copy. When withdrawing performance awards in the future, it is necessary to convert some performance awards into shares until the manager accounts for 10% of the total share. Such terms will make the interests of managers and investors of private equity funds more consistent and closer to investors.

It is the common goal of the transferor and acquirer of performance pay to make the cake bigger through a good mechanism and make private managers and investors win-win.

There are many different accrual methods.

What investors need to know is that the same performance compensation, because of the different algorithms, is actually driven by the private placement manager and the income actually delivered by the investors.

As early as 2009, the China Banking Regulatory Commission officially standardized the performance reward extraction method of Sunshine Private Equity, stipulating that profit and liquidation became the necessary conditions for commission (at that time, private equity could only be sunny through trust). In this regard, there was an uproar in the industry at that time. At the same time of opposition, the industry proposes to replace the "clearing algorithm" with the "high water level" commission method.

The so-called high water level means that the fund performance exceeds the best level in the history of the fund, and the fund manager can extract the performance reward. For example, the best performance in a fund's history is 1.3 yuan/share, and the net value in the second year falls back to 1.2 yuan/share, so although the fund still earns 20% more than the issue price 1 yuan this year, the fund manager can't get the performance commission. If the net value of the fund reaches 1.4 yuan/share in the second year, the fund manager can get a performance commission, but the "high water level" will be raised to 1.4 yuan. This method has been adopted by many sunshine private placements.

At that time, the industry believed that the new regulations of the China Banking Regulatory Commission might make it difficult for Sunshine Private Equity to survive. If private equity funds are required to be liquidated before their performance can be paid, although it is reasonable from a legal point of view, that is to say, if liquidation is not carried out, the net product value can only represent the book value, which fluctuates every day and is not really cashed in to investors. However, this violates the original intention of long-term investment, resulting in a short term of 1 year or 2 years, so as to ensure that the private trust products issued thereafter will not starve to death, and it is not conducive to the development of the industry.