1. Initial public listing
Initial public listing is the most desirable exit mode of private equity investment funds, which can bring huge economic and social benefits to private equity investors and invested enterprises. In the development history of private equity investment funds, IPO has a proud historical record. In the United States, many successful IPO companies are supported by private equity investment, such as Apple, Microsoft, Yahoo and AOL. Domestic examples include Focus Media, Ctrip.com, Home Inns, etc. The listing of these enterprises has brought huge return on investment. Of course, the management of the enterprise also welcomes this exit method, because it shows that the financial market recognizes the company's good operating performance, maintains the company's independence, and at the same time enables the company to obtain a channel for continuous financing in the securities market. However, IPO exit also has certain limitations. One or two years before the IPO of the project company, a lot of preparatory work must be done, and the information of the company's operation and management, financial status and development strategy should be announced to the outside world, so that investors can know the real situation of the company, expect positive evaluation, and avoid the undervaluation of the stock price caused by information asymmetry. Compared with other exit methods, the procedures of IPO are more complicated, the exit cost is higher, and there is a lock-up period after IPO, which increases the risk that the income cannot be realized or delayed.
2. Equity sale
Equity sale means that private equity investment sells the equity of its enterprise to anyone else, including second-hand transfer to other investment institutions, overall transfer to other strategic investors, and the invested enterprise or enterprise management redeems the equity from private equity investment institutions (that is, repurchase). Enterprises that choose to sell their shares generally fail to meet the listing requirements and cannot sell their shares publicly. Although the return is usually not as good as IPO, private equity investors can often recover all their investments and get considerable returns. In Germany, the financing of private equity investment funds mainly comes from bank loans, so the exit channels are limited to equity repurchase and mergers and acquisitions. Compared with IPO, investors get less benefits from these two exit methods. Similarly, Japan's financing channels are mostly banks, and like Germany, it faces the problems of limited exit channels and distribution of control rights.
3. Enterprise liquidation
Enterprise liquidation refers to the private equity investment fund withdrawing its investment through the liquidation company when the investment enterprise can't continue to operate, which is the worst result of investment withdrawal and often only part of the investment can be recovered. Liquidation includes voluntary liquidation and involuntary liquidation. Voluntary liquidation means that when the income from the sale of a company's assets exceeds the market value of its issued securities, liquidation may be the most powerful way for shareholders to dispose of assets. Involuntary liquidation means that the company is on the verge of bankruptcy, and due to a serious financial crisis, the company has to sell its existing assets to repay its debts, and the liquidation team will take over, liquidate, evaluate, handle and distribute the enterprise property. Private equity investment is a long-term investment. It takes a long time from the discovery of the project, the investment of the project, to the final realization of profit and the withdrawal of the project. There are many risks in the whole project operation process, such as value evaluation risk, principal-agent risk and exit mechanism risk. Investment institutions need to manage these risks.
1. Risks of private equity investment
In private equity investment, due to the high principal-agent cost and the uncertainty of enterprise value evaluation, private equity investment funds have high risks. Its risk problems mainly include the following categories:
(1) Risk of value evaluation
In the operation of private equity investment funds, the value evaluation of the invested projects determines the final equity ratio of investors in the invested enterprises, and too high evaluation value will lead to a decline in the return on investment. However, due to the poor liquidity of private equity investment, irregular cash inflow and outflow in the future, high investment cost and great uncertainty in future market, technology and management, investment valuation risk has become one of the direct risks of private equity investment funds.
(2) Intellectual property risks
This is of special significance to scientific and technological enterprises. Private equity investment, especially venture capital, values the core technology of the invested enterprise. If the ownership of the core technology is flawed (such as the invention of the technology by the entrepreneur at the original employer), it will obviously affect the entry of venture capital, and even bear the responsibility for breach of contract or contracting negligence. For this kind of risk, enterprises must confirm the ownership of core technology through professional evaluation.
(3) Risks caused by principal-agent
In private equity investment funds, the principal-agent relationship mainly has two levels: the first level is the principal-agent relationship between investment fund managers and investors, and the second level is the principal-agent relationship between private equity investment funds and enterprises.
The first-level principal-agent problem is mainly caused by imperfect laws and regulations related to private equity investment funds and low information disclosure requirements. This can't rule out the infringement, breach of contract or violation of the obligations of good managers by some bad private equity investment funds or fund managers, such as black-box operation, excessive trading, reverse operation, etc., which will seriously infringe on the interests of investors.
The second-level principal-agent problem is mainly "moral hazard" problem. Because of the information asymmetry between the investors and the financiers, the interests of the investee as an agent are inconsistent with those of the investors, which leads to the problem of "moral hazard" in the principal-agent and may harm the interests of the investors. With the help of professionals, we can make a standardized investment and financing contract and clarify the rights and obligations of both parties, such as the choice of investment tools, the arrangement of investment stages and the allocation of board seats of investment enterprises, which can prevent this risk to a certain extent.
(4) Risks in the process of exit
China's main board market has strict listing standards, which have strict requirements on the total share capital of listed companies, the amount of share capital subscribed by sponsors, the operating performance of enterprises and the proportion of intangible assets. It is difficult for small and medium-sized enterprises to land on the main board market, and the newly established GEM market is "too many porridge" to meet the listing needs of enterprises; The unclear nature and function of the property rights trading market and the lack of unified, transparent and scientific trading mode and unified supervision undoubtedly increase the exit risk of specific private equity investment fund investors.
2. Risk management
Private equity investment is a high-yield investment method, but also accompanied by high risks. With the continuous development of private equity investment industry, many effective risk control methods have been formed.
(1) contract binding mechanism
It is a legally effective risk avoidance measure for all commercial activities to stipulate the responsibilities and obligations of all parties in advance. In order to prevent enterprises from harming investors and protect investors' interests, investors will formulate various clauses in the contract in detail, such as affirmative and negative clauses, conditions for adjusting the share ratio, remedial measures for breach of contract, priority clauses for additional investment, etc.
(2) Sectional investment
Segmented investment means that private equity investment funds control the investment progress by segments in order to effectively control risks and avoid the waste of enterprise funds, only provide the funds necessary to ensure the development of the enterprise to the next stage, and reserve the right to give up additional investment and the right to purchase the shares issued when the enterprise raises additional funds first. If the enterprise fails to reach the expected profit level, the investment ratio will be adjusted in the next stage, which is a way to supervise the operation of the enterprise and reduce the operational risk.
(3) Share adjustment clause
Similar to other commercial activities, private equity investment can stipulate share adjustment clauses in the contract to control risks. Stock adjustment is an important risk control means in private equity investment. By adjusting the conversion ratio of preferred stock and common stock, the equity ratio between investors and enterprises can be changed accordingly, thus restraining the invested enterprises from making objective profit forecasts and setting realistic performance targets, and at the same time encouraging enterprise managers to be diligent and conscientious, pursuing the maximum growth of enterprises, thus controlling investment risks.
(4) Comprehensive securities instruments
Composite securities instruments usually include convertible preferred stocks, convertible bonds and convertible bonds. It combines the advantages of debt investment and common stock equity investment, and can effectively protect the interests of investors and share the growth of enterprises. 1. Strengthen the construction of laws, regulations and policies.
China's current laws and regulations provide a preliminary legal basis for the existence of private equity investment funds, but there are many cases where policies and regulations are inconsistent, not targeted or vague. The government can make further provisions on the basis of existing laws, and improve the legal environment of private equity investment by supplementing the Company Law, the Securities Law and the Partnership Enterprise Law. In addition, legislation also needs to make further provisions and norms on tax issues, investors' entry issues and exit channels. Taking the tax system as an example, the government needs to improve the tax supporting system and change the situation that private equity investment institutions set up companies in overseas offshore financial centers, which leads to the loss of tax revenue in China. It is suggested that private equity investment funds should be taxed according to domestic enterprises. For some emerging industries and special industries, preferential tax policies can be implemented to promote the entry of private equity investment funds, thus promoting the benign development of private equity investment and its market in China. In order to encourage private equity investors to take the form of limited partnership, China should also follow the common practice of tax legislation in other countries, strictly follow the principle of legal subject qualification, and only levy taxes on operating institutions with legal independent subject qualification to solve the problem of double taxation.
Recently, the Measures for the Management of Equity Investment Funds drafted by the National Development and Reform Commission has been reported to the State Council and will be promulgated soon, which will provide important laws and policies for the development of private equity investment in China.