Analyze how to identify reliable private equity funds
Since 2013, the private equity fund industry has achieved rapid development, but in the face of a mixed bag of good and bad private equity products on the market, how should investors identify and choose? The editor has compiled it here for your reference. I hope you will gain something from the reading process!
How to identify reliable private equity funds
Qualitative analysis
Qualitative analysis mainly evaluates the platform, managers, fund managers, management teams, investment research capabilities, etc.:
1. Platform, examines the company’s basic situation, such as comprehensive strength, equity structure, corporate governance, etc. .
2. Manager, examine the background, quality, style, etc. of the fund manager. This is the key for the fund to obtain long-term stable returns.
3. Investment research capabilities. If a private equity fund wants to remain invincible for a long time, it is obviously not enough to rely solely on the strength of some talented fund managers. Investment research capabilities are the foundation of competitive advantage, and a well-regulated management team is the magic weapon for private equity funds to obtain long-term and stable returns.
There is no absolutely objective standard for evaluating the strength of an investment research team, but the background, age, maturity, number of times it has experienced bull and bear cycles, past performance, investment logic and philosophy of the investment research team can all be referred to. index.
4. Decision-making process. Examine whether the fund has an efficient, compliant, and complete investment decision-making process. This is the guarantee for the effective implementation of the investment strategy.
Quantitative analysis
Quantitative analysis is to judge the ability of private equity funds to create income from the perspectives of risk, return, etc. You can mainly refer to the following indicators:
1. Income indicator - annualized return
Private equity funds have many return indicators. Investors can first focus on their annualized return, which reflects the annual compounded return level of the fund during its historical existence. The higher the annualized rate of return, the stronger the fund's ability to generate returns for investors. The longer the fund lasts, the greater the evaluation value of this indicator.
2. Risk indicator - maximum drawdown
The maximum drawdown describes the decline of funds from a high point to a low point, which means that investment in this fund may occur maximum loss. (Of course, historical data does not represent the future, and it is entirely possible that there will be greater retracement in the future, but the maximum historical retracement rate is still a very important indicator that we can refer to when choosing funds.)
In other words, if we accidentally buy the highest point, how much money the fund may make us lose, which is the worst case scenario that may occur when investing in a fund.
3. Comprehensive indicator - Sharpe ratio
The Sharpe ratio is one of the classic indicators that comprehensively considers returns and risks. This indicator can be commonly understood as the "cost-effectiveness" of a fund. . Generally speaking, returns are directly proportional to risks, and the Sharpe ratio expresses how much returns investors can get for each risk they bear.
The meaning of private equity funds
Private equity funds refer to investments in equity assets that cannot be freely traded in the stock market. The investment content mainly includes unlisted company equity or non-publicly traded equity of listed companies. The main forms include leveraged buyout, venture capital, growth capital, angel investment and mezzanine financing. What private equity funds pursue is not equity returns, but profits from selling equity through equity transfer paths such as listings, management buyouts, and mergers and acquisitions.
Introduction to the characteristics of private equity funds
1. Private equity funds
The scope of private equity funds’ fundraising targets is narrower than that of public equity funds, but their fundraising targets are all funds Institutions or individuals with strong strength and high-quality capital composition mean that the funds they raise are not necessarily inferior to public funds in quality and quantity. It can be an individual investor or an institutional investor.
2. Equity investment
In addition to pure equity investment, disguised equity investment methods have emerged (such as investment in convertible bonds or corporate bonds with stock options), and A portfolio investment method with equity investment as the main component and debt investment as the supplement. These methods are a major advancement in private equity’s investment tools and methods. Although equity investment is the main investment method of private equity investment funds, its dominant position will not be easily shaken. However, the rise of multiple investment methods and the combined use of multiple investment tools have also formed an unstoppable trend.
3. High risk
The risks of private equity investment first stem from its relatively long investment cycle. Therefore, if private equity funds want to make profits, they must make certain efforts, not only to meet the financing needs of enterprises, but also to bring benefits to the enterprises. This is destined to be a long-term process. Furthermore, the cost of private equity investment is relatively high, which also increases the risk of private equity investment. In addition, the high investment risks of private equity funds are also related to the poor liquidity of equity investments.
Unlike securities investment, which can be bought and sold directly on the secondary market, equity investment has limited exit channels, and the limited exit channels may not be smooth in specific regions or at specific times.