what is a private equity investment fund?

equity investment is a very old industry, but private equity (PE) investment is a new thing that has achieved rapid development in recent 3 years.

the so-called private equity investment refers to the process of capital operation in which non-listed enterprises with high growth make equity investment and provide corresponding management and other value-added services in order to withdraw through IPO or other means and realize capital appreciation. The interest of private investors lies not in owning dividends and operating the invested enterprise, but in withdrawing from the enterprise and realizing the investment income at last.

in order to diversify investment risks, private equity investment is carried out through private equity investment funds (PE funds, private equity funds or funds for short in this website). Private equity investment funds raise funds from large institutional investors and well-funded individuals in a private way, then seek opportunities to invest in unlisted enterprises, and finally obtain the investment return of the whole fund through active management and withdrawal.

Like the stock-trading private equity fund, PE fund is essentially a financial management tool, but the threshold for initial investment is higher, the investment cycle is longer, and the return on investment is more stable, which is suitable for long-term investment of large-scale funds. What is the difference between venture capital/venture capital fund and PE fund?

Venture Capital/venture capital fund (VC for short) entered China people's field of vision earlier than PE fund. Internationally famous venture capitalists such as IDG, Softbank and Kaipeng Huaying entered China earlier, earning enough attention and making good deals.

theoretically speaking, although VC and PE are both investments in pre-listed enterprises, they are quite different in investment stage, investment scale and investment concept. Under normal circumstances, PE invests in Pre-IPO and mature enterprises; VC invests in start-up and growth enterprises. The mentality of VC and PE is very different: VC's mentality is not to miss (good projects), and PE's mentality is not to make mistakes (referring to investment mistakes). However, today, the large-scale transaction makes the difference between VC and PE more and more blurred. After the established VCS (such as Sequoia Capital, Jingwei Venture Capital, Kaipeng and Defengjie) who used to do venture capital in Silicon Valley entered China, they also started to raise PE funds, and many disclosed investment transactions amounted to more than 1 million dollars. There are fewer and fewer VCs willing to invest in early-stage venture projects. At present, only Taishan Investment and IDG are still investing in projects of millions of RMB. Most funds, no matter what their names are, actually mainly participate in PE investment transactions between RMB 2 million and RMB 2 million.

the large-scale transaction is related to the increasing amount of funds raised in the capital market. In 28, CDH Investment and Hongyi Investment each raised RMB 5 billion PE funds in China. In 29, the amount of funds raised was further enlarged. Blackstone Group plans to set up Blackstone China Development Investment Fund in Pudong, Shanghai, with a target of RMB 5 billion. First Eastern Group plans to raise a fund of 6 billion yuan in Shanghai; CLSA and Shanghai Guosheng Group jointly initiated the establishment of a domestic RMB private equity fund with a fundraising target of 1 billion yuan; Jinpu Industrial Investment Fund Management Co., Ltd., which is jointly sponsored by Shanghai International Group Co., Ltd. and China International Capital Corporation, plans to raise a total of 2 billion yuan of Shanghai financial industry investment funds, and the initial fundraising scale will reach 8 billion yuan.

a single fund is limited to the labor cost, and generally no more than 3 projects are managed. Therefore, large PE funds tend to invest over 1 million yuan in projects, while private equity transactions of 1 million to 1 million yuan are left to VC funds and small PE funds to fill the market gap. Who will invest in private equity investment funds?

Private equity investment belongs to "alternative investment", which is a very important investment tool for wealth owners to diversify investment risks besides investing in the securities market. According to statistics, western sovereign funds, charitable funds, pension funds and rich consortia will habitually allocate 1% ~ 15% for private equity investment, and the annualized rate of return of private equity investment is higher than the average rate of return in the securities market. The annualized return of most funds is around 2%. In the golden age of technology stocks in the 199s, VC, the best gold circle in the United States, had several funds with annual returns of more than 1 times every year. The investment group of private equity investment funds is very fixed, and the number of good fund managers is limited, often too much money chasing too little investment quota. The normal scale of newly established funds is $1 million to $1 million. Most of the committed funds are old customers, and the amount that can be opened to new investors is very limited.

the investment period of private equity investment funds is very long, and the closed investment period of general funds is more than 1 years. On the other hand, the secondary market transactions of private equity investment funds are underdeveloped, so it is not easy for investors of private equity investment funds to quit after investing. On the other hand, most private equity investment funds adopt the commitment system, that is, the fund investors wait until the fund manager determines the investment projects before making corresponding contributions according to the commitments of the agreement.

because the history of private equity investment funds in China is not long, it takes a long process to cultivate fund investors. As overseas fund companies are more and more inclined to raise RMB funds in China, the following sources of funds have become the targets for fund-raising by various fund companies:

funds of financial institutions such as government-guided funds, various parent funds (also known as funds in funds), social security funds, bank insurance, etc., which are the preferred lobbying targets for various PE fund-raising. These capitals are well-known and have a high reputation. Once they commit to contribute, they will quickly attract a large number of capitals to join.

idle funds of state-owned enterprises, private enterprises and listed companies. Corporate stock trading always gives people the feeling of doing nothing, but corporate investment in PE funds has become a fashionable means of financial management.

idle funds of private rich individuals. There are also funds that raise funds directly for natural persons in China. Of course, the starting point for raising funds is still very high.

if it is raised directly from individuals, the threshold capital for initial investment is about 1 million yuan or more; If it is raised through a trust company, the threshold fund for starting investment should also be one or two million yuan. Ordinary people have no interest in investing in such funds. Who will manage private equity investment funds?

fund managers are basically two kinds of people. One kind of people comes from international big-name investment banks such as Morgan Stanley, Merrill Lynch and Goldman Sachs, and they are proficient in finance and have a wide network of contacts on Wall Street. The other kind of people come from entrepreneurs who retired after starting a business. The well-known managers who transformed from entrepreneurs in China include Shen Nanpeng (the former founder of Ctrip.com and Home Inn, now a partner of Sequoia Capital), Shao Yibo (the former founder of eBay, now a partner of Jingwei Venture Capital), Yang Lei (the former CEO of Palm Smart, now a partner of Taishan Investment), Tian Suning (the former CEO of China Netcom, now the chairman of China Broadband Industry Fund) and Wu Ying (the former CEO of Broadband Industry Fund).

fund managers must first have a unique vision of finding good companies. if managers do not have excellent past investment performance, it is difficult to gain the trust of investors. Since 2, a large number of China Internet, SP, new media and new energy companies have landed on Nasdaq or NYSE, which has brought a lot of returns to foreign funds. Since 24, a large number of private enterprises have landed in Shenzhen's small and medium-sized board, which has brought equally amazing returns to domestic funds. Therefore, it is easier for fund managers to win the trust of investors if they have experience in investing in star benchmark enterprises such as Baidu, Shanda Network, Focus Media, Alibaba, Wuxi Suntech and Goldwind Technology.

in addition to investment vision, fund managers also need to have certain personal wealth. In order to control moral hazard, if the fund manager decides to invest in a medium-sized transaction of $1 million, PD will pay $9.8 million (98%), and individuals as LD will pay $2, (2%) to match the follow-up investment. Therefore, the financial strength threshold of fund managers is also very high.

generally speaking, the management of private equity investment funds is a superb art. It is necessary to find high-speed growth projects, persuade enterprises to accept the investment of funds, and finally withdraw from the equity in the capital market. The competition between good project funds is fierce; I don't know if there is any investment trap in an uncontested project. Regardless of the performance, almost all fund managers are trapeze artists with amazing work intensity.