1, restrictions on investment scope and investment methods
Private equity investment is a high-risk investment mode, so it is particularly important to limit the investment scope, investment mode and investment ratio of each project. However, due to the complexity and inexhaustible scope of investment and investment methods, "negative constraints" are often used in practice to control investment risks. For example, it is agreed that the investment in a project shall not exceed 20% of the total subscribed capital contribution, and the investment shall not bear unlimited joint liability, and the bank loan of the partnership enterprise shall not exceed 40% of the total subscribed capital contribution.
2. Control of management expenses and operating costs
In practice, there are usually two ways: first, management fees include operating costs. The advantage is that it can effectively control operating expenses and control costs. At present, many domestic private equity investment funds have adopted this simple way to attract funds. Second, the management fee is shared separately, and the operating expenses of the limited partnership are collected by the limited partnership as a cost, which is not included in the management expenses of the general partner. This is an internationally accepted way. The amount of management fee is usually 0.5%-2.5% according to a certain proportion of the managed funds, and the extraction method can be quarterly, semi-annual or annual.
3. Benefit distribution and incentive mechanism
The general partner and limited partner of a limited partnership enterprise can flexibly agree on the distribution method of investment income; Generally speaking, for the part within the expected investment income, both parties can agree that the general partner can enjoy the income at a lower proportion; The general partner can enjoy a higher proportion of the income beyond the expected income; The higher the investment income, the higher the proportion that the general partner enjoys as a reward for the limited partner, which can promote the general partner to actively, effectively and beneficially carry out the partnership affairs. In domestic practice, in order to attract investors, some private equity investment funds often adopt "priority recovery mechanism" and "callback mechanism" to ensure that the general partner can enjoy the profit distribution after the limited partner recovers the investment, so as to ensure that the interests of the general partner and the limited partner are consistent.
(1) About "Priority Recovery Mechanism"
The so-called "priority investment recovery mechanism" means that when the fund expires or an investment project is liquidated, the limited partner must first ensure that the investment has been fully recovered or reached the minimum rate of return before the partnership enterprise is distributed. For example, you can agree to the following income distribution methods:
First, the limited partner gets back all the investments invested in the fund;
Secondly, calculate the internal rate of return. If the IRR is less than 8%, all investment income will be distributed to all partners according to the proportion of capital contribution, and the general partners will enjoy the income according to the proportion of capital contribution.
Thirdly, if the IRR is higher than 8% but lower than 10%, the part below 8% will be distributed to all partners according to the proportion of capital contribution, the part above 8% will be distributed to the general partners first, and the remaining 80% will be distributed to all partners according to the proportion of capital contribution;
Finally, if the IRR is higher than 10%, the income within 10% will be distributed according to the above principle, and 25% of the income above 10% will be distributed to the general partner first, and the remaining 75% will be distributed to all partners according to the proportion of capital contribution.
(2) About "callback mechanism"
The so-called "callback mechanism" refers to the mechanism that the general partner takes out a certain proportion of funds from the management fees received and the profits distributed after the withdrawal of investment projects, and deposits them in a specific account to make up for the losses or make up for the gains when the funds or some investment projects lose money or fail to reach the minimum income. For example, in a limited partnership private equity fund, it is agreed that the general partner will keep 40% of the income, which will be used to make up for the loss or income when the fund loses or fails to reach the minimum income of 8%.
To sum up, we can see that both the "priority investment recovery mechanism" and the "callback mechanism" reflect the difficulties of domestic general partners in raising funds and the compromises and concessions made in the distribution of benefits in order to attract funds.
4. Ways for limited partners to join or withdraw from the partnership and restrictions on the amount of capital contribution transferred.
After the establishment of limited partnership private equity fund, new limited partners can still be allowed to join; Generally speaking, the access of limited partners is decided by the general partners, but some restrictions will be set, for example, limiting the new limited partners to qualified institutional investors and corresponding capital requirements. In addition, it is also necessary to clarify the calculation method of the rights and interests of newly hired limited partners or the compensation scheme for the original partners. Regarding the withdrawal of limited partners, in practice, the partnership agreement requires limited partners to ensure that they cannot withdraw during the existence of the partnership.
In order to ensure the stability of limited partnership private equity funds, limited partners are usually restricted from transferring the capital contribution of the partnership. The transfer of the limited partner's contribution to the partnership can be divided into two forms: self-transfer and entrusted transfer. "Self-transfer" refers to the way that the limited partner finds the transferee by himself, and the general partner reviews and assists the transfer. "Entrusted transfer" refers to the way in which the limited partner entrusts the general partner to find the transferee and the general partner assists in the transfer. Under normal circumstances, when the limited partner transfers his capital contribution, the general partner requires to pay a certain fee, and the rate is different according to the different forms of transfer; The commission rate of self-transfer is low, for example, it can be 65438+ 0% of the transferred capital contribution, and the commission rate of entrusted transfer is high, for example, it can be 5% of the transferred capital contribution; By charging a certain transfer fee, limited partners can be controlled to frequently transfer their capital to the partnership. The fees collected can be regarded as the income of the partnership. If the general partner provides intermediary services, he may also extract a certain percentage of intermediary remuneration.
5. Constraints on General Partners
In the limited partnership private equity fund, the general partner carries out the partnership affairs, and the limited partner does not participate in the operation of the limited partnership, so it is necessary to prevent the general partner from infringing on the interests of the partnership. In addition to the binding mechanism already described in this document, there are the following binding measures for general partners:
(1) restrictions on related party transactions The limited partnership agreement prohibits the general partner from engaging in related party transactions and engaging in business competing with the partnership enterprise alone or in cooperation with others, unless approved by the general meeting of all partners. However, a limited partner may conduct transactions with the partnership.
(2) The restriction on raising new funds can ensure that the general partner has enough attention to carry out the business of the partnership. Private equity funds generally limit the speed at which general partners can refinance.
(3) Follow the investment restrictions of the fund.
In order to prevent general partners from investing or withdrawing from projects objectively based on their own interests, private equity funds restrict general partners from investing or withdrawing from funds.
(4) The system of regularly reporting the operation and financial status of the fund.
For the topic, the private equity fund requires the general partner who carries out the partnership affairs to report to the limited partner regularly, and the limited partner has the right to consult and copy the accounting books and other financial materials of the limited partnership enterprise, and has the right to obtain the valuation report of the investment project.
6. Sub-partners shall bear the loss mechanism first.
In order to satisfy the preference of risk-averse investors, some private equity funds stipulate that the general partner or related limited partner shall be the sub-partner, and the losses shall be borne in advance by the amount of capital subscribed to the partnership. For example, its risk-taking methods are as follows:
First of all, the minor partner bears the loss with the capital contribution subscribed to the partnership;
Secondly, if the contribution of the junior partner is not enough to bear the loss, the other partners shall share it according to their share of contribution.
7. Entrust management mechanism
The partnership affairs of a limited partnership private equity fund are generally carried out by the general partner, but the general partner may also entrust the partnership affairs to a third party. At present, there are some obstacles for foreign investors to directly set up private equity funds as general partners because China has not liberalized foreign investors to participate in the establishment of partnership enterprises and foreign exchange control restrictions on capital projects. Therefore, it is a flexible solution for foreign capital to participate in the establishment of fund management companies and obtain the profits of general partners through monopoly trade arrangements.
Where a general partner entrusts partnership affairs to a third party, it shall comply with the relevant provisions of the contract law on entrustment contracts. However, in the context of contract law, the entrusted management mechanism has the following shortcomings:
First, the entrustment relationship can be dissolved at any time, and the legal relationship is unstable. However, if the entrustment contract is unilaterally terminated and losses are caused to the other party, it shall compensate for the losses.
Second, fund management companies can only bear the legal responsibility for investment failure if they are at fault, which is lighter and less restrictive than general partners who bear unlimited liability.