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Zhi Finance » Q&A of Private Equity Investment Fund

Q&A of Private Equity Investment Fund

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What is private equity investment fund

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As its name implies, private equity fund refers to the fund engaged in non-public equity investment. Private equity investment (“PE” for short) refers to equity investment in unlisted enterprises, and actively participates in the operation and transformation of investment targets as a strategic investor, and sells shares for profit through listing, mergers and acquisitions or management buybacks.

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Private equity investment funds are generally raised through non-public issuance from institutions or individuals with risk identification and tolerance.

Classification of private equity investment funds

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Private equity investment funds usually include venture capital funds, M&A investment funds, bridge funds, etc;

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Venture capital funds invest in enterprises in seed stage, start-up stage, rapid expansion stage and early growth stage;

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M&A investment funds invest in enterprises in the expansion period and participate in management buyouts;

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Bridge funds invest in transitional enterprises or enterprises before listing.

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How to distinguish different types and sizes of private equity funds?

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Private equity funds can also be classified according to the size of the fund. Generally, the larger the fund size is, the later the investment enterprise develops, that is, acquisition funds or bridge funds. Small funds are venture capital or venture capital funds. The most complex is the fund commonly called the intermediate market. It has both high-end and low-end investments. Different intermediate market funds have different investment objects and investment styles, unlike venture capital or buyout funds, which have clear goals.

Characteristics of private equity investment funds

  1. In terms of fund raising, it is mainly raised from a small number of institutional investors or individuals in a non-public manner. Its sales and redemption are conducted by the fund manager through private negotiations with investors. In addition, the investment mode is also conducted in the form of private negotiation, rarely involving open market operations, and generally there is no need to disclose transaction details.
  2. More equity investment methods are adopted, and rarely involve debt investment. In terms of investment instruments, most of them are in the form of common shares or transferable preferred shares and convertible bonds. Therefore, PE investment institutions have certain voting rights in the decision-making management of the invested enterprises.
  3. Generally, it invests in private companies, that is, non listed companies, and rarely invests in publicly issued companies, so it will not involve the obligation of tender offer.
  4. The investment period is relatively long, generally up to 3-5 years or longer, which belongs to medium and long-term investment.
  5. The sources of funds are extensive, such as wealthy individuals, strategic investors, pension funds, insurance companies, etc.
  6. PE investment institutions mostly adopt limited partnership, which has good investment management efficiency and avoids the drawback of double taxation.
  7. Diversified investment exit channels, including IPO, TRADE SALE, M&A, management buyback of the target company, etc.

Which institutions are included in the industry chain of private equity investment?

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The industry chain of private equity investment industry includes five links and market participants: enterprises in need of funds, private financing advisers, funds and fund management companies, fund raising advisers and investors (institutional investors).

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First, enterprises that need capital and private financing consultants who provide financing services for enterprises; The core links are funds and fund management companies, as well as fund raising advisers who provide services for fund management companies and fund advisers who provide services for institutional investors; The last and most important link is the investor – institutional investor. In China, enterprises and (venture capital) fund management companies, the two market participants in the private equity investment industry, have already had a certain scale, but the three market participants of financing advisers, fund raising advisers and investors (institutional investors) are still not systematic.

Investment direction of private equity investment funds

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Private equity investment funds (PE) mainly invest in the equity of unlisted enterprises, rather than the stock market. This nature of PE objectively determines a longer investment return cycle.

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Private equity funds exit mainly through the following three ways: first, listing (IPO); 2、 Acquired or merged with other companies; 3、 Restructuring.

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Investors should note that private equity investment funds and private equity investment funds (that is, “private equity funds”, as investors often say) are two types of funds that are easily confused in name but completely different in nature, and the latter mainly invest in the secondary securities market.

Composition form of private equity investment fund

1. Trust system

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Characteristics of trust system: similar to limited partnership, it also has tax exempt status; However, the funds need to be put in place in one step, and the use efficiency is low; It involves trust intermediaries, which increases the operating cost of the fund.

2. Corporate system

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The characteristics of corporate funds are: corporate income tax needs to be paid; Shares can be listed; Investment income can be retained for further investment; Investors other than corporate income tax need to pay personal income tax, involving double taxation.

3. Limited partnership

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The characteristics of the limited partnership system: the general partner (GP) and the limited partner (LP) jointly form a limited partnership, in which the private equity investment company, as the GP, initiates the establishment of a limited partnership and subscribes to a small part of the capital contribution, while the LP subscribes to the vast majority of the fund contribution. GP bears unlimited responsibility for the investment, operation and management of the fund, and draws a certain proportion of the total amount of the fund every year as the fund management fee; LP bears limited liability, does not participate in company management, shares partnership income, and enjoys the right to know, consultation, etc.

What is venture capital fund

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The so-called venture capital fund is a fund that only engages in venture capital. Venture Capital (VC for short), also translated into “venture capital” in China, is a new type of investment widely popular in the world today. Venture capital funds absorb funds from institutions and individuals in a certain way, and invest in emerging, rapidly developing and potentially competitive enterprises that do not have listing qualifications in the form of equity investment to help the invested enterprises mature as soon as possible and obtain listing qualifications. Once the company’s shares are listed, venture capital funds can withdraw their funds by transferring their equity through the securities market and continue to invest in other risk enterprises.

Characteristics of venture capital funds

  1. Investment objects: mainly small, emerging or unincorporated high-tech enterprises without listing qualification.
  2. Investment cycle: generally 2-5 years.
  3. Return on investment: average 20% – 40%.
  4. Investment purpose: It is to inject capital or technology, obtain part of the equity (not for holding shares), promote the development of the funded company, and make capital appreciation and stock appreciation profitable.
  5. Profit making method: the enterprise is listed or shares are transferred.
  6. Investment stage: initial stage of enterprise development and expansion stage.

Issuance method of venture capital fund

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One is private venture capital fund. It is usually initiated by a venture capital company, with a capital contribution of about 1%, which is called the general partner (GP), who assumes unlimited liability. The remaining 99% of the capital contributions are made by institutional investors such as individuals, enterprises or financial and insurance institutions, which are called limited partners (LP). Like shareholders of joint stock limited companies, they only assume limited liability.

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The other is the venture capital fund that is publicly raised and listed from social investors. The purpose is to attract the attention of the public and support the venture capital of high-tech industry, which not only satisfies their desire for high-risk investment, but also gives them high return. This kind of fund, equivalent to industrial investment fund, is closed and can be freely transferred when listed.

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