Equity investment is a very old industry, but private equity (PE) investment is a new thing that has achieved rapid development in recent 30 years.
The so-called private equity investment refers to the capital operation process of non-listed enterprises with high growth, providing them with corresponding value-added services such as management, so as to withdraw through IPO or other means and realize capital appreciation. The interest of private investors lies not in having dividends and operating the invested enterprise, but in withdrawing from the enterprise and finally realizing the investment income.
In order to diversify the investment risk, private equity investment is carried out through private equity investment funds (this website is referred to as PE funds, private equity funds or funds). Private equity investment funds raise funds from large institutional investors and well-funded individuals by private placement, then seek opportunities to invest in unlisted enterprises, and finally get the investment return of the whole fund through active management and withdrawal.
PE fund, like stock exchange private equity fund, is essentially a financial management tool, but its initial investment threshold is higher, the investment cycle is longer and the investment return is more stable, which is suitable for long-term investment of large-scale funds. 2. What is the difference between venture capital/venture capital fund and PE fund? Venture capital/venture capital fund (VC for short) entered the field of vision of China people earlier than PE fund. Internationally renowned venture capitalists, such as IDG, Softbank and Peng Kaihua Ying, entered China earlier, gained enough attention and reached 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. In general, PE invests in Pre-IPO and mature enterprises; VC invests in start-ups 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, large-scale transactions make the difference between VC and PE more and more blurred. Old VCS (such as Sequoia Capital, Jingwei Venture Capital, Peng Kai, Defengjie) who once made venture capital in Silicon Valley started to raise PE funds after entering China, and many disclosed investment transactions amounted to more than 10 million dollars. Fewer and fewer venture capitalists are willing to invest in early-stage venture projects. At present, only Taishan Investment and IDG are still investing in projects with millions of yuan. Most funds, no matter what their names are, actually mainly participate in PE investment transactions of RMB 20-200 million.
The large scale of the transaction is related to the increasing amount of financing in the capital market. In 2008, CDH Investment and Hongyi Investment respectively raised RMB 5 billion in private equity funds in China. In 2009, the amount of funds raised was further enlarged. Blackstone Group plans to set up a Blackstone China Development Investment Fund in Pudong with a target of 5 billion yuan. First Eastern Group plans to raise 6 billion yuan in Shanghai; CLSA and Shanghai Guo Sheng Group jointly initiated the establishment of a domestic RMB private equity fund with a raising target of 654.38+0 billion yuan; Jinpu Industrial Investment Fund Management Co., Ltd., jointly sponsored by Shanghai International Group Co., Ltd. and China International Capital Corporation Limited, plans to raise a total of 20 billion yuan of Shanghai financial industry investment funds, and the initial fundraising scale will reach 8 billion yuan.
A single fund is limited to labor costs and generally manages no more than 30 projects. Therefore, large PE funds tend to invest more than 100 million yuan in projects, while private equity transactions from 1 0 million yuan to10 million yuan are left to VC funds and small PE funds to fill the market gap. 3. Which funds are the mainstream private equity investors in China market? There are many lists of various funds in the market. Zero2IPO, investment and cooperation, and even China Business Weekly will make some rankings from time to time.
Professional lawyers will deal with various funds in private placement transactions, and they are more or less familiar with the investment habits and characteristics of each fund. We suggest that small and medium-sized enterprises should try to choose the following well-known funds when financing privately, if possible.
Local funds: Shenzhen Innovation Investment Group Co., Ltd., Lenovo Investment Co., Ltd., Shenzhen Chen Da Venture Capital Co., Ltd., Suzhou Venture Capital Group Co., Ltd., Shanghai Yongxuan Venture Capital Management Co., Ltd., Qi Ming Venture Capital, Shenzhen Oriental Fuhai Investment Management Co., Ltd., Hony Capital, Yu Xintian Capital, Dinghui Investment, CITIC Capital Holdings Limited, etc.
Foreign funds: IDG, Softbank China Venture Capital Co., Ltd., Sequoia Capital China, Softbank Safran Investment Consulting Co., Ltd., Defengjie, Jingwei Venture Capital China Fund, Northern Lights Venture Capital, Lan Xin Asia Investment Group, Peng Kaihua Ying China Fund, ggv capital, Walden International, Jifu Asia Investment Co., Ltd., Detong Capital Management Co., Ltd., Gobi Partners Co., Ltd., Zhiji Venture Capital, Cybertron (China) Investment, and so on.
If the goal of private placement is to be listed in China, in addition to these funds, direct investment companies with domestic brokerage background are also a good choice. 4. 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 10% ~ 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 income of most funds is around 20%. The best golden circle VC in the United States was in the golden age of technology stocks in the 1990s, and the annual income of several funds reached more than 10 times every year. The investment group of private equity investment funds is very fixed, the number of good fund managers is limited, and too much money often chases too little investment quota. The normal scale of newly established funds is 65.438+0 ~ 65.438+0 billion dollars, most of which 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 10 years. On the other hand, the secondary market transactions of private equity investment funds are underdeveloped, and 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, the training of fund investors also needs a long process. With overseas fund companies increasingly inclined to raise RMB funds in China, the following sources of funds have become the target of fund companies to raise funds:
1. Funds of financial institutions such as government guidance funds, fund funds, social security funds and bank insurance. , is the preferred lobbying object of various private equity financing. These capitals are well-known and have a high reputation. Once they promise to contribute, they will quickly attract a lot of capital to join.
2 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.
3. Idle funds of private rich people. There are also funds that raise funds directly for natural persons in China. Of course, the starting point of fund-raising is still very high.
If it is raised directly from individuals, the threshold capital for starting investment is about RMB100,000 yuan; If it is raised through a trust company, the threshold fund for starting investment will be one or two million yuan. Ordinary people are not interested in investing in such funds. 5. Who will manage the private equity investment fund? Fund managers are basically two kinds of people. One kind of people come from Morgan Stanley, Merrill Lynch, Goldman Sachs and other international big-name investment banks, who are proficient in finance and have extensive contacts on Wall Street. The other kind of people come from entrepreneurs who retire after starting a business. Well-known managers transformed from entrepreneurs in China include Shen Nanpeng (Ctrip.com, former founder of Home Inns, now a partner of Sequoia Capital), Shao Yibo (former founder of Yi Bei, now a partner of Jingwei Venture Capital), Yang Lei (former CEO of Palm Smart, now a partner of Taishan Investment), Tian Suning (former CEO of China Netcom, now chairman of China Broadband Industry Fund) and Wu Ying (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 2000, 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 investors. Since 2004, a large number of private enterprises have landed in Shenzhen small and medium-sized board, which has brought the same amazing returns to domestic funds. Therefore, if fund managers have experience in investing in star benchmarking companies such as Baidu, Shanda Network, Focus Media, Alibaba, Wuxi Suntech and Goldwind Technology, it is easier for them to win the trust of investors.
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 of100,000 USD, PD will pay 9.8 million USD (98%), and the individual as LD will pay 200,000 USD (2%) to match the subsequent investment. Therefore, the threshold of fund managers' financial strength is also very high.
Generally speaking, the management of private equity investment funds is a superb art. It is necessary to find fast-growing projects, persuade enterprises to accept capital investment, and finally withdraw from equity in the capital market. The competition between good project funds is fierce; I wonder if there is any investment trap in a project without competition. Regardless of performance, almost all fund managers are amazing trapeze artists. 6. How do private equity investment funds make investment decisions? Entrepreneurs often call lawyers wearily. "Different people from XX Fund have visited for three rounds, when will it end ..." This is because enterprises do not understand the management characteristics of the fund.
Although the personal heroism of fund managers is outstanding, funds are still corporate organizations or organizations similar to companies. It is rare for a fund manager to be like the boss of a fund.
The internal personnel of the fund are basically divided into three levels, and the top level of the fund is the partner; Vice president, investment director and others are the middle level of the fund; Investment managers and analysts are the basic levels of funds. The general inspection procedure of the fund to the enterprise is that the vice president leads the investment manager to inspect first and then reports to the partner. After the partners are interested, they will go to the investment decision-making committee (composed of all partners, and domestic funds often invite fund investors to attend committee meetings) to vote. A project, from the initial contact to the final decision to invest, is as short as March and as long as one year. 7. Why does limited partnership become the mainstream of private equity investment funds? Limited partnership is a special form of partnership, which greatly stimulates the development of private equity investment funds in practice.
Limited partnership enterprises regard fund investors and managers as partners of the fund, but fund investors are limited partners of the fund and fund managers are general partners of the fund. In addition to avoiding double taxation in the tax system, the limited partnership mainly designed an ingenious distribution system of "different rights for the same share", which solved the harmonious unity of contribution and output and greatly promoted the development of the fund.
In a typical limited partnership fund, the investment and distribution arrangements are as follows:
●LP promises to provide 98% of the investment amount of the fund, and can also have a minimum return guarantee (that is, the minimum expected return on capital, generally 6%). After exceeding this rate of return, LP is entitled to 80% fund return. LP does not interfere with any investment decision of the fund.
●GP promises to provide 2% of the investment amount of the fund, and at the same time, GP collects a certain asset management fee from the fund every year, which is generally 2% of the assets under management. After the minimum return on capital of the fund reaches the standard, GP will get a 20% return from the fund. Employees' salaries, rent and travel expenses in the daily operation of the fund are all settled in the asset management fee of 2%. GP has exclusive decision-making power on investment projects, but it should report the investment progress to LP regularly.
Although China government departments have different opinions on whether to develop the limited partnership fund in China, at present, the opinions are basically the same: the fund can choose the company system or the contract system, but the limited partnership system is the mainstream direction of the fund development. 8. What is the duration of the fund's investment in the enterprise? When raising funds, there are strict restrictions on the duration of the fund. Generally, the first 3 to 5 years of fund establishment is the investment period, and the last 5 years is the withdrawal period (only withdrawal, no investment). After investing in the enterprise for 2 to 5 years, the foundation will try to quit. (*** 10 year)
The fund has four exit modes:
1, IPO or RTO exit: the most profitable exit method, but the exit price is greatly disturbed by the fluctuation of the capital market itself.
2. Exit from M&A (whole sale enterprise): It is also very common that the fund resells the shares in the enterprise to the next home.
3.MBO: low return.
4. Company liquidation: At this time, most investment losses occur.
It is also a dangerous gamble for enterprises to accept investment from funds. When a fund investment enterprise has no hope of listing in a few years, any attempt to withdraw from the fund will inevitably interfere with the normal operation of the enterprise. This is why private funds are hot. 9. How do private equity investment funds find target companies? According to our observation, domestic private entrepreneurs have low awareness of private equity investment funds. They are generally cautious, do not take the initiative to attack, but wait for funds to visit.
The social relations of fund investment managers play a key role in the choice of target enterprises. Therefore, the fund attaches great importance to the diversification of sources when recruiting employees, hoping to approach all kinds of high-growth enterprises to the greatest extent. Newly established funds often go to intermediaries to worship the pier, hoping that financial advisers can recommend more projects. In order to expand the social popularity as much as possible, there is a unique phenomenon in China. Fund partners often appear on TV stations as guests of various financial programs, and even start blogs on Sina. Trying to show the public a wise investor.
In addition, government information is an important source of prey for private equity funds. Private equity funds also have a nickname "crony capitalism" in the west to describe the close relationship between government officials and private equity funds. Many outgoing presidents in Britain and America worked in Carlyle, Liang Jinsong joined Blackstone after leaving office, and Gore worked in Peng Kai. X. What industries do private equity investment funds like to invest in? Private equity funds like enterprises with simple business model and unique core competitiveness, and the enterprise management team has strong expansion ability and management quality. However, private equity funds still have a strong industry preference, and the following industries are our favorite investment targets in the past five years:
1, TMT: online games, e-commerce, vertical portal, digital animation, mobile wireless value-added, electronic payment, 3G, RFID, new media, video, SNS；;
2. New service industries: financial outsourcing, software, modern logistics, brand and channel operation, translation, film industry, TV shopping and mail order;
3. High-growth chain industries: catering, education and training, dentistry, medical care, supermarket retail, pharmacy, cosmetics sales, sports, clothing, shoes and budget hotels;
4. Clean energy and environmental protection: solar energy, wind energy, biomass energy, new energy vehicles, batteries, energy-saving buildings, water treatment and waste gas treatment;
5. Biomedicine and medical equipment;
6.4 trillion beneficiary industries: high-speed rail, cement, special equipment, etc. 1. At what stage does the enterprise need private financing? There are less than 3,000 China enterprises listed at home and abroad, but there are millions of enterprises in China, and the average life span of private enterprises is only seven years. The probability of an enterprise from start-up to listing is very small. Enterprise management also has the law of "Death Valley". Most entrepreneurial projects died in the first three years, and it was only three years after the establishment of the enterprise that it slowly climbed out of the valley of death. Therefore, the selection of projects by private equity investment funds is very strict.
The difference between venture capital/venture capital enterprises and PE funds has become increasingly blurred. Except for some funds that do specialize in early projects with an investment amount of no more than 6,543,800 yuan, most funds are interested in a single private equity transaction with a threshold amount of more than 20 million yuan, and the competition among private equity transaction funds with an investment amount of more than 6,543,800 yuan will be fierce. Therefore, if an enterprise only needs one million yuan of financing, it is not recommended to spend energy to seek equity investment of funds, but should seek personal loans, personal angel investments, bank loans and even private high-interest loans.
According to our experience, service-oriented enterprises have grown to the scale of about 100 people, and their annual income exceeds 100 million, which is in a state of meager profit or close to A level and is more suitable for the first round of equity financing. It is more appropriate to arrange the first round of equity financing after the annual after-tax net profit of manufacturing enterprises exceeds 5 million yuan. These nodes are related to the valuation of enterprises in financing. If the enterprise does not grow to this stage, the valuation of the enterprise in private financing will not go up, and the foundation will lose interest in investment because the transaction scale is too small.
Of course, at this stage, not all enterprises are willing to take private placement, but the benefits of private placement are obvious: most enterprises rely on self-accumulated profits to slowly expand their business, while for service-oriented enterprises with light assets, it is difficult to obtain bank loans because of the lack of mortgage assets. After enterprises absorb private investment, their operations often get a qualitative leap. As a result, many enterprises went public, and the wealth of entrepreneurs was enlarged from the state of net assets to the market value of stocks (the P/E ratio of small and medium-sized private enterprises in China stock market exceeded 40 times, and the P/B ratio was between 5- 10 times), and the wealth appreciation effect was amazing. As long as there is an opportunity, most private entrepreneurs in China are willing to accept private investment. Second, how do enterprises approach private equity investment funds? Although the enterprise recommends itself to the fund, it is unlikely to succeed. In China, most of the negotiations on private equity transactions are initiated by the recommendation of friends of the investment managers of private equity funds and the promotion of intermediaries.
The cyclical characteristics of China's economy are very obvious. In different economic cycles, the phenomenon that enterprises look for funds and funds chase enterprises is always periodic. Generally speaking, in the economic boom stage, a good enterprise is often sought after by many funds at the same time, especially in TMT, new energy, environmental protection, education, chain stores and other fields. As long as the enterprise is willing to carry out private placement and the quality of the enterprise is not too bad, the funds will often move with the wind.
However, in the economic downturn when the desire for private placement is unprecedentedly strong, the difficulty of negotiation suddenly increases. Even if the boss personally takes the lead, makes a business plan and talks with dozens of funds in a haystack, the effect may not be good. At this time, the recommendation of financial advisers, investment bankers and lawyers plays a key role.
Under the current national conditions of our country, professional lawyers play an important role in the contact between enterprises and private equity investment funds. Private equity funds attach great importance to lawyers' recommendations and opinions, and generally at least visit companies recommended by lawyers. This is because:
First, the motives of lawyer recommendation and financial advisor recommendation are different. It is the daily business of financial advisers to recommend projects to funds. There is a strong economic motivation to reach a deal, and funds are often wary; Most of the projects recommended by professional lawyers to the fund are for personal help, which generally have no strong economic purpose, but are easily accepted by the fund.
Second, due to the professional characteristics of lawyers, lawyers cherish their professional reputation, and corporate lawyers with poor quality will not blindly recommend them, so as not to damage their reputation in the industry.
Third, lawyers are sometimes legal advisers of enterprise financing, and often have a better understanding of the operating characteristics and legal risks of enterprises. Funds often consult lawyers when judging the economic prospects of enterprises. Third, what caused the breakdown of private equity financing negotiations? In China, the success rate of private placement negotiation is not high. Taking the signing of confidentiality agreement between enterprises and intentional investment funds as the starting point for the two sides to start contact, according to our observation, less than 30% of them can finally negotiate a deal. Of course, there are many reasons for the breakdown of negotiations, and the common ones are:
First, entrepreneurs are too emotional, and their judgment on the internal valuation of enterprises is not objective enough, which is excessively higher than the fair market price. Entrepreneurs are often entrepreneurs. They have deep feelings for enterprises and like to read biographies of celebrities such as Ma Yun every day. They always feel that their enterprises are also great. At the same time, there are also funds to talk about private placement, which further verifies the strength of the enterprise. Therefore, unless the price is ridiculously high, others will not share the equity of the enterprise. However, the investment of capital follows the strict law of value, especially after the baptism of the financial storm, the valuation of enterprises is not as impetuous as that of entrepreneurs. If the gap between the two sides in enterprise value judgment is more than double, it will be difficult to negotiate a deal.
Second, there are policy risks in the industry, the business depends on a few specific contacts, the technology is too advanced or the business model is too complicated. As professional private lawyers, we have visited many strange enterprises, some of which rely on the contacts of the government and monopoly state-owned enterprises to set up policy barriers to get business; Some enterprises are particularly advanced in technology, such as the recent very hot film battery photovoltaic integration project, biomass energy or amino acid biomedical project; Some enterprises have to turn their business models several times before they can understand what business they are doing. Great businesses are always simple, and funds tend to choose simple businesses that are stifled from market competition. It doesn't matter if this industry is a bit local and traditional. Catering hotels, English training, and even health massage are all invested, while enterprises that are too difficult to understand and mysterious avoid them.
Third, the timing of enterprise financing is wrong, and the appearance that enterprises are too short of money scares the fund. The fund will always be icing on the cake, not a gift in the snow. Many domestic private enterprises never want to do private placement in good times, and only think of private placement when they can't open the pot. The fund is not a fool, and the results came out as soon as the due diligence was done. Corporate funds with ugly financial reports often don't have the courage to vote.
Fourth, enterprises have to enter a new industry or field with money. Some entrepreneurs have been very successful in their main business, but suddenly want to enter a new field that they have never played, so they find money to play these projects through private placement. This kind of play is not easy to succeed. The fund wants entrepreneurs to concentrate, and entrepreneurs who think too much are even more afraid. 4. What does signing a confidentiality agreement mean to the enterprise? Generally speaking, after finding a suitable way, it is not difficult for enterprises to contact the fund for inspection. After seeing one or two rounds, funds often ask companies to sign confidentiality agreements and provide further financial data. At this stage, our lawyers often receive calls from enterprises asking for transaction guidance.
The signing of the confidentiality agreement only shows that the fund is willing to take the time to seriously inspect this project, and the long March of private placement has just taken the first step, which is not a particularly celebratory thing in itself. At this stage, unless the entrepreneur can't judge what materials should be submitted by himself and ask the lawyer to help him judge, the lawyer only provides general legal guidance for signing the contract and will not intervene in the preparation of the materials.
In most cases, the signed confidentiality agreement is mainly based on the version of the fund. When helping customers understand the benefits of confidentiality agreements, we usually follow the following points:
First, the confidentiality period of confidential materials is generally at least 3 years;
Second, all enterprise documents marked as "trade secrets" submitted by enterprises should be kept confidential, but confidential information does not include information in known fields;
Third, the scope of confidential personnel is often extended to fund consultants (including lawyers hired by them), employees and affiliated enterprises. 5. Should enterprises hire full-time financing financial consultants? The positive evaluation and negative word-of-mouth of FA are outstanding. Fa is not a living Lei Feng. The service commission for enterprises to hire FA is generally 3 ~ 5% of the private equity transaction amount, and some FAs are more interested in corporate equity.
The most critical role of FA is valuation. However, most FA in China feel more like a poor professional "matchmaking agency", especially the financial forecasts made by FA are often scoffed at by funds. Nevertheless, if enterprises are unfamiliar with the capital market, hiring the most famous financial advisers (the top five in China) does help to improve the success rate of private placement, and it is worthwhile for enterprises to pay financing commissions for it.
Counsel's advice:
●FA requires caution in signing exclusive agency. If the enterprise is tied to a little-known FA, it will make the enterprise miss the opportunity of time.
● The payment of financing commission should be written into the final transaction document of private placement to avoid the interference and disputes of investors when paying the commission.
● The criterion of a good financial adviser: whether the project he handles is finally listed or not. Most FA's that require high upfront fees are liars, while top FA's do not require or require reasonable upfront fees. 6. How to pay the commission safely and uncontroversially? When the success of private placement is in sight, it often implies that enterprises will pay commissions to those who contribute to this project, and most enterprises are very confused.
Private equity transactions are like marriage. At first, you will get to know each other by fate, but in the end, you will overcome many difficulties and obstacles by holding hands. As the industry practice is that the fund as an investor generally does not pay any commission, it is reasonable for the enterprise to pay 2-3% of the thank-you fee to the person or company who has made great contributions to the transaction after the transaction is successful, but the following two points should be noted:
First, it is absolutely necessary to avoid bribing the investment manager of the fund, the staff of the counterparty, which will be characterized as "commercial bribery" and belong to the untouchable high-voltage line;
Second, it is suggested that the commission clause-"looking for fees" be written into the investment agreement or at least let investors know. The commission is a large sum of money, and the wool is on the sheep. The enterprise spends the money without the consent of the investor, which theoretically harms the interests of the investor. 7. When will the enterprise ask the lawyer to intervene in the transaction negotiation? The professionalism and complexity of private placement transactions exceed the knowledge and ability of more than 95% private entrepreneurs. Unless entrepreneurs are investment bankers, it is extremely irresponsible for enterprises and all shareholders not to ask lawyers to negotiate financing matters with private equity investment funds themselves.
Generally speaking, before and after signing the confidentiality agreement, enterprises should hire practicing lawyers as financing legal advisers. The usual practice is to turn to the perennial legal counsel of the enterprise. However, there are too few qualified private equity lawyers in China, and it is very unlikely that their perennial legal advisers will happen to do private equity transactions. Therefore, it is recommended to hire professional senior lawyers in this field for guidance. Private placement is a financial business. Therefore, powerful enterprises should select private consultants from the top ten law firms in domestic financial and legal business.
In our practice as a legal consultant for private equity transactions, entrepreneurs will deeply trust us whether the final transaction is successful or not. Among all private equity participants, financial advisers are more concerned about their own commissions, and sometimes they do not hesitate to lower the price of the enterprise in order to reach a deal; Capital is the game object of enterprises, with corresponding interests in negotiation and consistent interests after transaction; Fund lawyers only work for the fund, not to mention having any feelings with the enterprise; Only company lawyers consider problems completely from the standpoint of enterprises and entrepreneurs; For the benefit of enterprises and entrepreneurs, haggle over every ounce in negotiations. It is common that after the private placement negotiation is completed, we will be invited to be the perennial legal adviser of the enterprise, and the enterprise will also use our services in the next round of private placement and IPO business in the future.