The first experience of Private Equity Fund

Hello, everyone. Welcome to the private equity course of Niuniu classroom. Through four lessons, we will introduce the basic concepts and characteristics, operating mechanism, investment strategy and investment practice of private equity funds, so that you can have a systematic understanding of the overall situation and investment methods of private equity funds.

Next, let's get into the content of the first class, the initial experience of private equity funds.

What is a private equity fund?

In the past two years, funds have become a more and more popular way of investment. However, the term "fund" often refers to the public fund raised by the public. The investment threshold of public funds is relatively low, most of them are active in the secondary market and need to bear the risk of stock market fluctuations.

The counterpart is the private equity fund, which is a private equity fund that raises funds for specific investors. Mainly invest in the equity of unlisted companies. Private equity funds have a certain capital threshold, the investment period is usually long, mainly long-term investment, less affected by the short-term fluctuations of the market, so it is more favored by high net worth investors.

What are the returns of private equity funds?

One of the classic cases of private equity investment is Today's $10 million investment in JD.com in 2006. By the time JD.com went public in 2014, the value of this investment had swelled to more than $2 billion. By the time the stock was cleared in 2016, the net profit of capital today was more than 100 times, and the annualized rate of return during the investment period was more than 100%.

The case of today's capital is only an ideal situation for private equity investment and certainly does not represent its overall level of return. However, statistics show that the average rate of return on private equity investment is sizeable globally. Over the past 20 years, the average annualized return of private equity funds has reached 12.5%, a cumulative increase of more than 10 times, far higher than the average performance of the mature secondary market index NASDAQ and S & P 500 over the same period.

There are two main reasons why private equity returns can be significantly higher than the average returns in the secondary stock market.

First of all, there are more investment opportunities in the private equity market and the information is opaque. For example, there are fewer than 5000 listed companies in China, while there are millions unlisted companies. Professional investment teams can better tap investment opportunities, especially those start-up high-growth enterprises with huge room for rising value, so as to bring rich returns to private equity investment. After a private equity fund successfully withdraws from an invested company, its profit may be 3-5 times, or even dozens of times.

At the same time, private equity investment generally has a long lock-up period, so it is difficult to cash in a certain period of time, so it is necessary to give liquidity compensation, the investment price will be relatively low, so the expected return of investment exit is also higher.

What are the types of private equity investment?

Common types of private equity funds include:

The first category is venture capital (Venture Capital). Venture capital funds typically invest in start-ups with long-term growth potential, ranging from millions to tens of millions of dollars.

The second category is growth capital (Growth Equity). Growth investment funds usually invest in minority stakes in high-growth companies, such as companies that have developed to a certain stage in sunrise industries such as technology, health care, consumption and so on.

The third category is M & A capital (Buyout). M & A funds focus on buying controlling stakes in unlisted companies and sometimes make large direct acquisitions of listed companies.

What are the advantages of private equity funds?

Private equity funds have many advantages over funds that invest in the secondary market.

First, private equity funds have more investment options, thus thickening their earnings. Most of the companies with great potential are in the unlisted stage, and private equity funds can capture more investment opportunities through professional research at this stage. Share the development dividends of these high-growth enterprises.

Second, private equity funds also have more advantages in investment risk control. First of all, after investing in enterprises, private equity funds can be involved in enterprise management to a certain extent and track the development of enterprises. At the same time, when private equity funds invest, they generally sign the relevant terms of redemption, commonly known as "betting agreements" in the industry. if the company fails to be listed on schedule, the private equity fund has the right to require the company to buy back and achieve a safe exit. and then control the investment risk to a certain extent.

What are the disadvantages of private equity funds?

At the same time, private equity funds also have some shortcomings.

First, the threshold for subscription is higher. Private equity funds are issued only to institutional and individual investors who are qualified as qualified investors. For qualified investors to buy private equity funds, the minimum amount of investment needs to be at least 1 million, and some need 3 to 4 million or more.

Second, liquidity is limited. Private equity funds generally have a closed period of 6-12 months, which cannot be redeemed within 6 months after its establishment. Investors may need to pay a certain proportion of the redemption fee for redemption during the closed period, and there is no need to pay a handling fee for redemption after the expiration of the closed period. After the closure expires, the net value is usually announced once a month and redemption is open.

OK, this is the end of the preliminary introduction to private equity funds. In the next section, we will continue to talk about the operating mechanism of private equity funds.