Wenzhou Bank suffered heavy losses in financial management, do private equity funds make money?

Private Placement is private raising or private placement. What I mean privately is as follows: First, advertising is not allowed. Second, it can only be recruited from specific targets. The so-called specific object has two meanings. One means that the other party is relatively wealthy and has certain risk control capabilities, and the other means that the other party is an institution or person in a specific industry or category. Third, the number of private placement targets is generally relatively small, such as less than 200 people.

Compared with public funds such as closed funds and open-end funds, private equity funds have very distinctive characteristics, and it is these characteristics that give them advantages that public funds cannot match.

First of all, private equity funds raise funds through non-public means. In the United States, public funds such as mutual funds and pension funds generally advertise on the public media to attract customers, while according to relevant regulations, private equity funds are not allowed to use any communication media to advertise. The so-called "reliable investment information", or direct knowledge of the fund manager to join.

Secondly, in terms of fundraising targets, private equity funds only target a small number of specific investors. Although the circle is small, the threshold is not low. For example, in the United States, hedge funds have very strict regulations for participants: if you participate in the name of an individual, your personal annual income in the past two years must be at least US$200,000; if you participate in the name of a family, your family’s income in the past two years must be at least US$300,000. Above USD; if participating in the name of an institution, its net assets must be at least USD 1 million, and there are corresponding restrictions on the number of participants. Therefore, private equity funds have highly targeted investment goals and are more like investment service products tailored for middle-class investors.

Thirdly, unlike the strict information disclosure requirements of public funds, private equity funds have much lower requirements in this regard. In addition, government supervision is correspondingly looser. Therefore, the investment of private equity funds is more hidden and the operation is more complicated. It is more flexible and has a correspondingly greater chance of obtaining high-yield returns.

In addition, a significant feature of private equity funds is that fund sponsors and managers must invest their own funds in fund management companies. The success of fund operations is closely related to their own interests. Judging from current international practice, fund managers generally hold 3% to 5% of the shares of the fund. Once a loss occurs, the shares owned by the manager will first be used to pay participants. Therefore, the sponsors, managers and funds of private equity funds are closely interdependent and share the same interests of honor and disgrace. This also to a certain extent better solves the inherent interest constraints of managers of public equity funds. Weakening and stimulating the organizational form of private equity funds

1. Corporate style

Corporate private equity funds have a complete corporate structure and their operations are relatively formal and standardized. At present, corporate private equity funds (such as "XX Investment Company") can be established relatively easily in China. Semi-open private equity funds can also operate more conveniently in a flexible manner without having to undergo strict approval and supervision, and their investment strategies can be more flexible.

For example:

(1) Establish an "investment company" whose business scope includes securities investment;

(2) The number of shareholders of the "investment company" should not be large, and the amount of capital contribution should be relatively large, which not only ensures the nature of private equity, but also has a large scale of funds;

(3) The funds of the "investment company" are handed over to the fund Manager management, according to international practice, the manager collects fund management fees and performance incentive fees, and enters them into the operating costs of the "investment company";

(4) The registered capital of the "investment company" is set at a certain date every year Re-register at a specific time point to perform a nominal capital increase or share reduction. If necessary, investors can redeem their capital contribution once a year at a specific time point. At other times, investors can Equity agreement transfer or over-the-counter transactions can be carried out during the period. This "investment company" is essentially a corporate-style private equity fund that can be expanded at any time but redeemed only once a year.

However, corporate private equity funds have a disadvantage, that is, there is double taxation.

Methods to overcome the shortcomings include:

(1) Register private equity funds in tax havens, such as Cayman, Bermuda and other places;

(2) Register corporate private equity funds as High-tech enterprises (can enjoy many preferential treatment) and registered in a place with more favorable taxation;

(3) Backdoor, that is, jointly or acquires an enterprise that can enjoy tax preferential treatment during the establishment and operation of the fund (mostly It is better to be a non-listed company) and use it as a carrier.

2. Contractual type

The organizational structure of contractual funds is relatively simple. The specific approach can be:

(1) As the manager of the fund, the securities company selects a bank as its custodian;

(2) Raise a certain amount of money to start operations , open once a month, announce the fund net value to fund holders once, and handle fund redemption once;

(3) In order to attract fund investors, handling fees should be reduced as much as possible, and securities companies should act as fund managers People charge a certain amount of management fees based on performance. Its advantage is that

double taxation can be avoided, but its disadvantage is that its establishment and operation are difficult to avoid the approval and supervision of the securities management department.

3. Virtual type

Virtual type private equity fund looks like entrusted financial management on the surface, but it actually operates like a fund. For example, when a virtual private equity fund is established and expanded, it ostensibly signs an entrusted financial management agreement with each customer, but these entrusted financial management accounts are combined for fund-style operations. When buying and redeeming fund units, Settlement is based on the net value of the fund. The specific approach can be:

(1) Each fund holder opens a separate account in his or her own name;

(2) Fund holders*** Contribute capital to establish a master account;

(3) The securities company, as the manager of the fund, manages all accounts in a unified manner, and calculates the net value of fund units uniformly for all accounts;

(4) The securities company tries its best to Make the actual market value of each account equal to the market value calculated based on the net value of the fund unit. If the two are not equal, the balance of funds between the main account and the sub-account will be transferred to balance during redemption.

The advantage of the virtual fund is that it can circumvent the approval and supervision of the securities management department on the establishment and operation of the fund, making the establishment flexible and avoiding double taxation. The disadvantage is that it still has not got rid of the shackles of entrusted financial management, and further legal regulations are needed for fund raising. The capital operation is still subject to the supervision of securities management departments by securities management departments, and it lacks the development advantages of funds in terms of capital scale expansion.

4. Portfolio

In order to take advantage of the above three organizational forms, a fund portfolio can be established to combine several organizational forms. There are 4 types of fund of funds:

(1) A combination of corporate and virtual funds;

(2) A combination of corporate and contractual funds;

(3) The combination of contractual and virtual forms;

(4) The combination of corporate, contractual and virtual forms.

Three major paths for the development of private equity funds in China

Private equity funds are important participants in the capital market. According to their connotations, they can generally be divided into hedge funds, private equity funds and venture capital funds (also known as venture capital funds). can be called venture capital funds) three types. Private equity funds in my country usually refer to non-public institutional investors engaged in investment in the securities market. It is estimated that the size of private equity funds in my country's A-share market is about 500 billion yuan, and the amount of a larger single fund is estimated to be about 200-300 million yuan. With the in-depth development of my country's securities market and competition from investment institutions with foreign backgrounds, my country's private equity funds are also facing structural changes. The three fund models mentioned above will be the direction of structural changes in my country's private equity funds.

1. The split-share structure reform provides conditions for the rise of private equity funds

The split-share structure reform is the government’s stated goal. After the reform, the number of tradable stocks in my country's stock market will be 3 to 4 times that before the reform. Acquisitions between listed companies will also be much simpler than before full circulation. The pressure of hostile acquisition will also force the management of existing listed companies to work more closely with shareholders to avoid the passive situation of being acquired. In addition, after the stock is fully circulated, in order to achieve the purpose of industrial expansion, mutual acquisitions between listed companies will become easier and more meaningful in improving economic efficiency.

Usually any form of acquisition by a listed company will have a greater impact on its financial structure and lead to changes in stock prices. This change will inevitably bring changes to the investment model of private equity funds. Some of these private equity funds may focus on such business, transforming from the current generally speculative private equity funds into partnership funds (M&A

Fund) that specialize in mergers and acquisitions of listed companies or even industrial mergers and acquisitions.

This kind of acquisition fund is one of the large number of private equity funds (private equity

fund) in the financial markets of developed countries. Take the American Carlyle Group, which has made a lot of gains in my country in recent years, as an example. The company's own funds are about 8 billion US dollars, and the funds driven by investment can reach 80 billion US dollars, which is greater than the total number of all private equity funds in my country's A-share market. many.

With strong financial advantages, political advantages and familiar connections in global capital, it is basically possible to perform some surgical operations on some M&A projects, that is, overall acquisitions, without having to go to great lengths to obtain overseas capital. Listed on the market and obtain annual returns of over 30%. In addition, CapitaLand, a real estate investor that has been very active in the Mainland in recent years, has its parent company as a wholly-owned subsidiary of CapitaLand Group, a large real estate company listed on the Singapore Exchange. These international investment institutions view opportunities from a global financial perspective, skillfully combine assets, and conduct arbitrage in cross-border financial markets.

With the rapid development of international private equity funds, policy restrictions on my country's private equity fund industry will gradually become looser. Based on the current scale of my country's securities market, private equity funds with about 300 million yuan of self-owned assets can explore in this direction and drive investments of about 1 billion yuan through a leverage ratio of 3 times. In addition, it is necessary to conduct in-depth research on the business model of international M&A funds and strive to find arbitrage opportunities in cross-border financial markets.

2. Purely speculative private equity funds will transform into hedge funds

With the realization of full circulation of stocks of listed companies, the number of stocks of listed companies will increase several times, extremely The earth increases the liquidity of the market. Coupled with the increase in the strictness of securities supervision, it is difficult for individual institutional investors to use their capital and information advantages to obtain excess profits as before. In addition, as the concept of value investing is gradually recognized by people, the operation method of locking in the number of stocks through collusion to push up the stock price has become increasingly risky.

Due to the increase in the number of shares and the obligation to disclose the tender offer caused by the shares held by a single institution, investors in a single stock present a market pattern similar to monopolistic competition or full competition. A single institution It is difficult to have an absolute advantage. Finally, after the stock market has a short-selling mechanism in the future, stock prices will become more volatile and the direction will be more difficult to determine. Therefore, the profit model of simply locking in prices and driving up prices needs to be rewritten.

Due to the above three reasons, investment institutions that are purely engaged in stock trading can only follow the guidance of efficient market theory and conduct appropriate speculation on instantaneous price deviations. However, in an increasingly mature secondary market, arbitrage opportunities arising from irrational price fluctuations are very short-lived, and as the number of stocks and types of positions increase, private equity fund managers will no longer be able to monitor the market through personal tracking. Applicable. Because fund managers are affected by personal physical ability and intelligence, it is difficult to quickly judge investment opportunities amid instantaneous price fluctuations. Therefore, by compiling computer models and programs, and embedding trading instructions into such programs, it has become the best way for private equity funds to manage assets.

The difference is that when trading instructions are embedded in the program, the fund manager must clearly know his expected rate of return and his risk-taking coefficient. When fund managers have a complete understanding of the risk preferences of the funds they manage and formulate investment strategies based on this, the function of the market mechanism to optimally allocate resources can be reflected. This method is one of the most common means of investing in large Western financial markets, and with the opening and development of my country's securities market, its use has gradually matured. For example, the recently listed Baosteel Warrants can be traded using a computer-set model, and its ability to control transaction risks is far superior to the instant decision-making of traders (traders).

This kind of private equity fund will actually eventually evolve into a more typical hedge fund (hedge

fund).

There are already domestic investment institutions claiming to be hedge funds, but their websites show that the products they design are too narrow to match the current market conditions. Institutions engaged in hedging investments have no restrictions on the scale of assets. The most important thing is to develop effective risk control and transfer technologies.

3. Private equity funds with venture capital background can be transformed into venture capital funds

At the end of the last century, under the guidance of the strategy of rejuvenating the country through science and education, many venture capital institutions were established across the country. Since the pure venture capital environment at that time was not very mature and the stock market was booming, many venture capital companies shifted part of their investments to stocks in the secondary market, and some later became institutional investors who mainly invested in the secondary market. However, with the gradual improvement of my country's securities main board market and the successful demonstration effect of foreign venture capital companies in the field of venture capital, these institutions may be re-aroused to participate in venture capital.

At the same time, because it has experience in participating in the secondary market, the main business of the listed companies in the secondary market it invests is likely to be an important basis for its venture capital projects. With the share-trading reform and the increasing requirements of the securities authorities on the operating performance of listed companies, listed companies must seriously consider that their mergers and acquisitions projects can add points to their operating performance, unlike in the past market where they were simply based on manufacturing themes. acquisition.

Insufficient incentive mechanism and other disadvantages.

Under such conditions, listed companies, venture capital companies, entrepreneurs of invested projects, and stock investors of the listed company may get a win-win situation. Although this model is suspected of insider trading for venture capital companies, given the current domestic legal system and law enforcement space, this model has certain operability. The above-mentioned investment model can become a development direction discussed by some private equity funds with venture capital experience and background.

In fact, my country's rapidly growing small and medium-sized enterprises have always been an area where venture capital institutions are digging for gold.

According to statistics from Ernst & Young, in 2004, the amount of venture capital completed in my country reached US$1.27 billion, while in 2002, this figure was only US$418 million. Among them, foreign capital has become an important force in the development of my country's venture capital industry. Comparatively speaking, foreign investment has more advantages in project selection and exit mechanisms. For example, Goldman Sachs’ investment in Mengniu and Carlyle Group’s investment in Ctrip.com. This kind of profit model is what my country's private equity funds with venture capital experience and background must pay attention to. Generally, investors engaged in this type of business should have RMB assets of more than 50 million yuan. Engage in cross-market arbitrage by formulating a reasonable asset portfolio.

IV. Changes in the international and domestic situation have opened up space for the development of private equity funds

In recent years, a significant phenomenon has emerged in the international capital market. First, the rapid development of private equity funds , its performance is eye-catching, its model is increasingly recognized by some large institutional investors, and it has become the focus of the international financial market. According to statistics from the European Private Equity and Venture Capital Association, the total investment volume of European private equity in 2003 reached 29.1 billion euros, and the total financing volume reached 27 billion euros. The PricewaterhouseCoopers World Investment Report believes that the share of private equity investment in GDP in 2004 was 0.97%, 0.28%, and 0.23% in North America, Europe, and Asia respectively.

In the past five years, the total number of private equity funds in the United States has doubled, reaching the current scale of approximately US$700 billion. In addition, global hedge funds are growing rapidly. In 1990, there were approximately US$39 billion in global hedge fund assets. By 2003, they had reached an asset size of US$650-700 billion, with an average annual growth rate of more than 25%.

In the past five years, the total assets of U.S. pension funds are approximately US$5 trillion, and the proportion invested in hedge funds, private equity funds, real estate funds and derivative financial instruments has increased from 2% to 5%. The well-known California Pension Fund, Pennsylvania Pension Fund, and General Electric have all relaxed their investment restrictions on private equity funds, while many pension funds in Europe have also increased the proportion of investment in private equity funds.

In terms of venture capital, in 2003, the assets under management in Europe alone were approximately US$1.8 trillion, distributed in 36 European countries. The average venture capital assets in each country were approximately US$50 billion, which is Nearly 40 times that of our country. It can be seen that the development of venture capital in our country has great potential.

According to statistics from the World Bank, the gap between income and expenditure of my country’s pension funds from 2001 to 2075 will reach 9.15 trillion yuan. With the current investment system, it is impossible to cope with such a large expenditure. The only way is to replenish the account and increase the investment rate of return at the same time. One of the ways to increase investment returns is to entrust some assets to the management of private equity funds with excellent performance and integrity.

According to a comparison of the performance of hedge funds and similar funds in the U.S. market from 1995 to 2000, the average return rate of the top 10 best-performing hedge funds reached 53.6%, while the best-performing* The average return for ** funds was 36%, while the average return for the worst-performing hedge funds was -7.7%, and the average return for the worst-performing fund was -19.8%. The income level of private equity funds such as hedge funds is significantly higher than that of public funds such as mutual funds. Our country's private equity funds should be aware of the above-mentioned new trends emerging in the international private equity fund industry, and should actively adjust, proactively adapt, choose their own areas of expertise, and explore a profit model that suits them.

According to our country's laws, no unit or individual may engage in the business of absorbing public deposits or absorbing public deposits in disguised form without the approval of the financial regulatory authority, otherwise it will constitute an illegal act. The fundamental feature that distinguishes illegal or disguised absorption of public deposits from private equity funds is whether interest is paid. The income of private equity funds comes from risk income and should not involve any form of fixed interest, otherwise it will be illegal.

——Guiding the "adventurous spirit" into compliance channels

Private equity funds can accelerate capital appreciation and are also characterized by high risks. The existing so-called "private equity funds" in our country are not actually "private equity funds" in the strict sense, but are more of an "underground fund" nature. These underground funds do not have complete legality and regulatory feasibility.