I. About private equity funds
 
1. Positioning of private equity funds
 
        Internationally, according to the investment method or operation style, private equity investment funds can generally be divided into six types, of which three are the most common.
 
        The first is the venture capital fund VC (Venture Capital Fund), generally investing in the early establishment of enterprises or high-tech enterprises;
 
        The second is the Growth-oriented Fund, which is a narrow-minded private equity investment fund. The general investment is in the expansion stage of the unlisted equity of the company. Generally, it is not targeted at holding. The growth fund is also the largest proportion of private equity investment in China. section;
 
        The third is the Buyout Fund, which invests mainly in listed or unlisted equity of mature companies, and is intended to gain control of mature target companies to integrate corporate resources and enhance value.
 
        In addition, private equity investments include Mezzanine Capital, Pre-IPO Capital (Bridge Finance) and Private Investment In Public Equity (PIPE).
 
2. The model of private equity funds
 
   1 company system
 
         As the name suggests, the company-owned private equity investment fund is a legal person fund, mainly in accordance with the "Company Law" (revised in 2005), "Regulations on the Management of Foreign-invested Venture Capital Enterprises" (2003), "Interim Measures for the Administration of Venture Capital Enterprises" (2005) ) and other laws and regulations were established.
 
        In the business environment, because the company's concept persists for a long time, the company model is clear and easy to understand, and it is easier for investors to accept. In this model, shareholders are the investors and the ultimate decision makers of the investment, each of which allocates voting rights according to the proportion of capital contribution.
 
   2 trust system
 
        A trust-based private equity investment fund can also be understood as a private equity trust investment, which means that the trust company invests equity in the trust plan for equity investments.
 
        Its establishment is mainly based on the Trust Law (2001), the “Management Measures for Trust Companies” formulated by the CBRC in 2007, the “Administrative Measures for Trust Companies' Collective Fund Trust Schemes” (referred to as “trust two regulations”), and the private equity of trust companies. Operational Guidelines for Investment Trust Business (2008).
 
        The advantage of adopting the trust operation mode is that it can quickly concentrate a large amount of funds through the trust platform and play the role of capital enlargement.
 
        However, the shortcoming is that the trust industry lacks an effective registration system. As a company's listing promoter, the trust company cannot confirm whether it has a holding relationship or related shareholding, and the regulatory authorities require disclosure to the actual holder of the trust.
 
  3 limited partnership
 
        The legal basis for the limited partnership private equity fund is the Partnership Enterprise Law (2006), the Interim Measures for the Administration of Venture Capital Enterprises (2006) and related supporting regulations.
 
        According to the Partnership Enterprise Law, a limited partnership is established by more than two partners of less than fifty, consisting of at least one general partner (GP) and a limited partner (LP). The general partner bears unlimited joint liability for the partnership debt, while the limited partner does not perform partnership affairs, nor does it represent the limited partnership, and only assumes responsibility for the partnership debt to the extent of its subscribed capital contribution.
 
        At the same time, the Partnership Enterprise Law stipulates that a general partner may pay for labor, while a limited partner may not contribute with labor. This provision clearly recognizes the value of the intellectual capital of the general partner as the administrator, and embodies the advantage of the limited partnership “having money and powerful contributions”. In operation, the limited partnership enterprise does not entrust the management company to manage the funds, and directly manages and operates the enterprise affairs by the general partner.
 
        The main advantages of adopting a limited partnership are:
 
         The property is independent of the personal property of each partner, the rights and obligations of each partner are more clear, and the incentive effect is better;
 
        Taxes are only levied on partners, avoiding double taxation.
 
 4 "Company + Limited Partnership" model
 
        In the “company + limited partnership” model, the company refers to the fund manager as the company and the fund as a limited partnership enterprise. This model is more common in the operation of equity investment funds.
 
        Due to the high risk of natural person's execution of partnership as a GP, and the fact that private capital has different concepts and understandings of the limited partnership system, it will undoubtedly enhance the challenge of natural person GP. At the same time, in the Partnership Enterprise Law, there is no requirement for a general partner in a limited partnership to be a natural person or a legal person. Therefore, in order to reduce the personal risk of the management team, the “company + limited partnership” model is adopted, that is, the investment management company is established through the management team, and then the company is established as a general partner with the natural person and the legal person LP to establish a limited partnership equity investment. fund.
 
        Due to the limited liability system of the company system, once the fund is facing a bad situation, the management company as a limited liability can become a risk barrier, and the personal risk of the manager can be reduced. Under this model, the fund is managed by the management company, and the LP and GP follow the established agreement and make decisions through the investment decision-making committee. At present, well-known investment institutions in China use this mode of operation.
 
 5 "company + trust" model
 
       The "company + trust" combination model combines the characteristics of the company and the trust system. That is, the company manages the fund and obtains the investment funds needed by the fund through the trust plan.
 
        Under this model, the trust plan is usually initiated by the trustee, entrusting the investment team as a manager or financial adviser, suggesting that the trust can make equity investments, and the management company can also participate in the project and investment.
 
        It should be mentioned that Article 21 of the “Guidelines for the Operation of Trust Companies' Private Equity Investment Trust Businesses stipulates that “when the trust documents are agreed in advance, the trust company may hire a third party to provide investment advisory services, but the investment consultants shall not implement investment decisions on their behalf. This means that the manager cannot make independent investment decisions on the funds under the trust plan. At the same time, managers or investment consultants also need to meet several important conditions:
 
        Hold a trust unit no less than 10% of the trust plan;
 
        The paid-in capital is not less than 20 million yuan;
 
        The management team's major member equity investment business experience has not less than three years.
 
        The adoption of this model is mainly for real estate equity investment projects. In addition, some venture capital management companies that need to use fast-running funds often use the trust platform for fundraising. Xinhua Trust, Hunan Trust and other trust companies have issued such trust plans.
 
 6 parent fund (FOF)
 
        A parent fund is a fund that is specifically invested in other funds, also known as the Fund of Fund, which participates in other equity investment funds by setting up a private equity investment fund.
 
        The parent fund uses its own funds and its management team advantages to select suitable equity funds for investment; to diversify and reduce investment risks by optimizing multiple equity investment funds.
 
        The venture capital guiding funds and industrial guiding funds initiated by the governments all over the country are all in the form of the operation of the parent fund. The government can use the operation mode of the parent fund to effectively amplify the financial funds, select a professional investment team, guide social capital to intervene, and rapidly cultivate local industries, especially the emerging industries that the government hopes to support.
Second, about the new three board
 
 a, the positioning of the new three boards
 
       The "New Third Board" is aimed at the original "three boards". The so-called three-board market is called "the agency share transfer system" and was officially opened on July 16, 2001. As part of China's multi-level securities market system, the three-board market provides a place for continued circulation of listed company shares after delisting, and on the other hand, it solves the original national securities trading automatic quotation system (STAQ system) and NET system (NationalExchange). And Trading System) The circulation of legal person shares in several companies left over from history. In January 2006, with the completion of Century Riel and Zhongkesoft as the first listed companies, the Zhongguancun Science Park Unlisted Co., Ltd. shares quotation platform officially kicked off, because the listed companies are high-tech enterprises and different from the original transfer system. The delisting company and the original STAQ and NET system listed companies are called “New Third Board”. At present, the New Third Board is no longer limited to the Zhongguancun Science Park Unlisted Co., Ltd., nor is it limited to non-listed joint stock companies in Tianjin Binhai, Wuhan East Lake and Shanghai Zhangjiang, but is a national non-listed company limited. The trading platform is mainly aimed at small and medium-sized enterprises. The opening of the New Third Board marks the further development of China's OTC market. It has built a multi-level capital market system in China with the main board market, small and medium-sized board market and the ChiNext market of the Shanghai and Shenzhen Stock Exchanges.
 
 b. Ways for financing the listing of the New Third Board
 
       1. Directional issuance: In the aspect of equity financing, the company is allowed to issue financing at the same time as the application for listing or after listing, and may apply for one approval and issue it in installments.
 
       2. Preferred stocks: Preferred stocks may be more attractive to SMEs listed on the New Third Board. Generally, the SMEs in the initial stage have a high concentration of equity. This arrangement of preferred stocks allows entrepreneurs to maintain control over the company and create conditions for investors to enjoy more favorable dividend returns.
 
       3. SME private debt: Private debt is a convenient and efficient financing method. Its issuance review adopts a filing system, the approval cycle is faster, the supervision of fund use is looser, and the use of funds is relatively flexible. The comprehensive financing cost is lower than that of trust funds and private lending, and some regions can also obtain policy discounts.
 
       4. Market maker system: The market maker system is a system in which securities companies use their own funds to participate in the New Third Board trading and obtain profits through the proprietary trading spread. Since the securities company has a large number of outlets in the business department, it is convenient for customers to open the investment rights of the new three boards, thereby increasing the activity of the entire new three board transactions and revitalizing the entire market.
 
       5. Asset securitization: Asset securitization may be more suitable for companies with stable cash flow. However, in general, such enterprises are relatively mature, or the assets are large. However, the current cash flow of the listed companies in the New Third Board is not stable and the asset size is small. There may be some obstacles in using asset securitization tools.
 
       6. Bank Credit: At present, the Bank has launched special products for listed companies for small-capital enterprises. The New Third Board has established cooperative relationships with a number of banks to provide exclusive stock pledge loan services for listed companies.
 
 c. The impact of the New Third Board market on private equity investment
 
    1. Become a new way of exiting private equity investment
 
        The establishment of the share quotation transfer system has become a new way of capital withdrawal for private equity funds investing in the New Third Board listed companies, and listed companies have become another hot spot for private equity funds. In the past, private equity investment companies had to achieve exit, mainly through the listing of the secondary market.
 
    2. The New Third Board regulates the development of private equity investment
 
        All kinds of funds have been poured into the private equity investment industry in an orderly manner. The insurance industry, the securities industry, listed companies, state-owned enterprises, private capital, and local government guidance funds have all entered the equity investment industry, causing the phenomenon of grabbing projects and raising prices. The expectations of entrepreneurs are getting higher and higher. Some enterprises even reach 20 times and 30 times price-earnings ratio. It is more difficult for professional equity investment institutions to invest in such a flood of capital congestion.
 
    3. Provide sufficient project resources for private equity investment companies
 
        Relevant rules and regulations stipulate that it can meet the two-year survival period (continuous calculation of the overall restructuring of a limited liability company); clear business, continuous operation capability; sound corporate governance mechanism, legal and standardized operation; clear equity, legal compliance of stock issuance and transfer If the sponsoring broker recommends and continuously supervises these conditions, they can apply for listing on the New Third Board.
 
    4. Effectively promote the differential development of private equity investment institutions
 
        Enterprises will take the initiative to choose investment institutions to promote the organization's strategic development, business management, human resources construction, international cooperation, international business development, consolidation, etc., to provide enterprises with "tailor-made" services, improve the business level and differentiation of investment institutions. degree.
 
 3. How to invest in the New Third Board of private equity funds
 
        At present, the main mode of private equity funds is mainly investing in the listing of new three boards or promoting the listing of new three boards by invested companies. The main modes of operation are:
 
    (1) Investment before listing
 
        Investment business is the source of private equity fund business, so the quantity and quality of listing are particularly important. Therefore, although the expansion of the New Third Board has eliminated the requirements for the profitability of the listed companies, private equity funds will still choose to invest in SMEs with unique profit models or innovative businesses.
 
        Private equity funds are particularly important in selecting companies with unique profit models in order to be able to exit at a higher valuation after the company is listed on the New Third Board. At present, the common practice of private equity in the market is to conduct analysis and inspection in certain industries. In addition to paying attention to corporate financial indicators, the level of corporate management is also judged. In short, the selection of a good project requires a dedicated investment research department to carry out the necessary objective analysis and multi-party argumentation before it can be finally obtained.
 
        After the investment, the private equity fund should be able to really help the company to obtain real management improvement and value enhancement. The next task is to push the company to the New Third Board. After the company is listed, the increase in popularity and valuation is more likely to attract market capital investment. At this time, some funds have been able to opt out.
 
        At present, most investment institutions are still waiting for the implementation of the new three-board transfer system, in the hope of obtaining a higher valuation exit. When the transfer system has not yet been launched, the benefits of private equity institutions will be greatly limited.
 
     (2) Increase participation
 
        Investing in a new three-board enterprise will not only save the complex process and risk of selecting a company, but also acquire the company's equity at a lower P/E ratio, and find the optimal combination between risk and profit. Therefore, institutional investors can easily pass The company's listing to achieve the exit to get the difference. At the same time, because the NEEQ does not limit the number of additional issuances and the flexible system that can apply for multiple issuances at one time, the enthusiasm of the institutions to participate in the new three-board directional capital increase is even higher.
 
        At present, the share transfer system does not set a lock-up period for the additional shares of the listed New Third Board Company. Therefore, after the PE organization intervenes in the New Third Board Company through the subscription of the private placement mode, the discount amount can be realized at any time, or the standby will be withdrawn on the New Third Board or the IPO will be listed. , are all good profit models.
 
        However, the popularity of the fixed-income market makes it difficult for equity institutions to obtain a fixed share of the ideal investment companies. At present, there are two main ways in which many equity institutions obtain a fixed share:
 
        First, participate at a higher price. Many equity institutions have scared off competitors by reporting higher prices to host brokers, and even some offer has increased by 50% on the original basis.
 
        Second, direct contact with the company through the equity institution's own network. Its main commitment will be to assist the enterprise in terms of resources and management in the future.
Fourth, the choice and procedures of private equity investment
 
  I. Choice of private equity fund investment
 
       The high risk of private equity investment determines the high penetration of investors into the company, and its pricing and rights and obligations have a strong professionalism. From the perspective of investors, the investment strategies generally adopted include four modes: joint investment, segmented investment, matching investment and portfolio investment.
 
        1. Co-investment: It is mainly for projects or enterprises with high risks and high investment. Investors often use public investment in conjunction with other investment institutions or individuals.
 
        2. Sub-investment: refers to the investment in the time period. Generally, enterprises or high-tech enterprises in the initial stage of establishment are more risky in all aspects, and the capital demand is small. With the passage of time and the development of the enterprise, the risk is gradually reduced. As demand increases, investors can decide whether to invest further or withdraw investment based on the specific development of the company.
 
        3. Matching investment: When an investor invests in a project or a company, the manager of the project or enterprise must also invest a certain percentage of funds to form an incentive-binding mechanism to promote the management of the company and prevent the cause. Ethical behavior, invalid management caused by lack of credit, agency failure or information asymmetry.
 
        4. Portfolio investment: refers to investors investing a certain proportion of capital in multiple industries, multiple risk projects or risk enterprises in order to disperse and reduce investment risks and take timely countermeasures.
 
 II. Procedures for private equity investment
 
        Venture capitalists look for companies or opportunities that enable them to achieve high returns (over 35% annual yield). Sometimes, to achieve this goal in the shortest possible time, usually 3 to 7 years. Successful venture capitalists have a lot of valuable experience, including selecting investment targets, implementing investments, supervising the company, leading the company's growth, and driving the company through the difficulties and prompting the company to develop rapidly.
 
       Although each venture capital company has its own operating procedures and systems, it generally includes the following steps:
 
   1. Initial review
 
        A typical venture capital firm will receive many project proposals. Large-scale venture capital companies receive hundreds of project proposals every year. The initial selection of projects will be discussed within the company to decide whether to interview or reject. After a rigorous review, the project that has finally been selected for investment can be described as one of the best.
 
   2, interview
 
        If the venture investor is interested in the project proposed by the entrepreneur, he will contact the entrepreneur to directly understand his background, management team and business. If the interview is successful, venture capitalists will want to learn more about the company and the market, and perhaps he will mobilize other venture capitalists who may be interested in the project or business.
 
   3. Due diligence
 
        If the interview is more successful, the venture capitalist will begin to examine the company's operations and understand the project as much as possible. They conduct a careful evaluation of the technology, market potential and scale of the intended company and the management team through a review process that includes engaging with potential customers, consulting technical experts and holding several rounds of talks with the management team. It usually involves visiting the company. Interview with key personnel, valuation of instruments and equipment and supply and marketing channels. It may also include talking to corporate creditors, customers, and former employers of related personnel. These people will help venture capitalists to make conclusions about the individual risks of entrepreneurs.
 
        The evaluation of a project by venture capital is a combination of rationality and inspiration. Its rational analysis is similar to general business analysis. The market analysis, cost accounting methods, and business plan content are basically the same as those of general enterprises. The difference is that inspiration has a certain proportion in venture capital, such as the grasp of technology and the evaluation of people.
 
    4, the list of terms
 
        After the completion of the review phase, if the risk investor believes that the prospect of the project being applied is promising, then negotiations on the form and valuation of the investment can begin. Usually, a company will get a list of terms that outline the content involved, including the investor's valuation of the investment company and the planned investment amount, the main obligations of the invested company and the main rights required by the investor, and the investment transaction. The main conditions, etc., the main contents of these three aspects are:
 
        Investment amount, price and investment tools;
 
        Corporate governance structure;
 
        Liquidation and exit methods.
 
        This process may last for several months. Because the company may not know the content of the negotiations, how much he will pay, how many shares the venture capitalists want, and who will participate in the project, what will happen to him and the current management team. For companies, take the time to research these things and reduce the terms as much as possible.
 
   5, sign a contract
 
        Venture capitalists seek to adapt their return on investment to the risks they bear. Based on a practicable plan, venture capitalists analyze the value of the investment over the next three to five years, first calculating their cash flow or income forecasts, and then based on technology, management, skills, experience, business plans, intellectual property, and work progress. The assessment determines the risk size and selects the appropriate discount rate to calculate the net present value of the risk enterprise that it considers. Based on their respective assessments of the value of the company, the investing parties negotiated the final transaction value.
 
    6. Supervision after the investment takes effect
 
        After the investment takes effect, the venture capitalist owns the shares of the venture company and holds a seat on its board of directors. Most venture capitalists act as consultants on the board of directors. They usually get involved in several companies at the same time, so they don't have time to play other roles. As consultants, they mainly advise on improving business conditions to obtain more profits, help companies find new managers (managers), regularly contact with entrepreneurs to track the progress of operations, and regularly review the financial submissions of accounting firms. analysis report. Because venture capitalists know the business areas they invest in, their recommendations are valuable. In order to strengthen the control of the company, there are usually clauses in the contract that can replace managers and accept mergers and acquisitions.
 
V. Exit of private equity investment
 
        The withdrawal of a private equity investment fund means that after the value of the invested enterprise reaches the level expected by the private equity investment fund, the equity of the held enterprise is converted into the capital form in the most efficient way at the right time through the capital market. Maximize the benefits and withdraw from the company's purpose, to increase the value of capital or reduce losses. The exit mode includes secondary market exit, transfer exit, merger and acquisition exit, equity repurchase exit, and exit from gambling. Here, the non-mainstream management repurchase exit and the exit of the gambling method will not be elaborated.
 
        According to the statistics of 2015, the New Third Board has become the most important channel for the withdrawal of private equity funds. The specific private equity fund investment in the New Third Board has the following exit channels:
 
        Secondary market exit
 
        According to the provisions of the Interim Measures for the Administration of the National Small and Medium Enterprises Share Transfer System Co., Ltd., the transfer of listed shares in the national share transfer system may adopt the market-making method, the agreement method, the bidding method or other transfer methods approved by the CSRC. In comparison, the liquidity of these three methods is increased in turn, and the degree of difficulty is decreasing.
 
        1. Agreement transfer: The buyer and seller negotiate the price offline, usually the buyer and the seller negotiate directly, and then trade through the stock transfer system (New Third Board). Buyers must have more professional knowledge to avoid investment mistakes as much as possible.
 
        2. Market transfer: Market makers provide two-way quotations to the market. Investors choose whether to trade with market makers according to the quotation. Under the traditional market maker system, investors do not directly pair transactions.
 
        3. Bidding transactions: Bidding deals are currently not available in the New Third Board market. According to the “Several Opinions on Further Promoting the Development of the National SME Share Transfer System” issued by the China Securities Regulatory Commission in November 2015, continuous bidding transactions will not be implemented at this stage. With the launch of the tiered management system, it is expected that some of the market-making transactions will be converted into bidding transactions in the next 1-3 years.
 
        2. Transfer board exit
 
        Strictly speaking, China has not yet opened the transfer channel. According to the "Opinions", China is studying the launch of a new three-board company to the GEM. Although the regulatory layer clearly put forward the "transferable board", the several IPOs that have been realized before are not completely transitive, and can only be said to achieve the cultivation of IPO.
 
      The "Opinions" also clearly pointed out that it is necessary to adhere to the independent market position of the national share transfer system, and also emphasize that the share transfer system is not an "isolated market." The transfer system means that there are new measures in the process of building a multi-level capital market, so that these two markets have a better connection. The transfer board can enhance the liquidity of the market, improve the expectations of listed companies to further land in the capital market, and better attract high-quality listed companies to the new three boards for listing.
 
        3. M&A exit
 
        Mergers and acquisitions refer to the acquisition or control of the operation and management of other enterprises by one enterprise or enterprise group by purchasing all or part of the equity or assets of other enterprises. Other enterprises retain or eliminate the legal person qualifications. Compared with the transferee, it is a merger and acquisition, and the equity transfer is relative to the transferor. As a shareholder of a company, a private equity investment fund can withdraw from the enterprise by selling the shares it holds to the acquirer in pursuit of capital appreciation.