Study Of China Private Equity Investment From Investor’s Perspective

Beginning with1998, China’s private equity investment industry has gaineddramatically development within a decade----PE investment entities establishedfrom scratch, currently the number of PE investment entities has increased to couplethousands; capital structure has switched from foreign currency only to both foreigncurrency and RMB; Major PE funds structure changed from LLC to LLP; Majorinvestors switched from government entities to private entities; exit strategieschanged from overseas IPO only to the combinations of overseas and domestic IPOsalong with buyouts; portfolio companies increased from tens to hundreds annually;exit portfolio companies increased from less than ten to couple hundreds. China hasbecome one of the most active PE investment markets in the world. But, under thesurface of prosperity, due to the short period of time, regulation and legislation arestill in the process of completion and perfection, there happened lot of regulationviolations and conducts not conformed to common industry standards, the risk ofindustry level increased noticeably. With the probability increase of failure risk,more and more investors are eager to obtain some relevant theories and practiceguidance, but the reality is that there are very few researches focusing on PEinvestment based on investor’s point of view especially lacking of authoritativepractice research focusing on PE investment allocation, management, selection andevaluation.With lot of differences from other financial investment industry, PE industryhas its own unique characteristics. There will be lot of obvious shortages if we applytraditional established theories with PE industry. This is caused by several reasonssuch as PE Industry features of data confidentiality, abnormal distribution ofrisk-adjusted return, problems with IRR (Internal Rate of Return) based performanceevaluation and fund life issues etc. In the same time, as a complicated systematicengineering, PE fund evaluation and consideration are the results of collaboration ofmulti-factor. Therefore, multi-factor and multi-dimension are required to be considered. Based on intensive research on PE fund transaction cost, risk exposure,principal agent and so on, combining with investment practice in China, the authorproposed scientific and practical model of “PE fund investment strategies andintegrated PE fund evaluation” evidenced by many real case researches for thepurposes of providing theoretical and practical guidance for Chinese domesticinvestors in order to improve the efficiency of PE fund selection and reducepotential future risks.The thesis expanded its analysis from three dimensions:1. Based on investor’sperspective, PE investment selection tool was provided to help investors to build upPE investment fund portfolio strategy. The author analyzed the restriction ofapplying modern portfolio theory (MPT) with PE industry, also considered theunique characteristics of PE industry, constructed multi-dimension strategy selectionfor building up PE investment portfolio, first time built up “DynamicMulti-Dimension Driven PE Fund Investment Portfolio Model”, provided boththeory and practical model of PE portfolio construction for investors.2.Comprehensively expound PE fund evaluation methods and its investment decisionmaking mechanism, explicitly provided PE fund evaluation tools and standards tohelp investors to build up portfolio funds based on scientific evaluation.. The authoranalyzed the restriction of general PE fund evaluation methods, also considered thekey elements of a PE fund; constructed “Six-Factor Based PE Fund EvaluationModel”, also detailed PE fund investment negotiation strategy and key clausesselection were presented.3. Built up “PE fund performance projection model”.Proposed post investment managing elements and methods by the researches andanalysis of agency by agreement and LP-GP game playing to enable investors toreach their investment goal and reduce their adverse selection and moral riskscaused by asymmetric information obtained.Innovativeness of the thesis was showed by the following four aspects:1.Firsttime analyzed China’s PE fund portfolio strategy and evaluation mechanism fromthe investor’s point of view and solution was provided.2. First time proposed “PEfund multi-dimension strategy election” and built up “Dynamic Multi-DimensionDriven PE Fund Investment Portfolio Model”.3. First time proposed “Six-Factor Based PE Fund Evaluation Model”.4. Fully considered the PE fund performancefactors, first time built up “PE fund performance projection model”.This thesis built up a complete and systematic China’s PE fund investment andmanagement system based on investor’s perspective especially the above-mentionedfour researches are first of its kinds in China. They have strong theoreticalInnovativeness. Meantime, these investment management models also have practicalvalue due to their abundant real case analysis. These theories and models havepractical value and will be benefit for improving investor’s investment decisionmaking process and risk management skills, promoting China’s healthy and stablePE investment market.