A Study Of The Risk Avoidance Of Limited Partner In Private Equity Fund

Because the characteristics of the private equity investment are high-risk, private,opacity, and the private equity investment is a long-held asset, also, the investor is thelimited partner, so capital contribution account for a large number of its private equityinvestment. A lot of capital is entrusted to the general partner from limited partner withoutanticipating in the operation of fund management, which made the limited partner face lotsof risk during the private equity investment processes. This paper mainly focus on how toprevent the limited partner from facing risks, such as the principal-agent risk under limitedpartnership, the new investing fund risk, and the unsystematic risk about the investmentportfolio.The main risk of limited partner is the agency risk. Due to the endogenous andunavoidability of entrustment, LP has to reduce or control it in order to avoid the risk. Thisrefers to the game between LP and GP and the design at the contract built on equilibrium ofgame. When avoiding the risk of adverse selection, the contributing factors of fuzzyassessment methods, aiming to build the comprehensive abilities of fund manager, includeinvestment strategies, historical performances and the ability to manage the team, all thesecan be used to select the fund manager. The supervision and game model will be built in themoral hazard model, besides; in the principle-agent theory, GP will be stimulated by usingthe explicit incentive and implicit incentive, which is contribute to improve the GP and avoidthe moral hazard of LP. In addition, some measures about how to avoid the adverse selectionalso be recommended in this paper.During the risk aversion between the LP and new fund, the real option, which is a kindof investment philosophy, can be used as a flexible management method. The real option canbe used effectively, such as the investment management and contract signing refering to LP.When the limited partner participate in follow-up funds, especially when treating the privateright of excellent fund as a kind of option, the Binary tree option model will be used toanalyze real option of limited partnership terms and the value of follow-up investment ofexpansionary option.In the theoretical framework of portfolio investment, the feature of PE fund,performance measurement and other relationship among other assets were discussed in theportfolio investment of LP. But in the investment of private equity fund, when it comes tothe investment industry, region, enterprise developing stage and so on, these areas will becorresponding to the unsystematic risk. The LP portfolio investment using the portfoliotheory to avoid unsystematic risk, besides, in private equity funds, the LP portfolioinvestment probing into built the private equity fund portfolio and the portfolio management.At the last part, through using the risk aversion research, which is about the limitedpartners investing in private equity funds, the paper proposed the problems of standardizedthe development of private equity funds. All the relevant laws and the policy support shouldbe put into practice, so that the development of multilevel capital market will be promoted.