Factors Private Equity Returns

How to build the most effective combination between the rich man’s surplus capital and smart people’s surplus intellectual? Private Equity (PE) may be a good option. In recent years, thanks to the entire steady and healthy development of Chinese economy, the market of China’s private equity funds is developing rapidly. There are hundreds of PE institutions founded in short years. In particular, the grand opening of Shenzhen Growth Enterprise Market (GEM) in October2009not only provided a more convenient financing channel for small and medium enterprises, but also provided an efficient capital investment exit mechanism and a high expected return on investment. According to the latest statistics of Qingke, the first half of2011, PEs exited from Shenzhen GEM achieved nine times return on investment in average.From the perspective of PE investment, this article deeply studies the factors that affect the return, which not only help understand the operation mechanisms of PE market, the basic features of PE investment returns, but also offer a practical guide for the development of PE institutions.This paper firstly reviews the existing theory and analysis the several of factors which impact the return rate of PE’s investment. Secondly selects some of factors and make assumptions. Thirdly samples and designs the empirical mode for validation. This paper adopts both empirical and normative research method, and selects PE investment cases from Shenzhen GEM since opening to February28,2011for the study. Excel2000and SPSS19.0software are used to perform descriptive statistical analysis, correlation and regression analysis. Finally, according to empirical results and China’s national conditions, this paper provides some recommendations against the development of China’s private equity market and industry.According to this study, we conclude that generally PEs achieved very much high return on investment via GEM IPO. Investment internal rate of return (IRR) has significant positive correlation with start-up enterprise’s pre-IPO return of equity (ROE). And IRR is also significant positive correlated with the start-up company’s industry (whether high-tech industry or not). However, there is no significant correlation between the start-up companies’ location and IRR. Those investments in Beijing, Shanghai, Guangdong, Jiangsu and Zhejiang may not have higher returns than other regions. IRR and the reputation of PE are significantly negative correlated, and this is same to IRR and PE investment cycle length. The stock percentage and PE’s capital scale don’t influence the IRR much per analysis.Compared with the previous studies, this research has some creative points. From the research content point of view, this article includes all PE investments since GEM opening to February28,2011, which shall be the most comprehensive data. What’s more, since the sample selected has high target and practice, the results are more accurate and could reflect the return effects of PE investment via start-up firms IPO.