Research On The Principal-agent Risk Of Private Equity Investment

Private equity investment is a new business in China. Though it had developed very rapidly through the 1990s, its development is still not ample, compared with the developed countries in Europe and America. Because the proportion of the investment value is only 5% more or less in GDP, and that is less than 1/10 of the corresponding record in developed countries. But in the macro background of developing innovative economy and advocating consumption and industry structure upgrading, the private equity investment is facing the huge development opportunity in China now. The development of private equity investment has a positive role in promoting the innovation economy and it also helps accelerating the upgrading of the industrial structure and improving the level of corporate governance.The main object of private equity investment is the venture enterprises and mature businesses which operate difficultly and need to restructure. These enterprises have great risks and uncertainties, such as long-term investment period, opaque information and non liquidity. The private equity investment faces so many risks, which is likely to lead to the failure of investment. In all sorts of risks, the principal-agent risk is the most prominent, and compared with other industries, the principal-agent risk of private equity investment is more serious, because the private equity investment faces at least two principal-agent relationships. Private equity investment is a high degree of market industry, only solving the principal-agent problem, establishing scientific incentive and restraint mechanisms, can we promote the healthy development of the PE fund.The paper mainly consists of five parts:The preface introduces the research background and the significance; it also summarizes the present research in domestic and foreign countries. Research design and methods are also concluded in this part.The second chapter mainly introduces the basic concept and development of PE, and its main characteristics. At the same time it also makes a summary of study on the main participants and operation process.The third chapter presents two principal-agent relationships in PE, that is the relationship between the investor and the PE fund, and the relationship between the PE fund and the invested enterprise. Information asymmetry, may cause adverse selection and moral hazard, causing high agency costs.The fourth chapter proposes the control measures of double principal-agent risks from the theoretical point of view.The fifth chapter analyzes the CDH investment's methods and experiences in controlling the PE fund principal-agent risks.At the end of this paper, a statement of conclusion is made. And it focuses on the future development of PE fund. According to the domestic and international development trend of PE industry, it puts forward about the further researches.