Study On Risk Control Methods Of Private Equity Investment

China has become the most active investment market in Asia in recent years,making enterprises form the third financing model,private equity investment in addition to public offering of shares and bank credit.Private equity investment is characterized by high risk and high return,and faces complex risks under the new situation.However,the failure investment cases are very common as many domestic private equity investment institutions lack the ability to identify and control risks.Therefore,it is very necessary to study risks and control methods in private equity investment in this context.Based on the case analysis method and illustrated by investment in F Company as an example,this paper systematically analyzes possible risks of a project in the investment process and the corresponding risk control methods that private equity investment institutions can take before the investment.Then the paper concludes the general law to be the reference for private equity investment institutions in the project investment process when they deal with various risks and develop the risk control mechanism.Firstly,the paper introduces F Company in detail from three aspects of its internal situation industry situation and listing plan.Its internal situation mainly includes operation and finance aspect;the analysis of its pharmaceutical industry is mainly conducted from the five aspects of policy supervision,operation status,investment situation,Chinese traditional patent medicine breakdown industry,and F Company’s competitiveness.And financing and listing plan of F Company is also explained.Secondly,based on the above three aspects of F Company,the paper identifies the risks in its investment process,including the internal operation management risk,industry risk and listing risk analyzes possible risks of F Company during the internal operation management and listing process,and even risks in policy change and the overall decline of profit margins in the pharmaceutical industry.In addition,all those universal,analytical methods,perspectives and results can be extended to other differentcompanies and industries.Finally,the paper puts forward risk control methods based on the above three risks.One of the most effective risk control methods for private equity investment is due diligence that focuses on the consistency with CSRC,and private equity investment institutions can directly or indirectly obtain information and conduct interviews,thus reducing the risk of internal operation management,the risk of policy changing in the industry and the risk failing to be listed as planned.In addition to due diligence,it is possible to reduce future risks by requiring directors to set risk control provisions and provide advantageous resources in the agreement to further supervise and assist the invested enterprises.Different from venture capital and angel investment,in the private equity investment,those target enterprises in mature or Pre-IPO stage have already formed listing plans,or invited intermediaries to conduct the related guidance or counseling.Thus,private equity investment institutions can cooperate with accounting firms,law firms,securities companies and other intermediaries,and rely on their power and results to achieve information and resources sharing.Most private equity investment institutions only assess the value of target companies before the investment,and limited to knowledge and personal preferences of the investment team.The paper proposes three suggestions on the enterprise value from the perspective of risk control,the first is to adopt at least two assessment methods or the methods matching with the specific project situation;the second is to make the investment team,risk management department carry out the valuation and further refer to the assessment results of intermediaries;the third is to re-evaluate the equity value and dynamically supervise whether violating the agreed terms at the fixed period after the investment,such as the end of each quarter and according to the actual situation of the invested enterprises.This paper can help private equity investment institutions improve the risk control ability in the investment process,and provide the theoretical basis for the effective risk identification and control.In addition,it is conductive to improving the overall income level and achieving healthy development for those institutions,and further understanding the investment risks and conducting the scientific research or policy development for those researchers and regulators.