Private equity fund is a kind of fund type relative to public fund. Private equity fund is a small private investment company, which adopts partnership system and mainly invests in publicly traded securities and derivative financial products. It is a high-risk speculative fund. Since the 1990s, with the deepening of financial globalization and the innovation of various investment tools, the private equity fund industry in the United States has made great progress, with the number and scale of funds increasing by 20% every year, and now it has become the fastest-growing force in the financial field in the United States. At present, there are at least 4,200 private equity funds in the United States, with a total capital of over $300 billion.
American private equity funds have a wide range of investment fields and various investment methods. During the period of 1998, American pioneer hedge fund research company and other institutions studied the investment strategies of American private equity funds, and they classified American private equity funds into 16 categories according to different investment strategies. But generally speaking, there are two kinds of private equity funds in the United States: one is macro fund and the other is relative value fund. Macro-capital mainly uses the instability of macro-economy in various countries to carry out unbalanced macro-economic arbitrage activities. Macrofund collects and studies the macroeconomic situation of countries around the world. When it is found that a country's macroeconomic variables deviate from the equilibrium value, it will concentrate on a large number of reverse operations on the target country's stock market, interest rate, exchange rate and physical objects. When the country's macroeconomic situation changes, asset prices will depreciate sharply, and macro funds will get huge profits from it. It is generally believed that macro-capital is risky and destructive to the global financial system and is often accused of being the maker of financial crisis. The representative of macro fund is the quantum fund led by the famous Soros. Relative value funds are different from macro funds. Generally speaking, they do not bear big market risks, but only invest in the relative prices of closely related securities. Because the relative spread of securities is generally small, if leverage effect is not used, private equity funds cannot obtain high returns. Therefore, relative value funds tend to use high leverage. The most famous relative value fund is Long Term Capital Management Corporation (LTCM) in the United States. Due to the highly leveraged operation of LTCM, the company ended up with investment failure in just five years (LTCM was established in 1993,/kloc-0 officially started operation in February/994, and 1998 investment completely failed).
According to the registered place of private equity funds, we can also divide private equity funds in the United States into domestic registered funds and overseas registered funds. At present, less than half of American private equity funds are registered in China, and more than half are registered outside the United States. Funds registered overseas are also called offshore funds. These funds are generally registered in some tax havens such as Luxembourg in Western Europe, Channel Islands in Britain, Cayman Islands and Bermuda, and specialize in offshore securities investment outside the United States. In this way, on the one hand, these funds evade the supervision of the US government, and at the same time, they also evade the profit income tax for investors.
2 Establish procedures and organizational structure
The relevant laws and regulations on private equity funds in the United States are mainly contained in the Securities Law promulgated by 1933, the Securities Exchange Law promulgated by 1934, the Investment Company Law promulgated by 1940 and the Investment Consultant Law. Private equity funds are also regulated by the blue sky laws of various states.
According to the investment company law promulgated by 1940, only securities companies, unit trust and investment companies and public offering management companies with fixed denominations can be established in the United States. However, Rule D of the Securities Law establishes the No.506 safe haven clause for private partnerships to invest in the securities market, while Rule S of the Securities Law establishes the safe haven clause for foreigners to invest in private securities. These provisions stipulate that investors who meet certain conditions can set up partnership investment institutions without following the three ways stipulated in the Investment Company Law. This provides a way for private equity funds in the United States to bypass financial supervision.
According to American law, investors investing in private equity funds must be "qualified investors". The so-called "qualified investor" means that an individual investor must own securities assets of more than $5 million, with an average annual income of more than 200,000 yuan in the last two years, or an income of more than 300,000 yuan including his spouse; If the investment is made in the name of a legal person institution, the property of the institution is at least $6,543,800+0,000. Before 1 September 19961day, no more than 100 "qualified buyers" set up private equity funds without the approval of the US Securities Commission. 1 September 19961later, according to the national SECurities market improvement law of the United States, at the same time, the sec allowed private equity funds to attract institutional investors of more than 25 million dollars.
Private equity funds are generally composed of two types of partners. The first category is called general partners, which is equivalent to fund managers, and refers to individuals or groups that create funds. The general partner handles all the trading activities and daily management of private equity funds. The second category is limited partners. Restricted partners provide most of the funds, but do not participate in the investment activities of the fund. When planning to set up a private equity fund, the general partner signs a partnership agreement with the limited partner to stipulate the rights and obligations of both parties. A partner agreement is a basic document that constrains and regulates the internal relations of private equity funds, and generally includes the following contents:
1. Investment objectives, strategies and risk factors of the fund;
2. The status of general partners and limited partners;
3. Provisions on investment, capital increase and withdrawal of shares by partners;
4. Calculation details of incentive compensation;
5. Use and calculation details of management expenses;
6. Whether to allow the use of financial leverage and proportional restrictions;
7. Relevant regulations on dividends at the end of fiscal year, etc.
Generally speaking, the partner agreement has general restrictions on the general partner's fund investment objectives, so that the fund manager has enough flexibility to conduct investment operations and ensure the smooth progress of investment activities. The status of general partners and restricted partners and whether financial leverage is allowed must be clear. When investors join private equity funds, they usually hire lawyers to participate in the signing process of partner agreements, which can ensure that the agreements signed by investors are consistent with their own goals.
The general partner of a private equity fund can sell the fund shares after preliminary preparation. American law is very strict about the sales of private equity funds, and private equity funds are not allowed to advertise. Investors generally participate in investment in four ways: (1) based on the so-called reliable information of the upper level; (2) Having a direct understanding of the fund manager; (3) through other funds transfer; (4) Special introduction of investment banks, securities intermediary companies or investment consulting companies. The general partner sends private placement sales contract documents (including partner agreement) to each potential investor determined in advance, providing them with opportunities to interview experienced investors or provide investment advice. Finally, sign a partnership agreement with investors to attract investors' funds. In this way, private equity funds were established.
3 operating characteristics
American private equity funds are quite different from mutual funds in investment strategy and operation mode, mainly in the following aspects:
1. The investors are mainly some large investment institutions and some rich people. As mentioned above, the partners of private equity funds need certain conditions to obtain investment qualifications, which determines that only the rich can participate in private equity funds. For example, the investors of the quantum fund led by Soros are all super-rich, or financial oligarchs and industrial giants. The number of investors in Quantum Fund is less than 100, and the investment of each investor is at least100,000 USD, which is more than100,000 USD.
2. Generally, it is a closed-end partnership fund, which is not listed and circulated. During the period when the fund is closed, the partnership investor shall not withdraw the funds at will (or must inform in advance before withdrawing the funds, with a period ranging from 30 days to 3 years). The fund closure period is generally 5 years or 10 years. The basis for determining this cycle is that the economic cycle is generally 4 to 5 years, and the investment cycle of funds is generally longer than one economic cycle, because only in this way can fund managers have enough time to operate funds.
3. Black-box operation, investment strategy is highly confidential. According to American law, private equity funds do not need to register, report and disclose information to the regulatory authorities like mutual funds. American regulators believe that investors in private equity funds are mature and rational, and have sufficient ability to supervise the activities of fund managers, and neither securities regulators nor the public need to know about their operation. Managers of private equity funds generally require great freedom of operation in the partnership agreement signed with partners (investors) and do not disclose the investment portfolio and operation mode, so it is difficult for the outside world to obtain systematic information of private equity funds.
4. High lever operation. The investment purpose of private equity funds is to obtain high profits, but the fund's own financial strength is limited after all. Therefore, private equity funds generally use financial leverage (through credit lending) on a large scale to expand the scale of funds and break through the limitation of their own lack of funds. Under normal circumstances, the financial leverage ratio of fund operation is 2 ~ 5 times, up to 20 times. In an emergency, the leverage ratio of private equity funds will be higher. For example, Long-term Capital Management Company (LTMC) borrows funds from almost all the big banks in the world in the course of its operation, and the financial leverage ratio used is extremely high. On the eve of LTCM's huge loss in August, 1998, its leverage ratio was as high as 56.8 times, and on this basis, it established a financial derivative trading position of $65,438 +0.25 trillion with a total leverage ratio of 568 times. Under the action of high financial leverage, if the fund manager predicts accurately, the fund can get the maximum income; Once the fund manager makes a mistake in forecasting, financial leverage will multiply the loss amount.
5. Mainly invest in financial derivatives, which is highly speculative. Private equity funds are generally not supported by physical assets, and specialize in all kinds of short-selling and short-selling transactions in financial markets, and obtain high investment returns from them. Although the investment methods of private equity funds are different, most private equity funds employ professionals to be responsible for fund management, adopt accurate quantitative models, and implement so-called programmed investment decision management for investment transactions. For example, among the partners of Long-term Capital Management Company are 1997 Nobel Prize winners Merton and Scholes. They hire doctoral students from some universities to trade, calculate the price differences of various related securities through pricing models, and seize trading opportunities.
6. The organizational structure is relatively simple. Private equity fund is a partnership enterprise without a board of directors, and the general partner is responsible for the daily management and investment decision of the fund. In the United States, there are about 65,438+0/4 private equity funds with total assets of less than $654,380+million. They operate like small workshops and usually work in offices with only one or two people. Private equity funds generally do not have their own research institutions and rely more on external research information resources.
7. Adopt salary incentive mechanism linked with performance. Managers of private equity funds can not only get a fixed management fee for a certain proportion of fund assets, but also extract a certain proportion of investment profits as a reward. This ratio is usually between 5% and 25%. This incentive mechanism can attract a large number of outstanding senior professionals to join private equity funds and create excellent performance for private equity funds. According to data analysis, from 1988 to 1994, the average annual return rate of private equity funds is as high as 18.5%, which is much higher than other types of investment returns, such as the investment return rate of Morgan Stanley Capital Index is 8. 1% and the comprehensive bond index of Lehman Brothers is 8.6%.
8. There are various modes of operation, showing more characteristics of globalization. The operating mechanism of private equity funds is flexible, and there are no short-term profit indicators and clear restrictions on capital investment, and there are no restrictions on investment tools, financial leverage, investment strategies, etc., so that fund managers can choose investment strategies in a wider range of investment fields to obtain long-term high profits. Private equity funds generally use "hedging" to conduct counter-cyclical transactions, that is, buy when the price of securities falls and sell when the price rises. For example, relative value funds can arbitrage from the small differences in the pricing of some related financial products and make money in both bull and bear markets.
Four major investment strategies
After decades of development, the operation theory and investment strategy of American private equity funds have already surpassed the early way of simply using stock market hedging. Modern private equity funds have set foot in options, futures and other investment fields, and boldly used various investment strategies and operation methods (see table 1 for details). Generally speaking, the main operation modes of private equity funds in the United States are as follows:
(1) Use futures to hedge profits. Futures contracts can guard against interest rate risk, market risk and exchange rate risk. The specific types of futures can be divided into interest rate futures (long-term and short-term) hedging, forward stock index futures contract hedging and currency futures contract hedging.
(2) Hedging with options can be divided into stock index options, individual stock options and long-term interest rate options.
(3) Use swap transactions for hedging operations, including interest rate swaps and currency swaps.
(4) Use portfolio insurance to hedge. For example, when buying a call option on an existing portfolio, buy a policy from an investment bank or insurance company.
(5) comprehensive use of a variety of hedging means to operate. Especially after the 1990s, American private equity funds took advantage of the inevitable linkage effect between the stock market and the foreign exchange market, and used various means to impact the stock price, exchange rate and interest rate in order to obtain the maximum investment income.
5 Risk and supervision
Since 1990s, the international financial market has been in constant turmoil, and financial crises have broken out one after another. In the global financial crisis, especially in the Asian financial crisis, American private equity funds (especially hedge funds represented by Soros's quantum fund) played a very disgraceful role. However, American private equity funds are not the ultimate beneficiaries of this crisis, and many private equity funds have suffered heavy losses in the global financial turmoil. After the global financial turmoil, many problems in American private equity industry have been exposed. The main problem is that the operational risk of private equity funds is too high, which is not conducive to the stability of financial markets.
Table 1 Types and Strategies of Private Equity Funds in the United States
The risks of private equity funds mainly come from the following aspects:
1. Inherent defects of operation means. At present, the main operation means of private equity funds is hedging. The principle of "hedging" is to try to use related or unrelated reverse transactions to reduce risks. It should be said that hedging operation is an ideal hedging method, but the purpose of using "hedging" by private fund managers is not to hedge, but to speculate. Speculation itself has the characteristics of high risk, so speculation and value preservation are actually opposite sides. At present, hedging tools are mainly financial derivatives (futures, options, etc.). ), which greatly magnifies the risk of trading. Private equity funds will inevitably face much greater risks when trading in this high-risk environment.
In addition, the effect of hedging is related to the irrelevance of asset allocation. If the correlation coefficient of assets is positive, it is difficult for asset collocation to provide greater asset diversification effect. Options and futures held by private equity funds, such as exchange rate, interest rate, stock index, etc., have high correlation and frequent marginal changes, and the hedging effect will be greatly reduced.
2. High financial leverage. Driven by the pursuit of high profits, private fund managers often choose high debt leverage. The ratio of self-owned funds to borrowed funds is very high, and a small amount of funds is used for huge transactions. On the one hand, this operation faces great credit risk, on the other hand, it also magnifies the market risk. Although fund managers mostly use extremely complex models to calculate the ratios and trading ratios of various portfolios, although these calculations seem to be very accurate, once the market trend is misread and the stop loss is not timely, huge positions and leverage will bring huge losses rather than gains.
3. "Black-box operation" risk. Private equity funds are rarely supervised by financial authorities, and their operation lacks transparency. The risk of fund is closely related to the management style and personal risk preference of fund managers. Commercial banks, investment banks, brokerage companies, etc. China companies that provide financing and short selling for private equity funds have no way of knowing their overall assets. In order to ensure the safety of their own funds, long-term credit banks often require funds to maintain sufficient liquid assets or provide mortgage guarantees.
4. Systemic risk. It is difficult for private equity funds to cope with systemic risks. Although derivative financial instruments such as options and futures can theoretically resolve some systemic risks, due to the uncertainty of the market and the unpredictable correlation of different markets, if other funds operate in a similar way, the financial market will become more unpredictable, and the competition among speculators will become more intense, causing overall market risks.
5. Moral hazard of fund managers. The organizational structure of private equity fund is a typical principal-agent mechanism. Restricted partners hand over funds to general partners for operation, and only make general provisions on the use of funds, and usually do not interfere with the specific operations of fund managers. In addition to fixed management fees, fund managers can also get commissions according to their performance, which may encourage funds to abuse their power and make partners' assets bear greater risks in order to pursue more personal interests.
6. Political risks. With the development of economic globalization and financial internationalization, the investment direction of private equity funds in the United States has also shown a trend of globalization and diversification, especially some international funds and emerging market funds. On the one hand, their investment is influenced by market factors, on the other hand, it is also influenced by political factors in these countries. Once the market where the fund invests is in political turmoil or the financial market fluctuates greatly, the fund assets will suffer heavy losses.
In this global financial turmoil, the problem of excessive operating risk of private equity funds in the United States has triggered a debate on whether to strengthen the management and control of private equity funds in the United States and even the world. Most economists believe that private equity funds, especially offshore funds with macroeconomic background, have a great influence on the liquidity of international capital, and the disorderly flow of international capital is the root cause of the financial crisis. In addition, the highly leveraged operation of private equity funds not only brings high risks and high returns to investors, but also brings systemic risks to the entire banking system, so it is necessary to strictly control private equity funds. However, some people think that private equity funds are limited in scale and cannot have a decisive impact on the international financial market. The main reason of the financial crisis lies in whether the economic fundamentals of a country are healthy and whether the financial market is balanced. The arbitrage operation of private equity funds will not only cause crisis, but also help to improve the efficiency of the entire international financial market. Accordingly, they are not in favor of strict supervision of private equity funds. At present, most US congressmen and financial regulators disapprove of direct supervision of private equity funds. They believe that once the US government directly supervises private equity funds, these funds will transfer their business activities overseas, which may reduce the efficiency of the US financial market. We can believe that in the near future, the US government will not strictly supervise private equity funds directly, but the indirect supervision of private equity funds will be strengthened, especially the supervision of creditors of private equity funds will reduce the operational risks faced by private equity funds to a certain extent.