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Investor Education | Understanding 'Real' Private Equity and Stay Away from 'Pseudo' Private Equity

2023/08/24

In the field of private equity funds, there are many "fake" private equity funds, under the banner of "high yield and low risk", in the shadows to investors to set up pits, investors are unknowingly hollowed out of the "money bag", today I will give you an inventory of how to identify "fake" private equity funds.

At present, there are four types of prominent economic crimes in the private equity field

First, under the guise of "private equity funds", some private equity institutions are actually engaged in illegal fund-raising activities.

Second, individual private equity institutions have broken through the bottom line of the most important qualified investors in the private equity fund industry and engaged in illegal fundraising criminal activities by means of public publicity.

Third, individual private equity institutions did not carry out fund operations in accordance with the contract, or even fictitious investment projects or manipulated the establishment of shell companies to transfer and embezzle fund assets and funds raised by investors, and committed crimes such as contract fraud, misappropriation of funds or embezzlement of duties.

Fourth, individual private equity firms and practitioners violated the law by committing crimes such as insider trading and market manipulation.

【Five characteristics of private equity funds】

Enquiry method:

First, the surname of private equity funds is "private". Funds shall not be raised from units and individuals other than qualified investors, and shall not be publicized and promoted to unspecified targets through public communication media or through public communication media, lectures, reports, analysis meetings, announcements, leaflets, text messages, WeChat, blogs and e-mails.

Second, private equity funds must be registered for the record. All types of private equity fund managers shall apply for registration with the Asset Management Association, and after all types of private equity funds have been raised, they shall go through the filing formalities with the Asset Management Association. However, the registration and filing of AMAC does not constitute an endorsement of the investment ability and continuous compliance of private equity fund managers; It is not used as a guarantee for the safety of the Fund's property.

Third, private equity funds are not "debts". Private equity funds are not allowed to promise investors that capital will not be lost or promise minimum returns, and private equity funds often do not have the characteristics of fixed income securities.

Fourth, private equity investment emphasizes "matching". Private equity investment has established a qualified investor system, and stipulates appropriate qualified investor standards in terms of asset scale or income level, risk identification ability and risk bearing ability, and single minimum subscription amount. At the same time, the regulatory system requires an assessment of the investor's risk identification ability and risk-taking ability, and a written commitment by the investor to meet the conditions of qualified investor; Require private equity fund managers to conduct risk ratings on their own or entrust third-party institutions to conduct risk ratings on private equity funds, and choose to recommend private equity funds to investors with matching risk identification capabilities and risk-bearing capabilities; Investors are required to truthfully fill in the risk questionnaire and commit to assets or income; Investors are required to ensure that the source of entrusted funds is legal, and must not illegally pool other people's funds to invest in private equity funds.

Fifth, the operation of private equity should be "transparent". Formulate and sign fund contracts to fully disclose investment risks; Arrange fund custody matters in accordance with the fund contract, and if custody is not carried out, the institutional measures and dispute resolution mechanisms to ensure the safety of the private fund's assets shall be clarified; Adhere to professional management, establish a system for preventing conflicts of interest and transmitting benefits; Disclose information to investors truthfully in accordance with the contract.

The industry pointed out that private equity funds are normal financial investment methods, while illegal fundraising carried out by "pseudo-private placement" is a serious criminal offense, and there is an essential difference between the two.

Six common routines of "pseudo-private placement"

Routine 1, public solicitation. Private funds shall not be publicly offered, and funds shall not be publicly offered and issued in any way. However, "pseudo-private placement" has illegal publicity, does not talk about risks, does not strictly implement qualified investor standards, and recommends products to investors who do not have the ability to identify risks. They will promote to unspecified targets through public communication media or lectures, presentations, analysis meetings and bulletins, leaflets, text messages, WeChat, blogs, emails, etc.

Routine 2, capital and interest protection. "Pseudo-private placement" often fabricates or exaggerates investment projects, and promises to investors to preserve capital, give fixed income, pay regular interest, etc. by means of personal guarantees by the major shareholders of the investment target and guarantees by affiliated institutions of the investment target.

Routine three, famous base real loan. "Pseudo-private placement" does not have active risk management, but stipulates that the fund manager's related party, the major shareholder of the investment target or the related party will repurchase it at a premium, so as to achieve the purpose of engaging in lending business in disguise. If the promoter of a private equity fund promises investors a high percentage of guaranteed returns, then the private equity fund is likely to be a "pseudo-private placement" product. This kind of product can not effectively protect the safety of investors' funds, but also misappropriates or embezzles the raised funds, suspected of fraud.

Routine four, not filed with the association. Publicity and fundraising in the name of private equity funds, but did not go through product filing procedures with the Asset Management Association.

Routine five, there is no capital threshold limit. Private equity funds have high funding limits. Generally speaking, private equity funds are aimed at a small number of specific investors, and these investors generally face a high threshold and participate in a certain amount of funds. "Pseudo-private placements" generally do not set such high capital investment restrictions on investors.

Routine six, the number of people is not strict. According to the relevant regulations, there are strict restrictions on the number of investors of private equity funds and their management companies: the number of investors in partnership private equity funds shall be subject to the Company Law and the Partnership Law and shall not exceed 50, while for "contractual" private equity funds, "non-public funds shall be raised from qualified investors, and the cumulative number of qualified investors shall not exceed 200". In other words, the maximum number of investors in a "contractual" private equity fund is 200; Those who exceed the limit are likely to be "pseudo-private placements".

The team of Xinhenglida reminds that investors must be vigilant, cautious in judgment, distinguish between genuine and fake private equity funds, and avoid falling into the trap of illegal fundraising. How can investors choose formal private equity for investment?

1. Understand the basic situation of the fund company

First of all, it is necessary to understand the basic situation of the fund company, and the basic information of the private equity fund company mainly includes the time of establishment, registered capital, operation mode, etc. At the same time, you can also pay attention to the recent research reports of fund companies. The reason for understanding these is not only a more comprehensive understanding of the company issuing the fund, but also a general grasp of the company's judgment of the market situation at that time.

To check whether a company is formal, investors can inquire through the website of Asset Management Association of China or ask the securities regulatory bureau of the place where the institution is registered to find out whether the institution has been registered with the association, whether the registration information is complete, and whether it is consistent with the industrial and commercial registration information.

2. Select fund managers

The most important thing when choosing a private equity product is choosing a fund manager. A good fund manager should have the following qualities: the ability to think independently, diligence, flexibility.

In addition to judging by professionalism, the past performance of fund managers is also an important analytical factor. Past performance not only shows the strength of the fund manager, but also the ability to judge the market. More importantly, it can provide a very comprehensive indication of the fund manager's investment style, whether it is aggressive or steady. By analyzing the operation style of the fund manager, it is basically possible to see which is the most suitable for our products.

3. Examine whether the private equity products are formal and past performance

Past performance represents the management level of a private equity team, and the longer the performance can be measured, the more indicative it is. If a private equity firm does not perform well in the long term, even if the short-term performance is good, it needs to be cautious. Due to the rapid change in the performance ranking of private funds, it is best to look at the long-term performance of private funds in the past three years. A formal private placement product will have a formal filing certificate with the Asset Management Association of China, and investors can also log on to the AMAC website to check whether the private placement product is formal.

4. Look at the type of product purchased

Investors should choose products that match their risk tolerance and choose promising private equity products according to current hot spots.

5. Divide method

The sharing method does not completely look at the rate of return, high income does not necessarily mean that the return on investment of funds is high, but also depends on the proportion of sharing. Generally, the proportion of the share will be agreed on a guaranteed expected rate of return. As the yield increases, the more detailed the yield phase, the better. Investors need to have a clear understanding of the benefits and rewards that can be paid for their funds, as well as a clear incentive for fund managers.

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