What is the risk control in private equity investment?

There are many problems related to fairness in our life, and there are many forms of fairness in our country. One form of private equity investment is for equity. In this case, the risk is generally great, so it is necessary to control the risk and avoid the loss. So what is the risk control in private equity investment? The risk and risk control of private equity funds in investment can generally be analyzed from the following aspects. The risk of project selection and its control Project selection is the basis and premise of investment. Only by obtaining high-quality projects can the follow-up investment management be meaningful. Project selection is very important for project investment, which requires strict control on project selection. What factors should be considered when choosing a project? 1. The expected annual return on investment of investors who choose PE business is generally between 20% and 30%, and PE business should choose industries with high returns. From the current practice of PE, the industry distribution is diversified. Traditional industries are still favored, but there are also many rules to follow. Big consumption, big health, new energy, new materials, film and television media and artificial intelligence are becoming potential industries and should be highly concerned. 2. Choosing a superior investment environment in the region can reduce the project operation cost and thus increase the benefit of the enterprise. The selection factors include the natural geographical environment, economic environment, policy environment, institutional environment and legal environment of the project area. 3. Stage Selection Generally speaking, private equity funds match their own advantages and disadvantages according to the characteristics of each stage of an enterprise, such as seed stage, initial stage, growth stage and maturity stage, and focus on investing in enterprises at a specific stage: private equity investment funds will also invest in various enterprises in the development and transformation period, that is, those enterprises that are troubled by funds and try to turn losses into profits. In addition, private equity investment funds are also engaged in MBO leveraged buyouts, that is, the management of enterprises borrows a lot of money or provides shares to buy the companies they manage, which is also a special form of investment. 4. Project Selection First, the market potential of the project. Is there enough market capacity? Can it continue to grow at a high speed? Is the industry average rate of return high? Secondly, the core competitiveness of the project products or services. Do you have knowledge of intellectual property rights or technical barriers? Third, the overall quality of the management team. Including whether the team members are competent for their jobs, honest management, unity and cooperation. Finally, the legitimacy, feasibility and scale of the project. That is, whether the business procedures and certificates of the invested enterprise are complete and whether the expected rate of return of PE business can be achieved. Risk of project management and its control. Portfolio investment If the scale of private equity funds is large, in order to avoid the possible complete failure of a single project investment, it is generally necessary to put funds into different projects, thus forming a project portfolio. If many projects invested by private equity funds belong to different industries, different regions and at different stages of development, the overall risk of private equity funds will be greatly decomposed and reduced. 2. phased control of private equity funds can design a risk control system for project management, which can be divided into pre-audit and in-process control. -Pre-examination-Pre-examination is a strict examination of the investment plan and investment agreement submitted by the project implementation team, which is implemented after being approved by the product investment committee and the risk management committee. -In-process control-In-process control refers to private equity funds' off-site monitoring of invested enterprises and participation in major decisions. , urge the invested enterprise to report relevant matters in time, grasp the enterprise status, regularly produce and disclose relevant financial and market information, and keep relevant original vouchers and materials. The risk control of a single investment project is the focus of the risk control of private equity funds. If the risk of each investment project is well controlled, the project investment risk of private equity funds can be completely controlled. In practice, the risk control of a single investment project can be carried out from the following aspects. 1. Staged investment Staged investment refers to that private equity investment funds control the investment progress by stages in order to effectively control risks and avoid enterprises wasting funds. The allocation of investment funds should be carried out in stages according to the progress of the project, not at one time. Follow-up funds can only be followed up in time after the project is in good operation at this stage and achieves the expected goal. If the enterprise fails to reach the expected profit level, the investment ratio will be adjusted in the next stage, which is a way to supervise the operation of the enterprise and reduce the operational risk. 2. Adjustment of share proportion In project investment, private equity funds use composite financial instruments to adjust the share proportion of investment, thus reducing their own risks. The adjustment of the share ratio can not only protect the interests of investors, but also share the growth of enterprises, and also mobilize the enthusiasm of the management of the project company, promote the development of the project company and obtain more shares. 3. Contract binding and pre-agreed responsibilities and obligations of all parties are legally effective risk avoidance measures that all commercial activities will take. 4. Remedies for breach of contract Generally speaking, in the initial stage of project investment, private equity funds can accept the status of minority shares, while the management of the project company controls the majority shares, but investors can sign voting rights agreements with the project company to maintain special voting rights on some major issues. When the management of the project company fails to operate the enterprise according to the objectives of the business plan, if it is found that the management violates the agreement, the information provided is obviously wrong or a large amount of liabilities are found, the project company will bear the responsibility. Equity incentive and gambling agreement for management In order to encourage the management of the target company, private equity funds often set some terms, and when the company's operating performance reaches a certain goal, the management can be rewarded or punished according to these terms. The most common way to implement equity incentives for management is to stipulate and operate gambling agreements. Gambling agreement refers to the supplementary agreement on the uncertain future when investors and financiers reach an investment agreement. If the agreed conditions appear, both investors and financiers can exercise a right or obligation; If the agreed conditions do not appear, both investors and financiers exercise another right or obligation. The gambling agreement seems unfair to the financier, but it is actually fair in jurisprudence. The gambling agreement reserves some flexibility for both investors and financiers. It is an interactive valuation of the final price of equity and the intrinsic real value of the company, which actually helps investors and financiers to conduct equity transactions at a relatively fair and reasonable price as much as possible. What is the risk control in private equity investment? Our country has relevant regulations, and private equity investment often has a threshold of several million, so if there is a loss in this respect, it is often a great loss. Therefore, for this problem, we must first make a reasonable analysis and rational analysis to invest in the future.