Equity + Creditor's rights: Mezzanine Capital attack

Article | Our correspondent Wang Yueping sold PE to become the focus again. Recently, a number of sources said that China Investment Limited liability Company (CIC) proposed to invest 2 billion U.S. dollars in the United States three problem asset funds, respectively, under the Goldman Sachs and Oak capital and so on.　　Thus the PE sale since 2008 to a Chinese fund background to participate in the climax. In fact, the sale of two-tier market funds in the Lehman Brothers before the bankruptcy, has been popular in Europe and the United States PE market. In the near term, the best example of this is the Coller Capital and HarbourVest Partnership DFJ Esprit's stake in the acquisition of 29 top companies in the 3i Group's European portfolio at discounted value.　　And with the heat of the PE asset package, Coller Capital, the London-based world's oldest two-level market fund, has focused on China, while the fund has become an important partner. PE sales in November 2008, after the Harvard, Columbia Education Fund decided to sell PE, the big LP in order to reduce the impact of asset shrinkage also began to sell PE assets.　　So why is PE sold in the aftermath of the financial crisis? "Two-tier market fund transactions, only under certain conditions can occur." First, the GP and LP of the funds to be sold are willing to end the fund prematurely, and the asset needs to be sold; second, the two-tier market fund is ready to pay a higher premium.　　"Wang, an executive partner of the Fund, who was personally involved in the sale of the China first phase of the fund, told the Economist, including the premise that the 3i Group had transferred its European portfolio and the rumors of the rumored investment fund to buy assets such as Goldman Sachs and Oak Capital." The three bases held by Goldman Sachs, respectively, are related to the real estate and infrastructure industries that have been hit hardest by the financial crisis, so it is now in a state of sharp asset depreciation, and in order to mitigate its impact on the entire asset, Goldman Sachs and Oak Capital have had to be sold under the dual synergy of the relevant GP and LP.　　For the 3i group, which still needs to repay 1 billion of billions of dollars in debt to keep its balance, it has to sell its portfolio cheaply.　　Whether it is Goldman Sachs, Oak Capital, or 3i, the encounter is only a microcosm of the many US and European funds.　　In the financial crisis and the United States PE new rules under the double impact, PE has to be based on the current market value of the assets of the disclosure, no doubt make PE funds worse, thus exacerbating the PE fund to sell the pace. December 2008, PE giant Providence Equity has told investors that the fund in the third quarter of 2008, its active fund full losses, the latest set of funds in the quarter value also 19%, is expected to be worse in the four quarter. This directly led to more debt-laden investors put more pressure on their PE assets, and even some investors to the contingency, began in the two-tier market lowPrice dumping the PE stake in the hand.　　In addition, because the exit without door, the big LP also tighten the purse, just staged a sell PE assets drama. However, the previous sale of PE scenes in Europe and the United States basically appeared in the PE market, the Chinese market seems to be isolated, far away.　　Even sporadic cases occur only in the country's trading partner.　　For example, in July 2008, nearly 13% of the equity stake in the Beijing property exchange listed on the transfer, is a prelude to the transfer of domestic funds. In the same one months, Baosteel Group, Bank of Communications, Bank of Communications Shanghai Branch and China Oriental Asset Management company also began to hold its Shanghai Science and Technology Investment Co., Ltd. (hereinafter called Shanghai Science and Technology Investment) 9.8361%, 3.2787%, 3.2787% and 3.2787% Equity in the Shanghai Joint Equity Exchange listed transfer, as the domestic professional engaged in science and technology venture capital enterprises in the "Elder", the establishment of the Shanghai Science and Technology investment in 1993 has always been a good return, at this time, Baosteel and other institutions of the transfer of equity is indeed a pity, but it has to.　　and the Fund association global well-known two-level market funds Coller capital of the sale of PE to become the focus of the industry.　　Coller Capital's choice is in foreign PE fund sale is rife, the fund becomes Coller capitial to enter China's first choice. As early as April 2008, Coller Capital entered into a fund acquisition agreement with the China fund Management company, that is, the 4 portfolio companies in the first phase fund of the China Fund for the overall acquisition of Coller, and entrusted the Administrator of the Fund to continue to administer the fund,　　Become China's PE industry to sell fund assets of the typical case. It is noteworthy that the Fund is also the acquisition of the 3i Group European portfolio of the Fund, namely Coller Capital. Established in 1990 and headquartered in London, the Fund is currently managing about $8 billion trillion of assets and is one of the top five independent funds in the world and one of the world's largest two-tier market buy-out funds.　　By acquiring a portfolio of first-tier market funds in the two market, the level two market fund is able to participate in and share the higher returns and high profits of the first-level market private equity investment. While the Chinese market has long been coveted, Coller capital has been slow in China, thanks to the usual cautious style of the European Fund, compared with the other four independent funds, such as Blackstone and KKR. So why did it suddenly decide to sell in China?　　and choose to cooperate with the fund? It is clear that the development banks of the three European countries, as the special background of the Fund LP, not only make Coller capital easy to produce more common language, but also the operating mode of mezzanine capitals adopted by the Fund in China makes it feel "familiar". As an important part of the "sink and hair model", the fund will be the mezzanine capital modelThe mergers and acquisitions sector shifted to PE investment and landed in China.　　Precisely these make Coller capital to enter China has the platform which can rely on.　　One of the main components of the "remittance mode" is the mezzanine capital Sandwich Capital and the long-term loan of the European Development Bank. "Mezzanine capital is used mainly for convertible debt, although many funds are currently using this tool, but in Europe, often in mergers and acquisitions used more." In the United States, about 2000 years or so pipe market led to the popularity of convertible debt, but in China, most of the fund investment process, often use preferred stock is more. Wang said that, because of the background of the Special LP of the Fund, both the German Development Bank, the French Development Bank and the Dutch Development Bank, whose sources of funding were mainly European taxpayers ' money, would have higher security requirements accordingly. Therefore, in order to avoid the risk of direct entry into China, the company chose the Exchange fund which is relatively familiar with the Chinese market, and also made a request for the safety of the investment principal of the Fund. This also leads to the fund in the actual investment process, "often will be inclined to risk between the creditor's rights and equity in the convertible debt." If the enterprise develops well, the fund invests the enterprise to be able the creditor's rights to turn the equity, realizes the listing exit; If the enterprise encounters the accident, the development encounters the question, then the Fund may withdraw through the shareholder repurchase or the sale its creditor's rights.　　Wang told reporters.　　So how can convertible debt be specifically applied to the investment process? At the beginning of the investment, the investment company and the Enterprise will provide a conversion price for the "convertible debt" at the beginning of the issue, and then, before the listing of the enterprise, use the original negotiated price divided by the original price to calculate the average number of shares after the conversion of each convertible stock.　　That is, the shares that the fund company can acquire after the enterprise is listed.　　The value of convertible debt can be seen in the withdrawal of the investment project of the China First phase fund before the transfer of the Fund. Of the eight projects invested in the first phase of the remittance fund, four of them are in the continuing state of ownership, the other four have achieved the exit, including China's high-speed transmission, Huiyuan juice, as well as Acer oil equipment companies such as three companies through the listing to achieve the exit, and Xinjiang Taurus Biological Company (hereinafter called Xinjiang Taurus) is through redemption to achieve the exit.　　So why are there two different exit endings? Clearly, in the first phase of the Fund, its investment in Xinjiang Taurus for a variety of reasons encountered problems, need funds to withdraw early. In general, the "breakup" for the fund and the invested enterprises, are very painful things, need to go through a difficult stage, but because the investment process used in the convertible debt, so in the subsequent negotiations between the two sides, the fund and Xinjiang Taurus also staged a "break up is still a friend" exception. Originally, in practical terms, according to the provisions of convertible debt, the fund in the enterprise before the listing can be said to be only creditor's rights, with the enterpriseThe right to pay interest, and the situation is the same for the fund, the two sides need to discuss is only the price of redemption and the number of interests, so it is relatively easy to reach an exit agreement.　　And from the successful exit of Taurus in Xinjiang, not only the fund avoids the loss, but also causes the enterprise itself to lift the disputes caused by equity, more conducive to the follow-up development of enterprises. Compared to Morgan Stanley, Goldman Sachs and the British Union 73 million U.S. dollars injected into the prince's milk, finally because the gambling agreement led to the two sides rigid situation, convertible debt is clearly more practical significance.　　For most of the funds, the Fund in the process of investment encountered undesirable projects unavoidable, and if the investment in the use of convertible debt, obviously, for investors, is undoubtedly added a shortcut to exit.　　Transfer Mode bis-equity plus creditor's rights in addition to more security, easier to exit, the "Equity + loans" in the remittance mode of investment mode also makes it in the process of negotiations with enterprises, more competitive advantage.　　It is an example of a fund that eventually won the Huiyuan investment. As the second enterprise invested by the fund, although the fund "phase" Huiyuan juice, but at the same time, the world famous PE Warburg Pincus also fancy Huiyuan juice, and at this time, as a mere investment in a company's remittance fund, if direct competition, obviously must put forward very attractive conditions, And the combination of bank loans is its final investment in the important weight.　　Huiyuan provided a 70 million-dollar long-term loan to Huiyuan, which ultimately invested in Huiyuan before it was in Warburg Pincus. "If there is a fierce competition between the funds, the combination of bank loans, equity investment, and then loans, which is a very attractive condition for better companies, but also makes our investment more flexible." If the equity investment process, the investment of the company's higher P/E ratio, then in the interest rate of the loan we can return through the interest schoolwork, on the contrary, can also be a preferential interest rate to enable enterprises to obtain a certain degree of concessions. In addition, equity and loans can also adjust the proportion, so for the invested enterprises, not only according to the actual situation of the enterprise and future development to obtain the necessary funds, but also to minimize the dilution of shares, it is easier to obtain recognition of enterprises.　　Wang told our correspondent. In the two-year remittance fund, but also with "debt + equity" mode of continuous shot, has won the Shandong Hin and soy sauce, such as a group of outstanding enterprises.　　Obviously, the three European development banks as the unique background of its LP, so that the fund has won a unique competitive advantage, but also to allow more funds to join the ranks of the "reference". "In the United States, banks typically sell mezzanine investments directly to other funds," he said. In Europe, the main three major banks, such as the German Development Bank, the French Development Bank and the Netherlands Development Bank are our LP, so the special background of the LP created the Fund's special investment model. Wang said, according to the current PE regulations, in the domesticThe direct participation of the bank in PE investment has not been approved.　　In addition to the establishment of the National Bank for the special circumstances of several funds, at present, although the background of Bank International and BOC International is somewhat similar to that of the fund, but because the domestic banks do not have similar experience in this field, there is still a big difference between the choice of investment model and the fund of Huiyuan.　　Throughout the domestic PE fund, only the fund and CITIC Capital funds to use Mezzanine Capital Fund investment, it is clear that the domestic capital model shortage, not to mention the need for long-term experience accumulation. Coller Capital This times into China, the choice of remittance fund as a bridge, the value is precisely its unique "equity + debt" mezzanine investment model. But obviously, in the future, with the rise of PE in the bank, if the construction Bank, ICBC, Bank of China can be as LP, set up similar investment institutions, into the field of mezzanine investment, the fund may face more and more fierce challenges.