Compensation extraction method of private equity funds-Sunshine Trust

The China Banking Regulatory Commission recently standardized the performance compensation extraction methods of sunshine private equity funds, which caused heated discussion in the industry. A number of securities investors suggest replacing the liquidation law advocated by regulatory authorities with the "highest water level" and the "catch-back law" common to private equity funds.
It is reported that the China Banking Regulatory Commission may further explain the Operation Guidelines for securities, investment, and trust businesses of trust companies (hereinafter referred to as the Guidelines) in the near future.
In this recently issued Guide, china Banking Regulatory Commission (CBRC) stipulates that the performance compensation for Securities and Investment Trust businesses should be obtained only when the trust plan is terminated and profitable "). This operation denies the current "mobile" performance compensation method of the private equity fund industry, leading to market disputes.
Ke Shifeng, managing director of Martin KERP Investment Management, believes that the unreasonable reason of the liquidation law is that he ignores the incentive to private equity fund managers and supervises private equity funds based on the idea of supervising public funds, eroded the inherent advantages of private equity funds in securities investment.
Zhang dahong, senior vice president of customer portfolio design at Citibank's U.S. private banking department, said that the liquidation law focuses on protecting the interests of Trust investors and does not take into account the commercial operation costs of private equity funds.
Zhang dahong told Caijing that the high watermark system adopted by foreign hedge funds can be used as a reference for domestic private equity funds.
It is reported that in mature capital markets, hedge fund fees are usually divided into two parts. Some are asset management fees, generally between 1% and 2%, which are collected at the beginning of each quarter based on the size of the net assets. The other is the performance commission fee, which is generally 20% of the fund's profit and is extracted at the end of the year. The specific rules (how to collect and how to collect) vary with different funds and are not subject to legal restrictions. They are completely market contracts.
According to Zhang dahong, in order to ensure that hedge funds can motivate fund managers and protect the interests of investors in the case of losses, the compensation system of hedge funds has a special design, that is, "Maximum water level ". In the case of a fund loss at a certain stage, the manager must wait until the cumulative profit is offset from the previous performance Commission (if there has never been any profit, then the Investor funds will start to enter the Fund) after all the losses are accumulated, the performance can be improved again. The "Highest Water Level" varies with investors, depending on when they put money into the fund, which is recorded by the fund manager.
It is worth noting that the practice of "Highest Water Level" involves a series of practical problems. Liu Tianyi, Investment Director of Private Bank of Minsheng Bank, told Caijing that in terms of capital settlement, Western companies have formed perfect third-party settlement and settlement companies. There are still many obstacles to implementing the "highest water level" method in the current environment in China. For example, whether asset custody can handle complicated account management tasks of many trust investors technically, because the purchase, account opening, and redemption must be associated with a personal time stamp (time stamp) in order to accurately track the "highest water level" of individual investors ".
Zhang dahong also said that the depth and breadth of China's securities market have not yet reached a certain level, investment opportunities are limited, and fund managers have limited room to stretch their foot, requiring fund managers to adopt "Highest Water Level" and other clauses, there is also the suspicion of "impossible tasks.
He suggested that the claw-back clauses in Low-liquidity private equity funds such as venture capital are also worth the reference of domestic private equity funds.
It is reported that venture capital funds with low liquidity and leveraged buy funds do not have a "highest level", but there are generally "catch back" clauses. Because the realization of profit (or loss) of the investment project generally takes place only after the period of the Fund, the Fund Manager generally collects the share of the profit project first. If the period of the fund ends, if investors suffer losses as a whole, the fund manager can be requested to return some or all of the collected shares based on the extent of the losses.
However, the problem with this "catch-Back" method is that "investors can ask the trust administrator to return the" receive ahead "performance share under certain conditions, however, it may be difficult to define such conditions." Said Zhang dahong.
In response to the above suggestions, relevant persons of the China Banking Regulatory Commission said that the guidelines were published several years ago and they have listened to the opinions of all parties. China Banking Regulatory Commission is willing to discuss with all parties and strive to improve policies. However, the guidelines are intended to regulate trust and investment businesses, safeguard the interests of the principal, and do not involve the supervision of private equity funds. ■