The soul of PE is value creation

-Reporter do-joon for the recent media exposure of the "PE corruption" phenomenon, Wang Yanhui, vice president of Ping An bank, said in an interview with China Securities News reporter that the "PE corruption" of the investment agencies are often "pseudo PE", the real PE is committed to "create value", rather than in the company before the "hitchhiking"　　and "benefit delivery" through insider trading. To whether the value of the creation of the authenticity of PE China Securities newspaper: The current popular PE corruption, including Zhejiang Red Tripod, Shanghai music, credit investment bank events, so that the image of PE cast a layer of shadow.　　As a long-term study of China's PE development experts, whether so worried about PE in China's development prospects? Wang Yanhui: I do not worry, whether from the proportion of national savings into the PE industry, or from PE investment in the proportion of GDP and the diversity of PE types and the maturity of the investment style to measure, the Chinese PE industry are still very young, there are some problems are not surprising. With a cliché, it's a question of development, a question of progress. Regarding "PE corruption" and "PE overheating", I have already talked about some opinions in the recent media interview. I think that the hot discussion of "PE corruption" is not as cool as "PE concept." These incidents involved in the "PE", in fact, is not the real PE.　　Zhejiang Red Tripod, Shanghai Music is a disorderly fund-raising, the state letter of the problem is the investment bank personnel violations. There is a clear difference between the real PE and the funds involved.　　At present, the society will be a number of "pseudo PE" as a true PE, is the real PE unfair, so it is necessary to clarify. PE and mutual funds, hedge funds and so on are financial investment, there are many similarities.　　But from the investment process, PE investment and other funds are significantly different.　　First of all, PE in the value Discovery link, looking for can achieve high performance target with its support as an investment object. Whether the typical venture capital fund chooses the early enterprise with broad market prospect, the development period fund chooses the industry leading enterprise in the rapid development stage, or the mature enterprise that the Acquisition fund chooses the operation performance to have the big improvement space, all embody the requirement that PE discovers the high performance goal in the value Discovery link. PE investment is also a value investment. Some PE studies have pointed out that PE is walking in the inactive market, looking for enterprises with undervalued value (often legal use of insider information).　　Accordingly, PE has the characteristics of high yield and high risk expectation. PE investors include qualified institutional investors and wealthy individuals (or families) whose sources are long-term funds. PE investment is positive investment, the reason why investors invest PE is to pursue higher than bank deposit and open market stock bond investment, so as to increase the yield of the whole portfolio. At the same time, in order to diversify the risk of investment in more types of assets, although the return on PE assets and other assets are also relevant. The transparency and liquidity of PE market is lower than that of open stock market, and the investment period is more risky. Therefore, PE expected income is also higher. It should be stated that the expected high returns do not amount to actual high returns. is the PE actuallyWith the characteristics of "high risk and high income", the empirical research results of historical performance are inconsistent, but some excellent PE performance is obviously higher than the market, and has remarkable continuity and prognosis. Secondly, with many other financial investment, value creation is the central link of PE investment process.　　At present, some funds of our country are raiding stakes in Pre-ipo projects, not really creating value. Regardless of the type and style of PE, they are involved in the operation and management of the target enterprise to a certain extent, leading or participating in the value creation process of the target enterprise.　　Regardless of the direct investment enterprises, in terms of financial investment alone, many other types of investment, such as bank deposits, securities investment in the open market, bonds and equities, alternative investment in gold jewelry art investment, and so on, investors in the investment holding period is generally not used for the value of the investment object. In addition, in the Value Realization link, PE also has its own way. PE fund managers have great initiative in the choice of exit timing.　　Various types of exit, including listing, the original shareholder repurchase, over-the-counter sale, resale to other PE and so on. Create a variety of ways of value China Securities newspaper: According to your point of view, such as limited partnership may only be the form of PE, value creation is the soul of PE.　　So how does PE achieve value creation? Wang Yanhui: The basic mode of PE is discovering value, looking for the investment object with high performance potential, taking PE specific corporate governance structure instead of the original corporate governance structure, while injecting capital and using financial engineering, creating value mainly through the basic means of management reform, establishment of incentive and restraint mechanism and providing value-added service,　　After a certain period of time, to achieve high performance results, and choose the right time and way to exit, to achieve value. PE with a kind of financial investment institutions to centrally hold the private corporate governance structure, instead of family holding, industrial companies holding, decentralized shareholding or public companies corporate governance structure, so that target enterprises can pursue the long-term value of equity itself.　　The ways and means of PE value creation are various. First of all, capital injection is the most dominant means of PE creation value.　　It should be noted that PE capital injection is often used in various forms such as equity, options and convertible creditor's rights and so on, and at least for PE subject's buy-out fund, it often adopts financial lever. Management change is the important value creation means of PE. Radical change is the change of corporate governance structure. The contents of the narrow management change include board adjustment, strategic adjustment, asset reorganization and business reorganization, and the content of generalized management change includes incentive constraint and value-added service. The PE support enterprise's change strength usually is bigger than the enterprise which does not have the PE support.　　Management change is the most difficult factor for non PE supporting enterprises to imitate learning in PE mode. Incentive constraint is one of the basic methods of PE value creation. Incentive constraint is to solve the problem of principal-agent. In the first boom of the 80 's, this method has been paid more attention by theoretical research and has been widely studied and imitated by many listed companies, and become a corporate governance structureImportant impetus to change.　　Even some scholars believe that PE has changed the governance structure of the entire American company. Value-added service is an important means of PE value creation. The content of value-added services is extensive and diverse, which can be divided into two aspects: internal management improvement and external resources introduction. Although there are different types and styles of PE, the value-added service function is different, but there is hardly any PE which does not provide value-added services at all.　　Moreover, PE, which does not provide value-added services, will not survive, not to mention competitiveness, except in an environment of extreme financial repression and desperate funding. Some PE is widely used in financial engineering to create value. To use financial leverage, large proportion of debt financing, including the use of options, convertible credit and other financial instruments, such as the financial engineering, PE, especially as a PE subject of the acquisition fund to create equity value of the important means.　　The capital structure of a high debt ratio itself can bring about the effect of tax cuts, investors can get huge returns with a small amount of capital, and the pressure to repay debt after high leverage debt, and also force PE and management to improve their operations and improve their performance through various ways. Long-term investment is beneficial to value creation. Although there has been a "fast turnover" of PE in history, empirical research shows that the return on PE is usually related to the length of the investment period, and that the return of "quick turnover" is lower than that of the patient capital. At the same time, the returns of the development funds with shorter investment period are also lower than those of venture capital and buy-out funds with longer investment duration. In most developed PE market, the period of investment is prolonged. Appropriate extension of investment period, but also conducive to PE choose the best exit time, reflect high performance results, realize value creation.