Sequoia And Hillhouse Set Up Secondary Private Equity Fund

With the vigorous development of the secondary market, more and more PE institutions are no longer limited to the primary market.

It is reported that Sequoia China has launched a new fund to trade stocks of listed health and biotechnology companies. As early as August last year, it was reported that Sequoia Capital Equity Partners Fund, which is denominated in US dollars, was launched by Sequoia Capital equity partners, with an initial capital of more than US $300 million and invested in publicly traded stocks around the world.

it happens that there is a similar case. Recently, Shanghai Lingren private fund management partnership (hereinafter referred to as "linren fund") has completed the registration, with a registered capital of 10.05 million yuan, and its business types are private securities investment fund and private securities investment type fof fund.

It is worth noting that the relationship between linren fund and Hillhouse is close. In terms of personnel composition, another identity of Xu Yulian, executive partner of Lingren fund, is the partner of Liren investment, a private equity fund under Hillhouse. In addition, the related party information of Lingren fund also includes Liren investment and Zhuhai hilling Equity Investment Management Co., Ltd. In the view of the industry, the secondary market has always been an important business direction, and it is not surprising to set up a new private equity fund.

Zhang Qiang (pseudonym), partner of a PE organization, disclosed to reporters that in recent years, more and more venture capital institutions have either launched private investment funds in the secondary market or set up investment teams in the secondary market. The main purposes are as follows: first, in order to realize the exit of projects with higher valuation; Second, to meet the demand of some LP to allocate secondary market assets.

"In particular, to achieve a higher valuation of the project exit, is becoming a number of PE institutions need to address new challenges." He said. In the past, PE's project exit strategy was relatively simple -- selling stocks in a hurry before the maturity of funds, and they were not likely to consider the trend of stock price rise and fall, which led to their invisible loss of a lot of potential income. Nowadays, by setting up an investment team in the secondary market or getting involved in the private fund business in the secondary market, PE institutions can grasp the rise and fall trend of the secondary market, find a better exit time point and realize the exit of projects with higher valuation.

However, with the PE institutions increasingly strengthening the primary and secondary market investment linkage, how to prevent the interest transmission transaction has become a new test.

A number of private securities investment fund personages told reporters that it can not be ruled out that individual PE institutions should acquiesce in the secondary market private equity fund to raise the share price before the project exit, so as to achieve higher "excess return" in the project exit, so as to earn more profits and dividend Commission.

The compliance director of a large PE institution which has been involved in the private fund business in the secondary market said frankly that many PE institutions involved in the investment in the secondary market had established relatively comprehensive firewalls within them, which made the decision-making of the investment in the secondary market and the exit of the project in the primary market relatively "independent", and there was absolutely no interest transmission between them.

"At present, the secondary market team mainly provides the secondary market trend research and judgment, for the reference of the primary market investment team, in order to find a more appropriate exit time point and win more ideal returns." He pointed out.

Pave the way for project exit with higher valuation

Zhang Qiang disclosed to reporters that how to choose an ideal exit time point to get a higher valuation exit has been a big problem for them.

"In the past, our project exit strategy was relatively simple - we successively reduced our holdings of stocks before the maturity of the fund, but the actual investment income during the withdrawal period almost depended on luck. Sometimes when the stock market goes up, the return on project exit is naturally higher, otherwise, the actual return is not satisfactory. " He recalled. A few years ago, PE institutions have also noticed this problem, requiring the investment team of the primary market to carefully study the fluctuation trend of the secondary market and find a better exit time point to maximize the return on exit.

However, the effect of this attempt is not satisfactory. The reason is that the investment logic of the primary market is quite different from that of the secondary market. The former focuses on the sustainability of project business model, entrepreneurial team ability and high growth of the industry to judge the value of project investment; The latter also needs to take into account the capital inflow and outflow, monetary policy and other factors, study and judge the future stock price rise trend, and find the corresponding selling opportunity to maximize earnings.

Two years ago, Zhang Qiang's PE Agency decided to employ secondary market investment talents to join the post investment team to fill this short board. However, they soon found that the secondary market investment talents are well paid, and it is not cost-effective to limit his work scope to finding a better project exit time point.

Zhang Qiang said that at that time, they also had the idea of launching a secondary market investment fund, but in view of the limited investment experience and operation experience of the secondary market investment talents they recruited, they were worried that the secondary market fund would not be attractive for fund-raising and "let it go.".

A person in charge of a PE institution with a background of a large domestic financial institution told the reporter that in order to optimize the investment decision of project exit, they formulated new operating guidelines in combination with the Secondary Market Research Report of the parent company. Specifically, at the beginning of the year, PE institutions will review all listed projects internally. If the projects have entered the exit stage and achieved an IRR (internal rate of return) of more than 8% annualized, they will formulate corresponding exit plans according to the fluctuation trend of secondary market.

"On the whole, how to choose the most appropriate time point to achieve a higher valuation exit has always been a challenging task." He said it bluntly.

The "firewall" of benefit delivery remains to be solved

As more and more venture capital institutions strengthen the investment linkage between the primary and secondary markets, how to prevent the interest transmission transaction is attracting the attention of the industry.

"This is also the topic most concerned by some LP." The compliance director of the above-mentioned large-scale PE institutions that have been involved in the private fund business in the secondary market disclosed to the reporter. In the private placement of secondary market funds, some LP repeatedly asked PE Institutions how to build a firewall to avoid secondary market funds providing "benefit delivery" for PE Institutions to withdraw their projects. For example, private equity funds in the secondary market will first raise the shares of relevant listed companies, so that PE funds can obtain higher valuation and exit returns in order to earn more profits and dividends.

At present, his PE organization has set up multiple firewalls to ensure that this kind of interest transmission will not happen. Specifically speaking, the secondary market investment team and PE institutions can not disclose their project exit and warehouse building plans when communicating the fluctuation trend of the secondary market; The compliance department has specially set up the category of prohibited investment in secondary market stocks, that is, the investment projects involved in by PE funds are included in the category of prohibited investment.

"Individual PE institutions are not allowed to invest in PE funds and secondary market funds at the same time, so as to avoid the transmission of sensitive information such as project investment exit through LP, resulting in potential interest transmission behavior." The PE compliance director told reporters.

The reporter learned that in recent years, the financial regulatory authorities have strengthened supervision on the linkage trend of primary and secondary market investment of PE Institutions.

In 2017, the China Fund Industry Association (CFIA) required more strict classified supervision on private equity managers of securities and equity (including venture capital), stripped and adjusted the businesses of private PE Institutions with mixed operation problems, so as to prevent illegal arbitrage behaviors such as interest transmission and insider trading in different markets.

At present, when PE institutions apply to the relevant departments for filing and initiating private equity funds in the secondary market, they also need to submit a large number of materials to prove that a comprehensive fire wall has been established between PE funds and secondary market funds in terms of organizational structure, staffing, information exchange, investment decision-making, etc., so as to ensure that they operate independently and cannot create operation space for profit transmission.