Understanding Private Equity Fund and Capital in Business Investment

Understanding the Concept of Capital and Private Equity Fund

• In recent years, various business wars have been observed in the market, such as the short video war between Douyin and Kuaishou, and the online ride-hailing war between Uber and Lyft.

• Behind these business wars, capital is the driving force, and it is essential to understand what capital really means.

• Capital is the funder dad and is typically associated with private equity companies investing behind big companies. Private equity is the abbreviation of private equity fund, and it involves investing in private companies, which includes buying low and selling high.

• Private equity is a concept opposite to public equity and is more of a broader concept in China, often related to unlisted companies and initial stage investing.

• Private equity involves different stages in a company's development, including the earliest stage, growth stage, and maturity. Each stage carries different risk levels, investment value, and methods.

Understanding the Concept of Capital and Private Equity Fund

The Process of Growth Investment in a Business

• When looking at business projects, investors will read the business plan to assess the overall prospects and the industry.

• Investors also look at the founding team or founders to evaluate their execution capabilities and the potential for implementing the idea.

• Successful business ideas receive initial verification from market feedback, indicating a promising future.

• The growth stage signifies the need for replication and expansion of the successful business model.

• Investment in the growth stage involves higher amounts ranging from millions to hundreds of millions of dollars.

• Investors in the growth stage provide experience, resources, and support for companies expanding their operations.

• The growth stage leads to rounds of financing, with each round resulting in increased investment and valuation.

• Early investors or investment funds have the option to exit later as the business valuation increases.

• The process of growth investment involves a virtuous cycle of financing, production, and expansion.

The Process of Growth Investment in a Business

Private Equity Fund Structure and Investment Stages

• After making money, the private equity fund will be divided among the investors, including the General Partner (GP) and the Limited Partner (LP).

• The GP, or General Partner, is equivalent to the fund manager, while the LP, or Limited Partner, is the investor of the fund.

• The '2+20' principle is commonly used, where investors pay a 2% management fee and the fund manager keeps 20% of the profits, with the remaining 80% going to the investors of the fund.

• Some companies go public after rounds of financing, while others may raise multiple rounds of funding but remain private, with their valuations increasing significantly.

• The definitions and boundaries of VC and growth stages are becoming increasingly blurred, making it challenging to categorize companies into specific stages of development.

• As companies mature, they reach a more stable state with a clear business model and relatively stable cash income, making them attractive for traditional and narrow private equity investments.

• Private equity companies specializing in this stage focus on larger companies and invest with the intention of gaining control rights and making operational and financial improvements.

• Investments in mature stage companies often involve a longer holding period of 3 to 7 years, during which the PE company takes control and implements strategies to improve the company's profitability before considering options like packaging the company for market or selling it for profits.

• PE professionals at this stage often transition from investment banking, leveraging their financial and operational expertise in managing mature stage investments.

Private Equity Fund Structure and Investment Stages

Understanding Leveraged Buyout (LBO) and Private Equity (PE) in Investment

• Leveraged Buyout (LBO) is a strategy where a company is acquired using a significant amount of borrowed money to meet the cost of acquisition. In 2017, the successful launch of Canada Goose is a prime example of a well-executed LBO.

• Leverage is a key factor in LBO, allowing investors to control a company with a relatively small amount of their own capital. It involves borrowing funds, similar to buying a house with a mortgage, and then selling the acquired company at a higher value to realize returns.

• Private Equity (PE) involves raising funds privately to invest in various opportunities. It contrasts with public equity, where funds are raised publicly. PE investments cover a wide range, from investing in private companies to participating in secondary markets and hedge funds.

• The development of the Internet era and the emergence of tech giants like Alibaba, Tencent, and other new players have shifted the investment landscape. These companies have become significant players in domestic PE investment, with a strong presence in various fields.

Understanding Leveraged Buyout (LBO) and Private Equity (PE) in Investment

The Rise of 'SoftBank Dad' in Alibaba's Financial Success

• Alibaba's success is intertwined with the influential role of 'SoftBank dad'

• 'SoftBank dad' refers to Alibaba's early investor, SoftBank, which made over 130 billion U.S. dollars from the investment

• Investment by internet giants like Alibaba and SoftBank is categorized into financial and strategic investment

• Financial investment primarily focuses on generating financial gains, while strategic investment aims to bring additional value to the parent companies

• Examples of strategic investment include Alibaba's acquisition of an express delivery company and Google's acquisition of YouTube for traffic advertising support

• Both Alibaba and SoftBank focus on specific tracks for investment, with a competitive spirit evident in their diverse investments

• The era's investment trends have seen a shift towards industries that generate real value and contribute to society

The Rise of 'SoftBank Dad' in Alibaba's Financial Success

Conclusion:

Understanding capital and private equity fund is essential for investors and business enthusiasts to grasp the intricacies of investment and financial growth. It shapes the landscape of business development and plays a pivotal role in the success of companies. Embracing the dynamics of private equity fund opens up opportunities and insights for navigating the competitive business world.

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