Private Equity 20 Lectures (4) The 10+2 Life Cycle of Private Equity

Issue 4 The 10+2 life cycle of private equity funds, how does the fund exit

After the money enters the fund, where will it be used? What is the typical term of the fund? How do project companies in the fund exit? In this issue, we will take a look at the life cycle of private equity funds.

In fact, it is simple and simple, that is, the fund manager looks at the project, invests in the appropriate project company, and invests the fund's money in the project company. But there are still a lot of university questions here. Because if you think about it, each fund has to invest in dozens of projects, and these projects can't all be in place at the same time. After investing money, these projects cannot mature at the same time, so when to sow and when to harvest, is there any special attention?

1. Duration of the Fund

Funds do not continue indefinitely, because LP limited partners, that is, investors, cannot invest money in funds and wait indefinitely for these projects to be dragged on indefinitely. Investment depends on the return. Usually the term of the fund is 10+2, that is, the term of the fund itself is 10 years, and there is a possibility of a 2-year extension, but the 2-year extension may not be used.

2. The life cycle of the fund

a. Financing period

Within one or two years after the fund is established, it is a financing period. During this process, the fund manager will vigorously promote his fund and let the majority of LP limited partners invest in his fund. In fact, in real life, this process begins when the fund has not yet been established. So in fact, the actual situation is often that after the fund is established, sufficient money is raised within a few months very quickly, and it does not take a year or two. But because most funds will leave a two-year surplus in legal terms, giving LP more space. After this time, the fund will not continue to accept fundraising, that is, a fund that we often hear from others has closed.

b. Active investment period

The next 2-5 years is an active investment period. During this period, fund managers will look at projects very intensively and find suitable projects to invest in. Usually during this 2-5 year period, the fund manager will invest about 60%-80% of the money into the project company.

c. Management and Investment Call-Up Period

So what's next? In the next 3-7 years of the fund, the fund manager will try his best to cultivate the project companies he invests in, and will gradually give the remaining 20%-40% of the money to more favorite projects in the form of additional investment. , everyone should understand that many startups often have A round investors who will appear in the B round, in fact, this is the truth.

d. Project Exit Period

The last remaining two years or so is the project exit period. In fact, 90% of the projects have already achieved results before this stage. For example, some closed in 2 years, some were acquired in 3 years, listed in 5 years, and some were still in 8 years. Mixed half-dead. So in fact, in the last two years, the fund only needs to find a way out for the most difficult 10% of the nail household projects.

e. Possibility of biennial extension

Of course, this place can be used for the opportunity of a 2-year extension. If the fund manager thinks that there are really one or two companies that are worthy of their operation for another year or two and can sell at a good price, then they can propose it, and more than half The LP limited partners agree, then you can pass. Because of this majority requirement, fund managers are usually very cautious about using the 2-year rollover option. If this power is used, and it is still a low-price sale after two years of waiting, then it will be difficult for the fund manager to cross the line in front of the LP.

3. Feelings

You should have also discovered that in the entire life cycle of the fund, where is the biggest problem, because it is impossible for all project companies to mature at the same time, and there will be sooner or later, so you must understand the exit of the start-up company. Way.

In fact, there are two kinds, one is listing, the other is mergers and acquisitions. Of course, bankruptcy is also a possibility, and the investors' money will be wasted.

For example, in the eighth year, among the 30 projects, 20 were collapsed, 1 was listed, 6 were acquired, and 3 nailed households remained. Going public is the way to go. It’s hard to come by. Many times it really depends on talent and opportunity. And if you haven't been listed in the first eight years, it's basically impossible to wait for it to be listed in the last two years. Therefore, dealing with such a nail-biting project company is actually a way - mergers and acquisitions. So we often see that investors will help the companies they have invested in to find an acquirer to sell. It's like the girl can't get married when she's too old. The matchmaker finds a husband's family to marry the big girl as soon as possible.

Here, I would like to share with you some of my feelings after seeing the life and death of so many start-up companies.

In fact, the last three difficult companies are not hopeless companies, because each company has a different development path, sometimes it is not impossible for it to succeed, it just takes more time. But time waits for no one, and capital waits for no one.

Some people will ask, if you sell the company, will you be able to sell it? Sure, it just depends on the conditions. As long as it is cheap enough, there are always big companies willing to accept it. After all, it is a company that has been in business for ten or eight years, so it cannot be completely worthless. Let's take the example just now, a big girl who can't get married can always marry a fool or a lame person. Why does it have to be this way? Because the fund manager needs to see a result, just like investors are waiting for a result from the fund manager.

That's why we often hear about startups that were forced to sell off to a big company under pressure from investors. At this time, the founder sold the company that he cultivated by himself, just like the child he raised by himself, and sold it to a big company as a slave at a low price. If we give these companies more time, maybe they will have a better way out, but once you enter the circle of entrepreneurship, you will find that even the founders of star startups backed by several top VCs have How much can't help it.

Entrepreneurship is such a road, how many unexpected gains you have, there will be how many unspeakable losses.

Here are 20 lectures of private equity funds, a required legal course for investors in Silicon Valley. I'm Liu Xiaoxiao, an American lawyer. See you next time.