Private Equity 20 Lectures (1) What is a fund?
Issue 1 What is a fund? Is the fund you are talking about really a fund? Public funds and private funds | The relationship between GPs and LPs in funds?
Welcome to Lecture 20 of American Private Equity, a compulsory legal course for investors in Silicon Valley. I am Liu Xiaoxiao, an American lawyer. Fund is a concept that is often mentioned. When it comes to funds, it seems that the talker always looks like he is doing a big thing. So what exactly is a fund, which ones are the real funds that others say, and which ones have nothing to do with the fund at all? Today we will talk about the concept of "fund".
First of all, I would like to declare that the concepts mentioned today are all under the laws of the United States, but I explained it in Chinese, so there are still many differences from the concept of funds under Chinese law. When talking about specific concepts I will also mention it.
1. What is a fund?
Funds are actually a lot of people pooling their money to invest together. Compared with direct investment such as buying stocks or bonds directly, a fund is an indirect investment that lets others manage your money for you. Just like the fruit that grows from the tree, you can get it directly by picking it in the orchard, and you can get it indirectly through the process of fruit farmers, fruit wholesale markets, and supermarkets. 1. So it is conceivable that the indirect investment method of funds is actually much more extensive than direct investment in stocks or bonds. For example, even if you have never invested in individual stocks in the stock market, as long as you have Alipay, all the money you have deposited in Yu’ebao is actually placed in Tianhong Fund. It can be seen that compared with direct investment such as stocks or bonds, indirect investment funds are actually more closely related to our lives.
Second, the real or fake funds? The essence of the fund is to help people manage money
Sometimes you may hear people say that our company is going to do a fund. It sounds like the amount is not small, but why doesn't it feel right? When you ask a key question, how many people do you help manage the money? "Manage the money? We use our own company's money to invest it." After talking for a long time what kind of fund is this, it is purely an investment department under a large company, trying to find a way to invest its own money. This is still direct investment, not called a fund. The essence of the fund is to help others manage money. If you manage your own money, no amount of money is a fund.
And more commonly, the investment department of this company does not invest directly in the project company, but invests in a larger fund. If this is the case, it is actually a limited partner (LP) in the larger fund.
In the next few issues we will introduce the concept of limited partner (GP) and general partner (LP).
3. Public funds and private funds?
When we talk about funds, one of the biggest categories is actually public funds and private funds.
a. Public funds
Let’s talk about public funds first. Some of the concepts that you often hear, mutual funds, ETFs, and index funds, are all public funds. It should be said that what the common people discuss, invest in, and have access to are public funds. Why, the threshold for private equity funds is too high, we will talk about this in the next issue.
Then it should be noted that in China's investment environment, public funds are basically equivalent to "mutual funds". The standard translation in mainland China is called securities investment funds, Hong Kong is called mutual funds, and Taiwan is called mutual funds. The counterpart is the Mutual Fund in the United States, which is an actively managed fund.
The ETF traded open-end index fund (Exchange Traded Funds), from the name, we all know that it is actually a kind of index fund (Index Fund). Then we have to explain what an index fund is. To put it bluntly, an index fund is a fund that tracks a certain index (S&P 500, Nasdaq 100). Index funds are passive funds, and it is enough to track a certain index. , Fund managers basically do nothing. Then ETF is under the category of index funds, which means that EFT is also a passive fund.
Mutual funds and EFT are the two most commonly heard concepts in the funds (of course, public funds) that our common people can access. No matter how detailed the content is, it is not something we can convey to you as a legal channel. If you watch some financial programs, I am afraid you can learn more, especially teach you how to choose good public funds for investment.
From a legal point of view, in fact, public funds have nothing to say. Public funds are large in scale but small in number. The establishment of cemetery funds is under the control of several top law firms.
b. Private Equity
Private equity funds are different. Private equity funds are a game for a few people. Investors participating in it have at least the right to raise some questions or even revise their opinions on investment terms. Therefore, there are many places where lawyers can play a role.
The concept of private equity is actually mentioned in Lecture 7 of American Corporate Law 20, so I will briefly mention it here.
We often hear people say Angel investor (angel investment), Seed Round (seed round), A round (A round), B round (B round), C round (C round), PE (private sale). What is the relationship between these? In fact, these are all private placements, but the PE among them is the real private placement.
Why, this is indeed a place where it is easier to confuse the concept. The concept of private placement includes broad private placement and narrow private placement.
Private equity in a narrow sense is PE, private equity, investment in the mature stage.
In a broad sense, the angel investment, venture capital and private equity investment in a narrow sense are all included in the broad scope of private equity investment. 5 Why? Because the corresponding private placement in a broad sense is public offering. What is a public offering? That is, after the IPO public offering, the funds are raised, so all the financing before the IPO is a generalized private placement.
Then in the next few lectures, the concept of private equity that we will mention is actually applicable to private equity in a broad sense, but it is mainly applicable to private equity in a narrow sense. I know that everyone is still confused when I say this. In the next few videos, I will let you gradually clear the clouds and understand all these professional terms in this fund.
Here are 20 lectures of American private equity funds, a required legal course for investors in Silicon Valley. My name is Liu Xiaoxiao, an American lawyer. See you next time.
