Private Equity 20 Lectures (2) Qualified Investors in Private Equity
Issue 2 Accredit Investor of Private Equity, US Securities Act of 1933 | What kind of person can invest in private equity? Why can't I invest in private equity funds | Qualified Client and Qualified Purchaser
In the previous lecture, we have already understood the concept of funds and the cemetery and private equity funds, so why can't we invest in private equity funds at ordinary times, and what kind of people can invest in private equity funds?
If your portfolio is 100% mutual funds and ETFs, then you probably never need to know what I'm talking about in today's video. However, if you are interested in private equity, then the content of today's video is very important to you.
To invest in private equity funds, you need to understand some securities law provisions, including what is an Accredited Investor, a Qualified Client, and a Qualified Purchaser.
1. What is an Accredited Investor?
The term accredited investor can be traced back to the first major securities law in the United States, the Securities Act of 1933. The Securities Act of 1933, also known as "Truth in Securities Law," requires that investments must be registered with the government as a fundamental principle.
What is registration? Specifically, it requires investee companies to disclose certain information to investors in order to enable them to make informed decisions about their investments. This information includes:
• a description of the company's property and business;
• a description of the securities to be sold;
• Information about company management; and
• Financial statements certified by an independent accountant,
There are a lot of technical terms. In fact, to put it plainly, it is the public offering of stocks that needs to be disclosed. The above professional terms are the main chapters in the IPO prospectus.
So what are the exceptions in the Securities Act of 1933 that do not require registration? These include:
• Fundraising from a limited number of individuals or institutions;
• a limited number of products;
• Intrastate distribution; and
• Municipal, state and federal government securities.
This is also a bunch of professional terms. In fact, to put it bluntly, it is private equity.
So in short, registration is public offering, and non-registration is private placement.
I would like to say that here, the formulation of the statute itself is somewhat misleading. The principle of securities registration is the principle, and the non-registration of securities is the exception. Because the description of the statute itself makes people feel that more people are registered and less people are not registered. But in fact, it's not like that at all. Registration is actually an IPO of a company that goes public. In private equity, hundreds of companies are raising funds every day. So the actual situation is that although registration is the principle and non-registration is the exception, there are actually many exceptions, which have far exceeded the principle, so the exceptions actually swallow the principal.
A person who can conduct private equity investment, at the very least, is a "qualified investor", so what is a "qualified investor"?
The Securities Exchange Act of 1933 defines two types of "qualified investors". The first is banks, insurance companies, and financial companies, so we are definitely not satisfied. The second is an individual who meets the following specific conditions:
1) Asset elements: Investable assets of 1 million US dollars or more, everyone listens, this is very easy, such as New York, Los Angeles, Seattle, etc., any house in the United States is one or two million. Note that this asset cannot include owner-occupied residences.
2) Income Elements: If you are filing individual taxes, your income is $200,000 per year for the past two years; if you file a joint tax return, your income is $300,000 per year for the past two years. And both of them are expected to still reach the same level of revenue this year,
Either of the above two conditions is satisfied. Note that these limits were set in 1982 and haven't changed over the years. If you consider the factor of inflation, it is far from this figure, so it is already a very low standard that the price has not increased for so many years. And in real life, these are just a threshold, the starting price. Most private equity investors are people whose income and assets far exceed these standards.
2. What is a Qualified Client
First of all, let me explain that here we translate both accredited and qualified as "qualified", and some places will translate accredited investor as "trusted investor".
Entering the topic, if you want to understand what a qualified client is, you must first know that there is an "Investment Advisers Act" of 1940. What does that mean? Fund managers usually get remuneration from two parts, one is management fee and the other is performance fee. We will introduce the fund sharing model in detail in the next video. Today everyone Just need to know that the management fee and the performance fee are a ratio of 2/20, which means that the management fee and the performance fee are 2% and 20% of the investment amount, respectively.
But under the Investment Advisers Act, fund managers can only charge a management fee, not a performance fee, if they do not meet the conditions for qualifying clients. Then some friends may ask, this is a loss of the fund manager, what does it have to do with me. Then the fund manager will not be willing to do your business, and you will not be able to invest in many good funds.
So what kind of person can become a "qualified customer"?
a. Individuals with at least $1 million in assets under management with an advisor immediately after entering into an investment advisory contract with the advisor.
b. Individuals or individuals with a spouse who had net worth of $2.1 million or more, excluding owner-occupied residences, prior to entering into a consulting contract.
c. Individuals who met the definition of a qualified purchaser at the time the consulting contract was established—including ownership of an investment of at least $5 million.
d. Individuals serving as executive officers, directors, trustees, general partners, persons in similar positions, or in advisory positions.
e. An employee of the consultant who is involved in investment activities and has been involved in investment activities for at least one year.
In fact, among these five criteria, in most cases, private equity investors have completed the first one. what does this mean? That is, the money you invest in a private equity fund will cost 1 million. Moreover, the cases we have really come into contact with are basically every individual investor who invests more than one or two million in several fund projects. What is this concept, that is, if you can invest a million dollars at will, it means that your total assets must be in the tens of millions.
3. What is a Qualified Purchaser
Finally, let's introduce the qualified purchaser (Qualified Purchaser)
According to the Investment Company Act of 1940, if a private equity fund has more than 100 holders, it needs to register with the SEC as an investment company, unless all holders are qualified purchasers (Qualified Purchasers). Purchaser). There is definitely no private equity fund that wants to register and disclose it publicly, so for large-scale funds, it is very necessary to keep all its investors as Qualified Purchasers. As an investor and a qualified purchaser, you can also invest in higher-quality private equity funds.
So what kind of person can become a qualified purchaser (Qualified Purchaser)? One of the following conditions needs to be met:
a. Those who hold investments of $5 million or more
b. Companies holding investments of $5 million or close relatives
c. Trusts holding investments of $5 million or more, although not established specifically for the underlying investments
d. Investment managers with assets under management of $25 million or more
e. Companies with investments of $25 million or more
Any of these five criteria can be met. In real life, the most common one is to meet the first condition, which is to have an investment of at least 5 million US dollars. For this reason, qualified buyers are sometimes referred to as "super-accredited" investors.
Well, now we introduce the Accredited Investor (Accredited Investor), Qualified Client (Qualified Client) and Qualified Purchaser (Qualified Purchaser). After understanding the levels of various investors, did you find that poverty limits your imagination? It turns out that the real show of wealth is not a luxury car or a luxury house, but in front of a fund manager. Are you a qualified investor, a qualified customer or a Qualified Purchaser.
After meeting the criteria for becoming an investor, the next step is to actually invest the money in the fund. So how does the complex corporate structure in the private equity fund work? What does the GP and LP in the fund mean? What is the difference between a fund manager and a general partner? We will introduce these concepts in the next issue.
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.