Enterprise management risk mainly refers to the management risk of the invested enterprise. The risk may be caused by changes in the market environment of the industry, such as economic recession, wrong business decisions, such as blind expansion and excessive diversification, or insufficient ability of enterprise managers, or unstable management team, and so on. Grasping this risk is the most important indicator to test investors' vision.
Specifically, credit risk means that PE investors are often just financial investors, holding minority shares and having no control over the operation and management of enterprises. If the former major shareholder or management maliciously conceals or deceives investors, it may cause disputes and losses. This also includes the so-called "agency problem", that is, when there is a conflict of interest between shareholders and management, such as some state-owned enterprises, the behavior taken by management without equity incentives may harm the interests of shareholders.
The legal and policy risks mainly come from the imperfection of the legal system and the policy changes of the country. For example, some new things are not clear under the current domestic legal framework, and some rights and obligations are not clearly guaranteed by law, such as convertible bonds, redemption and gambling clauses. Especially for foreign investors, the difference of laws and regulations in different countries is also a kind of risk, which increases the transaction cost. Changes in policies, especially sudden changes in specific provisions for certain industries and certain investment methods, may also increase investors' unexpected risks.
I think the impact of execution risk is mainly in time, which mainly refers to the complexity of investment process operation, involving industrial and commercial registration, taxation, foreign exchange management, approval by ministries, IPO preparation stage and so on. The more complicated the implementation process, the longer it takes, which will affect the time cost and return rate of investment. For example, if you invest in a company that is already in the preparatory stage before listing, the company's financial and legal preparations have been completed, and the problems left over from history have been cleared up, then the probability of success in listing withdrawal is high and the risk is small. This is why some investors are willing to pay a higher premium for Pre-IPO projects, because the implementation risk is very small.
Market risk mainly refers to the risk of changes in the capital market, especially in the IPO market. For example, before 1 1 in June 2007, China, Hongkong and the United States basically welcomed the IPO reaction of companies in China, but from the end of the year, the situation was not so good, and the soaring financing expectations of enterprises often had to yield to the cold reality. At the same time, the change of share price in the secondary market also affects the valuation that some PE investors are willing to give, especially for Pre-IPO projects, and investors' returns are expected to be greatly affected by the secondary market. Therefore, rigorous PE investors, even in the period of high stock market, will not give ridiculously high prices, because no one knows what the market situation will be like when they withdraw in a few years.
In short, due to the long period of PE investment, we must fully consider all kinds of risks before making decisions, be psychologically prepared for a protracted war, and reserve enough space to deal with possible emergencies.