"3.15" Investor Protection Education Campaign | 6 Key Considerations for Private Equity Fund Investments

On the other hand, registration and filing involve a formal review of the application documents, focusing solely on their completeness and compliance with regulatory standards. The Asset Management Association does not conduct substantive reviews of private equity firms, nor does it impose any licensing thresholds. Yet, fund managers exploit investors' misconceptions by falsely portraying registration and filing as equivalent to official regulatory endorsement. Leveraging this misperception to enhance their own credibility through self-promotion based on备案 information constitutes an illegal practice.

Our company’s featured promotion for this event focuses on six key considerations for private equity fund investments. What are the risks associated with private equity funds? Let’s learn together!

As an investor in a private equity fund, you should possess solid financial strength, have a thorough understanding of the capital markets' regulatory framework, be able to make informed investment decisions based on your own analysis and judgment, and maintain ongoing vigilance and oversight over both the private equity management firm and the custodian institution after making your investment.

Six key things to keep in mind when investing in private equity funds!

1. Be Wary of Promotional "Schemes"

High risk is an inherent characteristic of private equity funds, and disclosing these risks is the obligation of private equity firms. Investors should remain vigilant when dealing with private equity institutions that excessively package or over-promote their products—especially those that either refuse to address—or deliberately sidestep discussions about risks and potential pitfalls. In private equity fund sales, the following misleading "marketing tactics" often emerge:

First, improperly enhancing credibility through "registration and filing."

On one hand, the registration and filing of private equity firms is not an administrative approval—it’s merely a post-event registration process. Managers who claim that their private equity firms are officially licensed financial institutions approved by the CSRC or the Asset Management Association, and that their private funds are compliant investment products, are misleading investors. Don’t be easily fooled.

On the other hand, registration and filing involve a formal review of the application documents, focusing solely on their completeness and compliance with regulatory standards. The Asset Management Association does not conduct substantive reviews of private equity firms, nor does it impose any licensing thresholds. Yet, fund managers exploit investors' misconceptions by falsely portraying registration and filing as equivalent to official regulatory endorsement. Leveraging this misperception to enhance their own credibility through self-promotion based on备案 information constitutes an illegal practice.

Second, improperly enhancing creditworthiness through "trustee custody."

Private equity funds are not required to have custody, and the custodian's responsibilities aren't entirely identical to those of the fund manager. Moreover, having a fund under custody doesn’t mean the assets are automatically "safe in a vault." Investors should avoid blindly trusting "custody arrangements" and instead remain cautious—especially when managers use "XX Bank/Brokerage custody" as a marketing gimmick to unfairly enhance their credibility.

Third, other deceptive promotional "tactics."

As advertised, guaranteeing principal and returns—or promising high yields with regular interest payments—while simultaneously fabricating or exaggerating investment opportunities, leveraging misleading marketing campaigns to build momentum, and even exploiting emotional ties like family relationships to swindle investors out of their funds. Additionally, claims are made about fund products being backed by multiple layers of credit enhancements, particularly through personal guarantees from major shareholders or affiliated institutions. Moreover, some schemes employ pyramid-style sales tactics, cultivating extensive networks of sales representatives, establishing numerous branches and distribution outlets, and offering lucrative commission structures. For instance, investors earn substantial rewards simply by encouraging friends and acquaintances to purchase the funds. In other cases, elderly customers are targeted with offers like iPhones or televisions as incentives when they buy into these investment products.

2. Ensure that the purchasing channels are legitimate.

Remember not to purchase through illegal channels, and stay vigilant against unauthorized fundraising disguised as "financial innovation." Private equity fund managers and their products must be registered and filed with the Asset Management Association of China. We recommend that investors check the association’s official website before buying any private equity products. When investing in private equity products, carefully review the product details—understand exactly whose product you’re buying, who you’re actually signing a contract with, where your funds will be transferred, and where they’ll ultimately be allocated. Avoid being lured by promises of sky-high returns; keep in mind: "What you’re eyeing is someone else’s profit, while what they’re really after is your principal." If you notice anything suspicious, don’t hesitate to reach out to the Asset Management Association or relevant regulatory authorities for guidance.

3. Invest within your means

First, assess your own qualifications. For private equity fund investors, in addition to investing no less than a specified amount in a single private equity fund, institutional investors must have net assets of at least RMB 10 million as of the end of the most recent year, while individual investors must have personal household financial net assets of at least RMB 3 million, total household financial assets of at least RMB 5 million, or an average annual income of no less than RMB 400,000 over the past three years—and they should also demonstrate sufficient risk awareness and tolerance. Investors should carefully evaluate their own circumstances to determine whether they meet the criteria for qualified investors.

Second, assess your risk tolerance. Private equity funds are characterized by high risk and potentially high returns, but they also come with a minimum investment threshold. Therefore, before subscribing to a private equity fund, carefully evaluate your own risk tolerance. If you cannot afford to take on such risks—or if your risk tolerance is relatively low—you should proceed with caution when making the purchase.

4. Thoroughly assess the situation beforehand

Currently, there are numerous privately registered institutions. Before making an investment, investors can check the basic details of these private firms and their registered private funds on the official website of the Asset Management Association of China, as well as verify their business registration information through the National Enterprise Credit Information Publicity System.

First, assess the compliance level. Investors can visit the Asset Management Association website to review relevant information and, combined with the quality of the registration and filing details, make an initial judgment on the compliant operations of private equity firms. Additionally, they should check whether regulatory authorities have previously imposed any supervisory measures on the private equity manager.

Second, it’s important to assess the firm’s professional capabilities. Currently, many individuals with no prior experience in the securities industry—and often lacking any relevant academic or professional background—have transitioned into the private equity fund sector. Their primary motivation is frequently to exploit the "private equity" label as a cover for engaging in illegal activities and pursuing illicit profits. As a result, these firms inherently carry extremely high risks from the very outset. Therefore, evaluating a company’s competence should not rely solely on the sophistication of its office decor or the quality of employees’ attire. Instead, investors should pay closer attention to the educational backgrounds and professional histories of the firm’s senior executives. Investors should exercise caution when dealing with private equity firms whose staff appear ill-equipped to perform their roles effectively.

Third, carefully review the contract. This includes, but is not limited to: when examining the contract, ensure that the rights and obligations outlined are reasonable, verify that the document is complete, and check for any irregularities such as missing or misplaced pages. Be sure to read the terms thoroughly, and if you encounter unfamiliar concepts or unclear wording, promptly ask the manager for clarification. Stay cautious of short-term investments with periodic interest payments—these often mask higher risks. Never fall for exaggerated or misleading marketing claims. Additionally, for contracts executed in multiple copies, confirm that each version contains identical content. Pay close attention to whether the investment term aligns properly with the expected returns. Private equity funds, in particular, typically involve longer investment horizons; thus, promises of "short-term high returns" usually don’t align with the nature of equity investing and may indicate significant risks of illegal activities like Ponzi schemes. Always remain vigilant.

5. Decisions should be made rationally and cautiously.

Many institutions lure investors with the promise of high returns, even going so far as to commit fraud or illegally raise funds under the guise of private equity funds. Therefore, investors must stay sharp and vigilant—don’t let the allure of sky-high profits make you lose sight of potential risks or rush into investments blindly. Instead, consciously resist tempting gimmicks like "get rich overnight," "fast-track wealth creation," "high returns with zero risk," or "guaranteed principal and returns." Approach every opportunity with a healthy dose of skepticism, avoid relying on luck, and firmly embrace the principle that "investing always carries risk." Only after thoroughly understanding the risks should you proceed with careful, prudent investing—because staying safe means avoiding being duped altogether.

6. Continue to monitor closely after investment

After subscribing to a private equity fund product, investors should continuously monitor the fund's investment activities and operational status, ensuring that the private equity manager fulfills its information disclosure obligations as agreed. If investors notice any signs of the manager going missing, absconding with funds, misappropriating or embezzling fund assets, or if the fund faces significant risks, they should promptly report the issue to the Asset Management Association of China or the local Securities Regulatory Commission office in the manager’s registered location. Alternatively, once a dispute arises, investors should promptly pursue arbitration or legal action to safeguard their legitimate rights and interests. Additionally, if investors uncover any evidence suggesting that the private equity manager may be involved in criminal activities such as fraud or illegal fundraising, they should immediately file a formal complaint with the relevant public security or judicial authorities.