JD Capital Sets Foots in Inferior Investment of Structured Products


At the evening of July 28th, JD Capital (430719) released a statement that together with capitalists of some funds and corporate controllers, as one of initiators, it would set up LONGTAI JD Invstement Co., Ltd. to enter into the inferior investment field.

Good venture control was the guarantee of investment and product safety. Different products have different venture control measures in PE markets. To enter into inferior sector by setting up LONGTAI Investment may be a measure to structurally design its funds.

Structured products become popularizing

Structured design referred to distributing returns into three levels. Innovators buying preferred stocks enjoy preferred return and those buying secondary and inferior stocks enjoy inferior return. Inferior investment is invested by financing sides and the inferior beneficiaries can get balance after deducting principal, expected returns and relevant fees of preferred beneficiaries, also undertake risks during investment.

The above-mentioned has been proved by JD Capital’s staff. He said, “Inferior investment is the structured design of funds, which will be used to guarantee the shares of funds. Inferior guarantee fund will not be limited or be inclined to new-founded funds.”

However, it’s not imagined by JD Capital. Recently, Chinese VC/PE firms have undergone fast changes in fund-raising modes and investment styles, forming a special development mode with Chinese characteristics. Some PE funds have begun to innovate in return modes and developed the structured product concept, namely dividing LP into preferred and inferior levels.

For example, LP PE funds can be divided into preferred and inferior LPs, in the funding proportion of 3:1. GP contributes 1.0%, and charges a 2.2% of management fees. when projects begun to exit, the allocation order of ROI is as follows: (1) return LP preferred principal, and contribute 50.0% of ROI; (2) allocate ROI by GP’s preferred order after returning LP inferior principal; (3) return GP principal; (4) after above allocation, remaining ROI is divided in accordance with 30.0%, 45.0% and 25.0% for preferred LP, inferior LP and GP.

Inferior LP and GP provide guarantees for preferred LP that can take its principal back first and gain 50% of ROI, which also forces LP and GP to undertake more risks. Inferior LP will gain most in return allocation and GP gain 25% of remaining returns.

JD Capital’s First Attempt

In April this year, JD Capital was listed on the NEEQ, but its strategy directions were not clearly specified in its public transfer statement. After China closed its IPO market, VC industry was impinged and JD Capital was questioned.

JD Capital did not reply whether it was one of steps for JD Capital in such field. However, JD Capital acted as GP and LP because its LP directionally issued stocks and increased its market share among fund markets. If its average ROI reached 30% as shown in its transfer statement, it would earn a lot based on its profits in funds and the inferior return of LONGTAI Investment.

It’s shown that LONGTAI Investment’s registered capital is 2.6 billion yuan. JD Capital subscribed 320 million yuan, accounting for 12.25% of the registered capital and becoming the biggest shareholder. Natual person Xu Chunlin is the second biggest shareholder for taking 7.69% of its shares. Besides the two shareholders, there are 19 natural persons taking 3.85% of its shares, 3 natural persons 1.92% and Feng Yuan, a natural person, 1.15%.

From the public transfer statement, it’s clearly to know that some shareholders are the participants of directional M&A plans, and LP. JD Capital said most of LONGTAI’s shareholders were JD Capital’s long-term strategic partners.

Such investment return distribution mode should attribute to the requirements of LP and GP under different situations, and would be suitable for investors that would like to participate in VC/PE investment with low risks. Of course, lower risks would produce lower returns. Compared the mode to traditional 80/20 mode, preferred LP could take its principal back and gain returns in a proportion, which could not be achieved in the 80/20 mode. In addition, GP could participate in the allocation of investment return which was higher than that under the 80/20 mode.