Research On Financial Due Diligence Under Private Equity Investment

With the further development of world economy globalization, the international masters of capital enter the domestic capital market one after another, which cause a competitive set-up of a large number of domestic private equity funds with an explosive trend. According to the Zdatabase, in2011, there are209RMB funds are raised, which is a194.4%increase year on year.195of the disclosed raising funds amount to＄23.408billion, increasing119.2%year on year. While amoung the foreign private equity investing funds, there are26of them which can be invested in Chinese funds are finished raising, growing136.4%year on year. However, in the meantime of the rapid development, part of the invested enterprises don’t develop a lot as expected. Studies have shown that this situation mainly due to the incomplete survey of information asymmetry risk of the both party of investment and financing, due diligence is not implemented thoroughly, or the implementation is ineffective. Thus leads to a wrong judgment on the enterprise investment value, and resulting to decrease the income of the investors after they finish their investment. It shows that under the gorgeous guise of the private equity market, due diligence plays a crucial role in how to investigate the "true nature" of the enterprises comprehensively and profoundly, and how to minimize the risk of investment. Among them, financial due diligence was taken as the best hedging tool before investing by the investors, so it is becoming highly valued by the investors.The highly information asymmetry of the investment and financing parties has always been the primary obstacle to impede the mutually beneficial and win-win progress. This article attemps to find out how to conduct due diligence, especially financial due diligence under the situation of highly information asymmetry of both parties of investment and financing in the range of private equity; how to measure outflow mechanism according to the characteristics of private equity, to improve the theoretical framework of financial due diligence; To analyse the risk from the collected materials collected by due diligence staff, and then put forward a sound strategy according to it. To avoide the impact on the survey result by the operatation under financial due diligence itself, in case of influencing the invested enterprises’valuation by the investors. Discussing the above aspects, and then to provide a viable hedging approach for investors. Hoping that through theoretical research and practical work summary on the financial due diligence, to provide some guidance to the financial due diligence under private equity investment.