Research On PE’s Valuation Adjustment Mechanism

Private equity investment was introduced into China from the western capitalmarkets in the nineties of last century, which is widely used in China’s capital market asthe most convenient direct financing method in addition to IPO. VAM is designed for theinvested enterprise valuation adjustments, which gives financiers compensation toincrease its premium income when the enterprise is undervalued. Otherwise, the investorwill be given compensation to make up for its losses when the enterprise is overvalued.Besides the introduction and conclusion, this paper has four chapters. The firstchapter introduces the concept of private equity investment, development history,current situation, its different connotations given by different countries, the participatingsubjects in private equity transactions.The second chapter introduces the meaning classification and legal relationship ofVAM. The first section analyzes the meaning and classification of VAM, and introducesseveral influenced cases of VAM in private equity investment in our country recent years.The paper discusses the main part of VAM and elaborates the core content of VAM aswell as its object.The first section of the third chapter specifies legal nature of VAM, that it isconsidered as the atypical contracts, accessory contract of investment agreements,conditional contract of VAM. The paper elaborates that future performance of investedenterprise has uncertainty when VAM is signed. However, it does not confer "aleatorynature" on VAM. The relationship between "aleatory contract" and "conditional contract" is not antagonistic as "either this or that". The fact that VAM is "conditionalcontract" cannot be the reason why it cannot be "aleatory contract". The second sectionand the third section discuss rationality and legitimacy of exist and wide use of VAMrespectively.The fourth chapter elaborates the obstacles of the implementation of VAM in ourcurrent legal framework. The paper introduces some common methods to circumvent thecontrol of VAM, and risk prevention VAM.