How State-Owned Equity Funds Respect Market Rules(AI Translation)
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By Caixin Weekly's Yue Yue
一级市场近来政策频出，从中共中央政治局会议提出“要积极发展风险投资，壮大耐心资本”，到国务院办公厅时隔八年再提“创投国六条”（《促进创业投资高质量发展的若干政策措施》），中国私募股权和创业投资（PE/VC）行业的重要性和紧迫性被推到前所未有的高度，给降至冰点的市场带来暖意。
The primary market has recently seen a flurry of policies, from the Central Political Bureau of the Communist Party of China advocating "actively developing venture capital and growing patient capital," to the State Council General Office, after an eight-year hiatus, reintroducing the "National Six Venture Capital Policies" (Several Policies and Measures to Promote High-Quality Development of Venture Capital). The importance and urgency of China's private equity and venture capital (PE/VC) industry have been elevated to an unprecedented level, bringing a wave of optimism to a market that has hit a freezing point.
这些政策围绕“募投管退”全链条，直指行业所面临的难点、堵点，拟进一步完善政策环境和管理制度，积极支持行业做大做强。已受煎熬数年的从业者则心有戚戚，“再不提振大家的信心，可能‘一级市场已死’‘逃离一级市场’就要真的一语成谶了”。
These policies focus on the entire chain of “fundraising, investment, management, and exit,” directly addressing the key issues and obstacles faced by the industry. They aim to further improve the policy environment and management systems, actively supporting the industry in becoming larger and stronger. Practitioners who have endured years of hardship feel a sense of urgency, warning that without a boost in confidence, predictions like “the primary market is dead” or “fleeing the primary market” might indeed come true.
“2023年可以说是中国创投行业史上最难熬的一年，2024年很大可能会是2023年的延续。”一位私募行业研究人士称，“募资端市场化的资金越来越少，投资端数量和金额都在继续下行，退出端受制于IPO管制，压力也越来越大。”
"2023 can be said to be the most challenging year in the history of China's venture capital industry, and 2024 is likely to be a continuation of 2023," said a private equity industry researcher. "There is a dwindling amount of market-driven funds on the fundraising side, both the quantity and amount of investments are continuing to decline, and the exit side is under increasing pressure due to IPO regulations."
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- China is introducing several venture capital policies to boost the PE/VC industry, addressing key industry issues and aiming for improved policy environments and management systems.
- State-owned capital is now the largest investor in the primary market but faces challenges with non-market-driven behaviors influencing investment strategies.
- The market is seeing declines in new funds and investments, with increased state involvement and calls for adjustments in performance evaluations and introduction of patient capital from insurance and pension funds.
The article discusses the recent uptick in policy efforts aimed at promoting the private equity and venture capital (PE/VC) industry in China. The Central Political Bureau of the Communist Party of China and the State Council General Office have introduced several measures to support this sector, underlining its rising significance amidst challenging market conditions [para. 1].
The latest policies address issues across the entire investment chain, aiming to foster a conducive environment for growth. Practitioners are keenly feeling the urgency to buoy industry confidence amid declining investments and regulatory pressures on IPO exits [para. 2][para. 3]. The reliance on state-owned capital, which should embody patient capital, has paradoxically become more impatient due to conflicting performance assessments and short-term objectives [para. 5][para. 6].
There are calls for government-guided funds to stick to their functional role instead of crowding out private venture capital, ensuring fair competition and market dynamics [para. 7][para. 8]. Temasek in Singapore serves as an example of successfully managing state-owned capital with a market-oriented approach [para. 9][para. 10]. However, the challenges at the local level include conflicting goals of state-owned LPs which can lead to performance dissatisfaction with GPs, highlighting the need for professional capital management [para. 11][para. 12].
Wang Ran's controversial remark that "the primary market is dead" sparked a broad discussion within the industry. Recent data shows a significant decline in new fund establishments and investment activities, reflecting a cooling market [para. 13][para. 15]. However, the shift from reliance on foreign USD funding to local RMB funding has created a new dynamic, with local government-guided funds and state-owned capital becoming predominant [para. 16][para. 17].
An analysis indicated that a substantial portion of capital is now from state-owned entities, which come with their own mandates and challenges [para. 19][para. 20]. Addressing the "unavoidable risks" in fund cycles due to misalignment between local leaders and fund managers remains essential [para. 4][para. 5][para. 21][para. 22]. Furthermore, the emphasis on patient capital must be revisited, requiring a shift in evaluation mechanisms that currently prioritize short-term gains over long-term value [para. 22][para. 23][para. 24].
The heavy influence of state-owned LPs has resulted in issues like intense scrutiny, changing fee structures, and administrative interventions that distort market practices. Establishing a sound performance evaluation system and a fault tolerance mechanism for investments could mitigate these challenges [para. 29][para. 30][para. 31][para. 35]. Strategic measures could involve bifurcating funds between those aimed at attracting investments and those focused on preserving and appreciating value [para. 40][para. 41].
Patient capital's emergence is crucial, necessitating broadened participation by insurance funds and social insurance in venture capital, coupled with suitable regulatory adjustments [para. 42][para. 45]. Aligning attributes of long-term patient capital, like insurance or pension funds, with venture investments is imperative but will require systemic reforms [para. 47][para. 48][para. 49].
Ultimately, ensuring smooth exit channels for funds remains fundamental to nurturing confidence and fostering genuinely patient capital. Encouraging extended investment and exit periods while accommodating the time required for scientific research to achieve commercial viability is essential [para. 53][para. 54].[para. 20][para. 19][para. 5].
- eCapital
易凯资本 - eCapital is a Chinese private equity firm whose founding partner, Wang Ran, commented at a mid-June 2024 industry event, sparking debate with his statement "the primary market is dead." His remarks highlighted concerns about the transformation of China's PE/VC market and the dominance of government-guided and state-owned capital.
- Beijing Taikang Investment
北京泰康投资 - Beijing Taikang Investment is led by CEO Huang Shengxuan. Huang emphasizes the need for patient capital in equity investment, highlighting that government investment platforms should collaborate with professional institutions. He argues that long-term investment requires a comprehensive system, including matching assessment mechanisms and professionalization, to truly form patient capital.
- Sino Insurance Investment
中保投资 - Sino Insurance Investment's Deputy General Manager, Chen Zihao, emphasized the importance of performance assessment, calling it a perpetual guiding principle. He stated that most institutions, especially state-owned ones, conduct annual assessments and highlighted the need for appropriate evaluation mechanisms in long-term equity investments to facilitate effective performance measurement and foster positive incentive systems.
- Guotai Junan Innovation Investment
国泰君安创新投资 - Guotai Junan Innovation Investment's Executive Committee member Wang Bingquan suggested that state-owned capital should innovate in assessment cycles, moving away from annual evaluations to better accommodate long-term investments. This proposal aims to improve the capital’s viability for supporting startup investments, considering that short-term assessments may discourage sustained investment efforts in burgeoning enterprises.
- Temasek
淡马锡 - Temasek, a model for state capital management globally, relies on professional managers for capital preservation and growth. Wu Yibing, Chairman of Temasek China, states that despite being state-owned, Temasek operates fully market-oriented. Achieving this requires shareholder trust and market-oriented practices in talent, incentive mechanisms, and investment evaluation.
- Bauhinia Capital
紫荆资本 - Bauhinia Capital's Legal Director, Wang Shu, highlighted the potential for insurance funds to support venture capital as long-term, patient capital, provided regulatory constraints like the "C-ROSS II" rules are addressed. He emphasized that sweeping away these obstacles could facilitate collaboration between insurance funds and the venture capital industry, enhancing sustained, stable returns.
- After an eight-year hiatus：
- The State Council General Office reintroduced the 'National Six Venture Capital Policies'.
- By the end of 2023：
- The cumulative target size of government guidance funds is estimated to have exceeded 13 trillion yuan, with a committed size of about 7 trillion yuan.
- The first half of 2024：
- 2,393 new PE/VC funds were established in China, with a fundraising scale of $219.5 billion.
- The first half of 2024：
- 3,971 investments were made with a total transaction scale of $68.4 billion.
- Mid-June 2024：
- Wang Ran, founding partner of China eCapital Corporation, stated that 'the primary market is dead' at an industry event.
- A few days later in June 2024：
- Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission, responded to Wang Ran's statement.
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