A ten - year veteran employee used their salary for co - investment but didn't earn a single cent.

“If you've been co - investing for ten years and neither made a profit nor suffered a loss, you're already a genius!” Zhang Tong told a reporter from Rongzhong. “Investment institutions had regulations on co - investment a long time ago. At first, it was voluntary. Later, after LPs demanded it, it was mandatory for a while. Recently, it has been relaxed again. Only part of the investment team is required to co - invest, and there is no hard requirement for the middle and back - office departments.”

The co - investment task of investment institutions is changing from a welfare subsidy to a pressure.

“I've been with the company for ten years. At first, I thought it was an internal welfare and hoped to achieve financial freedom through the team's co - investment,” an IR from an institution in South China told Rongzhong. “Later, I found that making money from co - investment is really a low - probability event. We did an internal statistics. Looking at all employees' co - investments, at most, it's just a break - even. The money you made is just lost again.”

“From my experience, there's no way to make money from co - investment in ten years.”

Within the institution: Can you really make money from co - investment?

Co - investment in VC funds may be a special mechanism. In other industries, it's basically very rare to have to pay out of your own pocket to work.

However, regarding the co - investment mechanism, there are different perspectives from the development of the industry and the internal recognition of institutions.

Seven or eight years ago, co - investment was still a new thing.

At that time, a small number of institutions opened up the team co - investment system - employees could follow the fund's investment projects according to their own risk preferences.

Generally speaking, co - investment is divided into fund co - investment and project co - investment. Fund co - investment is for partners and VPs and above, who directly or indirectly hold fund shares; project co - investment is mostly for middle - and lower - level investors, who directly hold the equity of the target project. The co - investment quota is generally between 1% and 30% of the total investment amount of the project.

A few years ago, team co - investment was actually a reward mechanism. During this period, the path of co - investment was “allowing employees to co - invest” rather than “mandatory co - investment.”

A big difference is that the reward - based co - investment system has no penalty mechanism - when a project incurs a loss, there is no penalty mechanism for the employees in charge of the investment in terms of their income.

All co - investments only set an upper limit and are invested through the team's co - investment fund. Voluntariness is the only principle.

“Around 2018, our fund pioneered the team co - investment mechanism. Not only investment managers but also middle - and back - office staff could co - invest in projects,” Zhang Tong told a reporter from Rongzhong. “At that time, the fund invested in a number of good projects, with good returns and subsequent growth. I was really itching to take out my salary to co - invest, and indeed some projects performed very well.”

But the problem is exit.

After several years of development, these projects from the Internet era have entered the exit period. However, from the perspective of the track, technology - related projects such as medical and chip have become the mainstream on the stage, and model innovation has started to decline. In terms of exit, many projects that were booming in the past did not perform as expected.

“Your mentality is really different when you've put your own money into a project,” Zhang Tong said bluntly. “Some projects made a little money, but some just incurred losses. On balance, it's a break - even. From the overall return perspective, it's already considered good among the employees who co - invested internally.”

But as time goes by, co - investment in the fund has become a clear task.

Especially for the investment team, mandatory co - investment is required.

Rongzhong learned that the mandatory co - investment amounts of different funds vary. For example, in a state - owned institution in Guangzhou, the mandatory co - investment of investment team members is based on the lower of 1% of the project investment or an average of 100,000 yuan per person in the investment team.

Some state - owned venture capital institutions require the main members of the investment team to co - invest no less than 100,000 yuan.

Such quota requirements put great pressure on the relatively low - paid positions in the investment team, and there have even been cases of “taking out loans to go to work,” which to some extent affects employees' work enthusiasm and quality of life.

The mandatory co - investment amount not only affects employees' personal liquid assets but also determines the upper limit of the co - investment amount that employees may lose in a project. The larger the mandatory co - investment amount, the greater the amount employees may lose in an extreme loss situation.

Different from the early reward - based team co - investment, mandatory co - investment brings considerable pressure to employees.

LP: If your institution doesn't co - invest, how can I dare to invest?

For LPs, team co - investment has become a restraint mechanism.

The main reason for this phenomenon lies in the binding of risks. For LPs, “If you're not even willing to invest your own money, why should I invest in you?”

LPs are also afraid of losses.

According to data from the Chinese Academy of Science and Technology for Development Strategy, from 2018 to 2022, the proportions of loss - making Chinese venture capital projects at the time of exit were 45%, 51%, 52%, 55%, and 49% respectively. Over the five - year period, the average ratio of losses to profits for venture capital project exits was 50:50, which also reflects that there is still a relatively large risk of loss in Chinese venture capital project investments.

As time goes by, in recent years, fewer and fewer funds have a DPI of 1. The return on investment exit has gradually declined over the past ten years.

From 2020 to 2022, the average return rate of venture capital project exits was 24.2%.

Such returns force LPs to ask GPs to put up more chips to ensure “no losses.” Especially in recent years, after state - owned LPs have become the mainstream investors in the market, they emphasize the stability of funds even more.

Over the past three or four years, various inspections and audits have forced state - owned LPs to face questions such as “Why did it lose money?” and “Loss of state - owned assets.” Looking at the current market as a whole, mandatory co - investment mainly exists in RMB funds.

Many people describe the relationship between LPs and GPs as a marriage. At first, it's full of tenderness, then it enters the honeymoon period, followed by the burnout period, and finally the period of breaking up in anger.

“Before the investment, we were all good brothers patting each other on the back. After the investment, suddenly losing control, we can only slam the table.”

Take the investment return requirement as an example. Although at the beginning, we had a good talk. I give you money, and you invest a certain proportion in the local area. But after the investment, it's found that many enterprises just register a small local company with no real business. How can this be considered a contribution to the local industry? It's just fulfilling a registration quota.

Such things are countless. You have management policies, and I have countermeasures.

LPs have invested real money but have neither achieved the effect of industrial investment attraction nor made a profit. They can't explain it to their superiors, so LPs have come up with many ways to restrain GPs.

For example, the issue of management fees reported by Rongzhong a few days ago. Since you don't manage the money well, let's talk about the management fees later.

The requirement for GPs' teams to make mandatory co - investments is the same. “You have to put some of your own skin in the game before I can invest in you with confidence.” Under this universal formula, GP partners can only remain silent.

But the reality is that the investment team really doesn't have much money. Even in the up - cycle of the industry, there is a credit discrimination chain in the investment circle: US - dollar PE > US - dollar VC > RMB PE > RMB VC.

With relatively low salaries, having to take out a part of the money for co - investment puts great pressure on RMB funds with lower - paid employees. “From the perspective of the nature of the funds, LPs' money is for investment, but employees' salaries are for living. How can they afford to co - invest?” an investor from an institution in Beijing complained to a Rongzhong reporter.

“It seems that investors have a basic salary + carry + investment success bonus + co - investment return. But in fact, carry is just a legend in the industry. Whether you can get the investment success bonus depends on the institution and whether the partners are willing to give it. As for the co - investment return, forget it. A project lasts for seven years. How long do you have to wait? And what if it loses money?”

“As a ten - year veteran of the institution, I've seen individuals make money from co - investing in a single project. But if you look at the entire co - investment cycle, being able to break even already means having very good investment vision,” Zhang Tong said bluntly.

Investors and employees of institutions have also clearly felt the change in the cycle. When the entire industry enters a downward cycle, no one can stop the decline of DPI. This seems to have become a curse, breaking the beautiful fairy tale of mandatory co - investment.

Is the combination of mandatory co - investment and the salary incentive mechanism really an incentive?

For institutional partners, the requirement from LPs for co - investment seems to be a clause that must be accepted. But within the institution, there are strong opposing voices. When co - investment becomes a mandatory restraint and a reward - and - punishment mechanism linked to salary, internal risks are emerging: first, team instability, and second, it affects investment actions.

Rongzhong previously heard that a leading state - owned VC institution set up a salary incentive system and a co - investment mechanism referring to market - oriented institutions.

It is understood that in the early stage, the salary incentive standard of this institution was “2 - 1,” that is, 2% of the excess return of the invested project was rewarded to the project investment team, and if the project incurred a loss, 1% of the actual loss amount would be deducted. Later, the salary incentive standard was raised to “4 - 2,” that is, 4% of the excess return of the invested project was rewarded to the project investment team, and if the project incurred a loss, 2% of the actual loss amount would be deducted. Compared with the market - oriented system, this salary incentive system adds a penalty mechanism for project losses. It can not only meet the incentive needs of high - quality talents to a certain extent but also increase the restraint effect on investment decisions, preventing excessive speculative behavior that may occur in the case of only rewarding and not punishing. The establishment of the reward - and - punishment system also enables a deep binding of the interests between the investment team members of this leading state - owned VC, the enterprises, and the projects, deepening the investment team's decision - making attention and prudence.

However, the combination of the mandatory co - investment system and the reward - and - punishment system based on returns means that on the one hand, the current liquid assets of investment team members will decrease, and the disposable income will be reduced; on the other hand, the losses that team members need to bear in case of project losses will be further magnified.

“The combination of the reward - and - punishment system and mandatory co - investment is like team members leveraging their investment in projects. If the project loses money, our losses will be greater than before.” Under such an unreasonable system, even in state - owned investment institutions known as “iron rice bowls,” there have been many employee complaints and even a wave of resignations.

Is mandatory co - investment reasonable? More serious consequences may affect investment behavior.

Rongzhong learned that previously, a leading state - owned VC required employees to make mandatory co - investments until the co - investment amount reached 30% of their annual salary, and the co - investment amount for a single project was the lower of 1% of the total project investment or 100,000 yuan. Since the investment team invests in many projects, whether it's 1% of the total investment amount or 100,000 yuan for co - investment, it accounts for a large proportion of ordinary employees' annual income. Eventually, the co - investment amount of ordinary employees will basically reach 30% of their annual salary.

From the employees' perspective, even though the co - investment return may be relatively considerable in the future, the short - term co - investment expenditure not only reduces the total liquid assets available for employees' living consumption but also lowers their living expenditure expectations. For some employees who are already in a liquidity crisis, the rigid requirement of “either co - invest or leave” forces them to borrow money everywhere and bear a lot of debt and interest.

In the process of communicating with industry insiders, an employee from a state - owned institution that follows the system of this state - owned VC said that the purpose of the mandatory co - investment system includes risk control for possible dereliction of duty by in - service personnel. However, the reward - and - punishment system has already bound the employees' interests once, and mandatory co - investment further links employees' returns with project returns, virtually leveraging team members' investment in projects. If the project loses money, our losses will be greater than before. “Under such an unreasonable system, even in state - owned investment institutions known as iron rice bowls, it has led to many employees' complaints and even a wave of resignations.”

Is mandatory co - investment reasonable? More serious consequences may affect investment behavior.

“If you've been co - investing for ten years and haven't made a single cent, you're already the best performer in the internal co - investment within the team.”

This article is from the WeChat public account “Rongzhong Finance” (ID: thecapital), author: Abu, editor: Wuren. It is published by 36Kr with authorization.