Everyone wants to revitalize the existing stock, but no one is willing to take the lead in acknowledging the losses first.
"Prevent chaos once loosened, and stagnation once tightened." At the recent closed-door symposium "Ten Questions from ChinaVenture" held in Nanjing, Han Yuze, Founding Partner and Chairman of United Capital put forward this old saying, which struck a chord with all guests present. These eight characters sum up the most subtle situation facing the primary market at the moment:
Not long ago, the official release of the "Document No. 54" brought new changes to the venture capital industry. On the one hand, Document No. 54 clearly supports investing in early-stage, small-scale, long-term, and hard technology projects, and encourages the cultivation of patient capital; on the other hand, it also emphasizes strict supervision, risk prevention, enhanced penetration, and strict access. The content about correcting local governments' over-reliance on fund investment promotion directly hits the pain points of the venture capital industry.
Unsurprisingly, the topic of Document No. 54 became the entry point for the entire closed-door discussion. Following the long-standing tradition of "Ten Questions from ChinaVenture", the topics raised by the guests at the meeting focused on more specific realities: How long does fund filing take? To what extent should risks of projects be disclosed? How on earth should the existing shares of state-owned capital parent funds be sold?
This is not an easy discussion. As the topic went deeper, the participants repeatedly talked about a deeper transformation: the venture capital industry that used to operate relying on "capital supply" and rising valuations is entering a stage where it must re-answer the questions of "who contributes capital, what to invest in, how to exit, and who takes responsibility".
When supervision, audit, return investment, DPI and industrial cultivation are all imposed on one fund, how to leave room for professional judgment? This is probably a question that all practitioners must answer next.
Supervision is not a background, but a new operating condition
For GPs who have long been accustomed to finding a balance between contracts, investment decisions and project judgments, the new regulatory framework first changes the operating schedule. Liu Si, Managing Partner of Poly Capital said that differences have emerged in the implementation pace of new funds in many cities: the negotiation cycle in some regions has been extended, while others are still waiting for detailed rules. She said, "In the long run, for industrial GPs, the advantages of cooperation with state-owned capital will become more obvious", but in the short term, waiting itself is a cost.
Du Yan, Founding Partner of Shuimu Tsinghua Alumni Seed Fund has a more direct feeling. She is preparing the second phase of an early-stage fund in a city in eastern China, and found that the threshold for pre-approval is significantly higher than before. The challenge is that for early-stage institutions, the window for good projects is often fleeting, "missing many good projects is still a big loss for early-stage institutions". Her suggestion is not to lower the standards, but to establish a more adapted review efficiency for investing in early-stage and small projects.
Zhu Pai, CEO of Yifeng Capital focuses his anxiety on the operational level of information disclosure. Although he has adhered to the annual report system for many years, he still worries that the boundary of "material adverse situation" is not clear: which contents including repurchase revocation, bank loan renewal, and gambling adjustment need to be disclosed, to whom to disclose, and how to make effective decisions? "Managers should spend more time on their management responsibilities. Disclosure certainly needs to be done, but specific details and procedures are required to guide managers on how to disclose." Behind this slightly exaggerated judgment is the real unease of the industry about the scale of responsibility.
Xin Qiang, CEO of DT Capital has the most stern judgment. He believes that Document No. 54 is not an isolated policy adjustment, but the starting point for venture capital to be incorporated into a more stringent administrative supervision framework. "Compliance has become the lifeline and red line." In his view, the supply-side adjustment of the industry will realize supporting the excellent and limiting the inferior through the compliance threshold; investment ability is still important, but it is no longer sufficient to constitute the survival qualification of a manager alone.
The impact of market environment adjustment continues to be transmitted to the capital contribution link. Shen Yi, Executive Director of the Investment Department of SDIC Chuanghe said that managers of national-level guidance funds should give priority to strictly abiding by various management rules, and then transmit compliance operation standards to cooperative GPs in a practical market-oriented way. "We are not a regulatory agency, and essentially a market-oriented capital contribution platform." He proposed that the core role of national-level parent funds should be an intermediate carrier connecting national policy orientation and market-oriented investment institutions, rather than a simple secondary constraint subject.
State-owned capital is demanding a different type of GP
In the current macroeconomic and policy environment, the value reshaping of the private equity industry and the state-owned capital-led market pattern are intertwined, jointly shaping the customer structure and behavior boundaries of current fund managers.
Liu Shoubang, Assistant General Manager of Nanjing Innovation Investment Group pointed out that the private equity industry is undergoing structural transformation, gradually differentiating from the previous comprehensive white horse institutions to more vertical, earlier-stage, and M&A integration capability-oriented directions. In this process, state-owned capital funds not only shoulder the strategic task of serving the development of national and local industries, but also need to take into account the requirements of maintaining and increasing the value of state-owned assets and compliance management, which requires managers to seek a more refined balance among multiple goals.
Combined with front-line practice, Liu Shoubang shared the challenges objectively faced by the industry under the complex environment. He said that equity investment is a highly complex systematic project. In a macro environment full of uncertainties, the phased results of a single project will inevitably have certain deviations from the original expectations. However, under the current state-owned capital management system, higher standards are put forward for the compliance of the whole investment process and the scientificity of decision-making. When facing the comprehensive consideration of multiple dimensions such as industrial guidance, financial return, and risk prevention and control, it puts unprecedented tests on the professional operation, refined investment research and whole life cycle management capabilities of managers.
Wu Qiaoxin from the Equity Investment Department of Da Jia Asset also emphasized that the patience of insurance capital for long-term equity investment is still based on positive cash return. She said that for projects that trigger repurchase or gambling, we should not only look at a single agreement, but also look at the institutional requirements and the fundamentals of the project; sometimes immediate litigation is not the optimal commercial solution. "It's really very difficult." She lamented that when direct investment projects are examined one by one, the difficulty borne by managers is much higher than that of only being responsible for the whole portfolio.
Liang Xun, Head of Equity Investment of Everbright Yongming Investment Management Department extended the issue to exit assessment. He observed that IPO, share reduction, repurchase and M&A are testing investors intensively at the same stage, and even situations may arise where shareholders of different natures cannot reach a unified opinion. Moreover, "successful exit today indicates smoother capital contribution in the future." This means that exit is no longer just the last page of the fund cycle, but is in turn determining whether the next fundraising cycle can start.
For industrial capital, how to make full use of the market-oriented mechanism to assist state-owned capital investment decision-making is a topic we have always attached importance to. Yang Zhihao, Investment Director of Yanghe Co., Ltd. introduced that Yanghe, together with Huatai Securities and Jiangning High-tech Zone, jointly established a parent fund, which is exactly hoping to assist state-owned enterprise investment decision-making through joint investigation, joint research and joint decision-making by dual GPs. "We explore and invest in excellent GPs, walk hand in hand with us, and grow and progress together in the investment field." In the period when the influence of state-owned capital is expanding, this statement reminds the industry that the attributes of capital can be different, but attaching importance to the improvement of professional investment and management capabilities is the consistent pursuit of all parties.
The paradox of S funds: everyone wants to revitalize the stock assets, but no one is willing to admit losses first
At the level of industry cycle, there is still a buffer period for the implementation of supporting fundraising rules, but the work of improving the liquidity of stock assets is extremely urgent. Shen Yi shared the practical coordination problems commonly faced by the state-owned capital parent fund industry: at present, S fund investment prefers high-quality underlying assets, and there is a market-oriented discount space for transaction pricing; while the disposal of state-owned assets must strictly follow the standardized evaluation and pricing mechanism, there are objectively coordination difficulties between the two pricing standards, which limits the transfer efficiency of stock fund shares, and it is urgent for all parties in the industry to jointly improve the supporting transfer mechanism.
Combined with past practical cases, Liu Shoubang mentioned that some high-quality projects that achieved exit in the early stage may face inspection and evaluation from different perspectives in the subsequent performance of the capital market. This refined consideration of decision-making logic and transaction timing is a comprehensive test of the fund manager's ability to balance multiple goals. This also means that under the current regulatory framework, fund managers not only need keen market insight, but also need to build a scientific, fair, transparent and standardized decision-making system to ensure that market-oriented transactions operate steadily on a compliant and transparent track.
Liu Jiawei, Managing Partner of Boquan Capital believes that the difficulty of the S market is fundamentally the income requirement of the capital side. Buyers are not naturally picky, but the capital contributors behind them have certain requirements for returns; what can really be favored by the market may only be part of the stock portfolio. "Many assets or funds that are not so good really cannot exit, and this is a structural problem." In this case, if the newly added S funds are still assessed according to pure financial returns, it will be difficult to fulfill the policy expectation of resolving stock assets.
Ding Zhongmin, Managing Partner of Changshi Capital has seen similar deadlocks: a mature parent fund tried to package and sell six sub-fund shares, but the buyer only took part of the sub-fund shares after due diligence, and the buyer and seller finally failed to close the deal because they could not meet their respective assessment return standards at the same time. Extension is not a universal solution either. Industrial and commercial term, filing status and account use will push GPs into a passive position.
Therefore, Han Yuze suggested that regulatory detailed rules should be issued as soon as possible to let the industry know "what rules to follow", and implement the new-old separation policy for historical funds to give a cleanup and rectification cycle for stock problems. He also suggested that green channels should be set up for small-scale funds that meet the national key directions, and encourage managers to carry out M&A integration. For the industry where a large number of institutions are no longer able to raise funds normally but still bear the responsibility of stock assets, the integration exit mechanism and the manager clearing mechanism should be designed simultaneously.
M&A is not a universal exit, and compliance cannot replace professional judgment
When S funds cannot absorb all stock assets, M&A is frequently placed with high hopes. But Yu Tong, General Manager of Yicun Capital believes that M&A can only solve part of the exit demand, rather than the liquidity problem of all stock assets. In her view, there are obvious differences between M&A targets and small-proportion equity investment targets, and factors such as valuation, gambling arrangements and the preference of listed companies will affect transaction completion. Some projects have acceptable fundamentals, but because they are not in popular tracks, they may still face liquidity dilemmas.
In such a market environment, many GPs are pulling their strategies to both ends. The institution where Yu Tong works adopts a "dumbbell-shaped" strategy: one end is more early-stage, and the other end focuses on M&A; for high-valued assets in the middle stage, they remain cautious. Yu Jianlin, Managing Partner of High Tide Capital, has a similar feeling: the industry is not only differentiating between AI and other tracks, but the GPs themselves are also differentiating. Facing state-owned capital, financial LPs and their own development demands, the key is no longer whether there is increment, but whether "high-quality increment" can be achieved.
Li Hongsen, Partner of Jinyu Maowu described another pressure from the perspective of regional industrial structure. At present, state-owned capital has become the main contributor of private equity funds, so projects oriented by national strategies are more crowded and their valuations are higher; while long-cycle tracks such as medical treatment are not popular in market-oriented fundraising, and capital allocation willingness is low. The more concentrated the industrial policy is, the more institutions need to retain judgment between "conforming to the direction" and "reasonable price".
Liu Si from Poly Capital puts the answer on the depth of industrial resources. When deploying around AI, embodied intelligence, pan-semiconductor, new energy and industrial scenarios, she believes that GPs with industrial background and capable of supporting project landing will have more advantages when cooperating with state-owned capital. The "advantage" here is not to help local governments complete investment promotion indicators, but to be able to identify projects, connect industries and undertake post-investment management.
Du Yan reminded that there is no "advanced template" that can be easily replicated in different regions. She believes that Beijing is still an important source of disruptive technologies, and the value of Shanghai and the Yangtze River Delta lies in the combination of mature capital, loose environment and industrial application scenarios. "Scientific and technological products and technologies must be iteratively applied in the industry to truly find their application points and their future." For local state-owned capital, what is really worth learning may not be the terms themselves, but the mechanism that leaves room for professional institutions to test, iterate and tolerate mistakes.
What the industry needs is not a single answer, but a set of executable balance rules
This discussion did not give an easy conclusion. The pre-compliance emphasized by Xin Qiang, the transmission of national tasks mentioned by Shen Yi, the balance of multiple demands discussed by Liu Shoubang, the safety and DPI proposed by Wu Qiaoxin, the S fund logic stated by Liu Jiawei, and the M&A boundary put forward by Yu Tong are all valid, but they are not naturally compatible when placed together.
The eight characters Han Yuze finally gave may also be the common state of mind of many participants: "Uphold the fundamental principle, pursue extraordinary performance, and wait for the flowers to bloom." The primary market is bidding farewell to an era supported by both liquidity and valuation. The new order has not yet taken shape, but it is certain that vigorously increasing the proportion of direct financing has become a national strategy. Only when responsibilities can be reasonably defined, stock assets can be truly priced, and professional judgment can be respected, especially when the tax burden of patient capital is fair, will capital be willing to take risks for long-term innovation again.
This article is from the WeChat official account "ChinaVenture", author: Tao Huidong, and published with authorization from 36Kr.