Multiple Governments Ease Regulations for State-Backed Venture Capital
The new regulations aim to increase state-owned capital investment in technology companies, improve the innovation and entrepreneurship ecosystem, and the challenge lies in how to implement them.
Since the beginning of this year, the General Office of the State Council and several local governments have introduced new regulations on state-owned capital management.
The focus of the new regulations is to improve the assessment of funds and the mechanism for fault tolerance and exemption from liability.
Caijing has compiled new regulations from 11 local governments and the General Office of the State Council, and the purpose of the new regulations is consistent: by optimizing the management of state-owned capital funds, increasing investment in technology companies, and further improving the innovation and entrepreneurship ecosystem.
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The latest release was in September this year, when the Hubei Provincial State-owned Assets Supervision and Administration Commission issued the "List of Matters for Which State-owned Enterprises are Exempt from Liability for Faults".
The list clearly states that in strengthening the strategic security function of state-owned enterprises, preventing and resolving regional systemic risks, dealing with historical issues, and handling the revitalization of low-efficiency idle "three assets", promoting key tasks in the reform and development of state-owned enterprises, under specific circumstances causing state-owned assets losses or other adverse consequences, exemption from liability can be granted.
The Guangdong Province's science and technology innovation regulations introduced in July this year also mentioned that "the provincial people's government's departments of science and technology, finance, state-owned assets supervision and management, and other departments set different assessment indicators for the investment period and exit period of state-owned angel investment funds and venture capital funds, comprehensively evaluate the overall operation effect of the funds, and do not take the preservation and appreciation of state-owned capital as the main assessment indicator."
The regulations will be implemented on October 1, 2024.
An unnamed state-owned investor from a certain place told Caijing before that at the end of last year, many state-owned capitals were held accountable for investment returns.
Investment returns are a difficult issue for many state-owned capital funds.
One reason is that most RMB funds have a cycle of seven years, which means that investing in a project for five years requires entering the exit process.
However, many technology companies cannot go public or be acquired within five years.
In addition, the valuation growth of technology companies is closely related to their own business situation and market fluctuations.
"The expected income situation of the company is very likely to be unattainable, which will lead to no growth or even a decline in valuation, and the fund will not have a paper return."
In addition, different audit departments have different calculation methods for calculating returns.
For market-oriented funds, if the return of a fund period is not ideal, the impact is not great.
However, state-owned capital funds will face issues such as whether there is a "loss of state-owned assets", and the investment person in charge will become more cautious.
The associated impact is that the investment terms are becoming more and more "harsh", and clauses such as mandatory buyback and bet are becoming more common, which will directly affect the development goals of innovative companies.
The purpose of the new regulations for fault tolerance and exemption from liability introduced by many places is to solve this problem and "loosen the shackles" for investors.
There are many substantive provisions, including extending the fund cycle and increasing the loss tolerance rate.
For example, the new regulations issued by Guangzhou Development Zone, Shenzhen City, and Chengdu High-tech Zone mention that the existence period of the sub-fund should not exceed ten years in principle.
Sichuan, Anhui, Shenzhen and other places have proposed different degrees of fault tolerance rate.
Among them, Chengdu High-tech Zone has also set a loss tolerance rate of 20%-80% for different stages and types of funds such as seed funds, angel funds, venture capital funds, industrial investment funds, and merger and acquisition funds.
Data from the State-owned Assets Supervision and Administration Commission of the State Council shows that by July this year, central enterprises have managed 126 venture capital funds, with a subscribed scale of 52.9 billion yuan, and the amount of investment has been 31.3 billion yuan, mainly invested in fields such as advanced manufacturing, energy, and electronic information.
According to the survey of 109 state-owned venture capital institutions and government-guided funds published by the Equity and Venture Capital Professional Committee of the China Investment Association in 2023, 61.47% of the institutions have established a fault tolerance mechanism, an increase of 9 percentage points from 2020.
Many places have introduced new regulations on June 19, 2024, the General Office of the State Council issued "Several Policy Measures to Promote the High-quality Development of Venture Capital", also known as the "Venture Capital 17 Articles", which mentioned that it is necessary to optimize the management of venture capital funds invested by the government, reform and improve the assessment of funds, fault tolerance and exemption from liability mechanism, and improve the performance evaluation system.
Systematically study and solve the problem of concentrated expiration and exit of venture capital funds invested by the government.
It is necessary to improve the state-owned venture capital investment management system and the due diligence and compliance responsibility exemption mechanism that conforms to the characteristics and development laws of the venture capital industry, and explore the assessment of state-owned venture capital institutions according to the entire fund life cycle.
In addition to Beijing, Shanghai, Guangzhou and Shenzhen, the state-owned venture capital in Anhui and Sichuan is active, and these two provinces have relatively earlier proposed to implement fault tolerance and exemption from liability for state-owned capital.
In December 2023, the People's Government of Anhui Province issued "Several Measures to Support the High-quality Development of Risk Investment and Venture Capital", proposing to optimize the government fund management mechanism, and relax the existence period of the venture capital sub-fund invested by the provincial government equity investment fund to no more than 15 years, and pay the management fee according to the actual payment amount of the sub-fund.
The new regulations also propose that the investment risk tolerance of the venture capital sub-fund invested by the provincial government equity investment fund should be reasonably set, and the overall performance of the sub-fund should be evaluated and audited according to the investment loss allowance rate of angel investment funds and venture capital funds, which are up to 80% and 40% respectively.
In September 2023, Hefei City, Anhui Province, issued the "Hefei City Angel Investment Fund Management Measures", which mentioned that the risk tolerance mechanism of the angel investment fund should be established, and the fund is allowed to have a loss of up to 40%.
The excess part is made up by the reward funds obtained by the fund management institution.
From June to July 2024, Chengdu High-tech Zone issued the angel investment sub-fund declaration guide and the full life cycle capital support service system, and clearly set the scale of loss tolerance for various types of investment funds.
The loss tolerance rate of policy funds such as seed funds, angel funds, venture capital funds, industrial investment funds, and merger and acquisition funds is set from 80% to 30%, and the loss tolerance rate of market-oriented funds is set at 20%.
It is also proposed that the sub-fund existence period should not exceed ten years in principle.
In terms of exemption from liability, Luzhou City in Sichuan proposed new regulations as early as 2022.
In October 2022, the Luzhou City State-owned Assets Supervision and Administration Commission issued the "Luzhou City State-owned Enterprise Operating Investment Fault Tolerance and Exemption from Liability Trial Measures", which clearly stated that if the state-owned capital causes economic losses or other adverse consequences in the investment, if it meets four conditions at the same time, it should be exempted from liability in principle.
The four conditions are: Beijing is the most active city in venture capital in China, and the Dongcheng District of Beijing also issued the "Dongcheng District Government Investment Guidance Fund Management Measures (Draft for Comments)" in May this year.
It mentioned that the relevant departments and staff of the guidance fund management institution should be exempted from legal, regulatory, and disciplinary responsibility in the process of performing their duties if they meet the following situations: The challenge lies in the implementation.
In April last year, Wang Zhongmin, the former vice chairman of the National Social Security Fund Council, said that for state-owned capital management institutions, if they directly invested in 100 projects, 99 of which were successful, but one project failed, they would need to take responsibility.
Even if it is not an investment failure, but the project has a slight financial record flaw, the state-owned capital management institution needs to take responsibility.
This leads to risk aversion behavior when state-owned capital management institutions make equity investments.
The aforementioned state-owned investor mentioned that the main reason for the accountability at the end of last year was that many state-owned capitals set many terms for the invested enterprises, including returns, as well as short-term profits and income.
However, many enterprises did not achieve the expected income and profits.
"It is normal for start-ups to have unstable performance in the early stage, and it is common for them to make a profit one year and lose money the next year, but for state-owned capital, there will be risk control issues."
The earliest venture capital in China originated from the United States, and clauses such as buyback, performance bet, and listing bet were also pioneered by dollar funds.
In August this year, Kuang Ziping, the founding managing partner of Qiming Venture Capital, wrote that these clauses created by dollar funds are rarely used in Silicon Valley, one is because investors with independent judgment ability are generally "despised" by performance bets, and they believe they have enough judgment ability.
The second is that once the bet is made, the founder and the investor will have different dreams, and in order to achieve the indicators of the bet agreement, the management may sacrifice other more important goals.
However, in the past ten years, these clauses have become more and more common in RMB funds, and have even been abused by some funds.
Many investors told Caijing that in the past few years, some state-owned investors have been in a relatively contradictory environment.
On the one hand, state-owned capital needs to invest in key areas, but actual investments are difficult to plan, and many times it is "hard to invest".
On the other hand, the pressure of inspections and inspections from different departments is very large, and the return on investment is forcibly required, but many technology-based start-up companies that meet policy requirements are difficult to achieve returns in the short term.
In order to cope with the pressure of returns, state-owned capital usually chooses to enforce clauses and even sue.
The aforementioned investor mentioned that this approach is actually very likely to not get back the investment, mainly to "have an account".
Some investors are optimistic about whether the new regulations for fault tolerance and exemption from liability introduced by many places can alleviate similar situations, and they believe that extending the fund term and increasing the loss tolerance rate can indeed alleviate the pressure on investors.
However, some clauses involving specific implementation are still not clear enough, such as how to calculate the return rate, whether it is necessary to calculate the direct return after listing and acquisition, or to calculate according to the current valuation; whether to calculate according to the overall return of the fund or according to the return of a single period, etc.
In addition, some investors are worried that under the new regulations, if the fund still has losses beyond the requirements, will it face stricter accountability, "we may be even more cautious."
Today, state-owned capital has become an important force in promoting innovation and entrepreneurship, and investment and innovation and entrepreneurship are long-term actions, and sufficient development space is crucial.
From the central to local governments, various related policies have been introduced, and it can be seen that state-owned capital is constantly exploring and adjusting strategies to play a greater value.当然可以，不过您还没有提供需要翻译的内容。请提供您想要翻译的文本，我会帮您翻译成英文。