many local governments have introduced new regulations to loosen restrictions on state-owned venture capital
2024-09-22
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the purpose of the new regulations is to increase state-owned investment in technology companies and improve the innovation and entrepreneurship ecosystem. the challenge is how to implement them.
text｜liu yiqin, reporter of caijing, and zheng keshu, researcher
editor: xie lirong
since the beginning of this year, the general office of the state council and several local governments have successively issued new regulations on state-owned assets management. the focus of the new regulations is to improve fund assessment and fault tolerance and exemption mechanisms.caijing compiled new regulations from 11 local governments and the general office of the state council. the purpose of the new regulations is the same: to increase investment in technology-based companies by optimizing the management of state-owned funds and further improve the innovation and entrepreneurship ecosystem.the latest release was in september this year, when the hubei provincial state-owned assets supervision and administration commission issued the "list of tolerance and exemption from liability for state-owned enterprises". the "list" clearly states that in strengthening the strategic guarantee function of state-owned enterprises, preventing and resolving regional systemic risks, dealing with historical problems, and revitalizing inefficient and idle "three assets" and promoting key tasks of state-owned enterprise reform and development, if state-owned assets losses or other adverse consequences are caused under specific circumstances, exemptions can be granted.the science and technology innovation regulations issued by guangdong province in july this year also mentioned that "the provincial people's government's science and technology, finance, state-owned assets supervision and management and other departments will set different assessment indicators for the investment period and exit period of state-owned angel investment funds and venture capital funds, and comprehensively evaluate the overall operation of the fund. the preservation and appreciation of state-owned capital will not be the main assessment indicator." the regulations will come into effect on october 1, 2024.an unnamed state-owned investor in a certain place told caixin that at the end of last year, many state-owned assets were held accountable for investment returns. investment returns are a problem for many state-owned funds.one reason is that most rmb funds have a life cycle of seven years, which means that investing in a project requires entering the exit process after five years.however, many technology companies cannot be listed or acquired within five years. in addition, the valuation growth of technology companies is closely related to their business conditions and market fluctuations. "the expected revenue of the company is likely to fail to be achieved, which will lead to no growth or even decline in valuation, and the fund will have no book return." in addition, different audit departments have different ways of calculating returns.for market-oriented funds, if the return of the first phase of the fund is not ideal, the impact is not significant. however, state-owned funds will face the issue of whether there is a "loss of state-owned assets", and investment managers will become more cautious. the collateral impact is that investment terms are becoming more and more "harsh", and mandatory repurchases and gambling terms are becoming more and more common, which will directly affect the development goals of innovative companies.the purpose of the new regulations on fault tolerance and exemption of liability that have been introduced in many places is to solve this problem and "loosen the constraints" on investors.there are many substantive clauses, including extending the fund cycle, increasing the loss tolerance rate, etc. for example, the new regulations issued by guangzhou development zone, shenzhen city and chengdu hi-tech zone mentioned that the duration of a sub-fund should not exceed ten years in principle.sichuan, anhui, shenzhen and other places have proposed different degrees of tolerance. among them, chengdu hi-tech zone has also set a tolerance rate of 20%-80% for funds at different stages and categories, such as seed, angel, venture capital, industrial investment, and m&a funds.data from the state-owned assets supervision and administration commission of the state council show that as of july this year, central enterprises have managed a total of 126 venture capital funds with a subscribed scale of 52.9 billion yuan and an investment amount of 31.3 billion yuan, mainly in advanced manufacturing, energy, electronic information and other fields. according to a 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-tolerant mechanism, an increase of 9 percentage points from 2020.
new regulations issued in many places
on june 19, 2024, the general office of the state council issued the "several policy measures to promote the high-quality development of venture capital", also known as the "seventeen measures for venture capital", which mentioned that it is necessary to optimize the management of venture capital funds funded by the government, reform and improve the fund assessment, fault tolerance and exemption mechanism, and improve the performance evaluation system. systematically study and solve the problem of concentrated maturity and exit of venture capital funds funded by the government. it is necessary to improve the state-owned venture capital management system and due diligence and compliance responsibility exemption mechanism that conform 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, state-owned venture capital in anhui and sichuan has been active, and these two provinces also proposed to tolerate and exempt state-owned assets from liability relatively early on.in december 2023, the people's government of anhui province issued the "several measures to support the high-quality development of venture capital and entrepreneurial investment", proposing to optimize the government fund management mechanism, and relax the duration of venture capital and venture capital sub-funds in which provincial government equity investment funds hold shares to no more than 15 years, and the management fee can be paid according to the actual paid-in amount of the sub-fund.the new regulations also propose that the investment risk tolerance of venture capital sub-funds in which provincial government equity investment funds hold shares should be reasonably set, and performance evaluation and audit assessment should be conducted on the overall returns of the sub-funds in accordance with the maximum investment loss allowable rates of 80% and 40% for angel investment funds and venture capital funds respectively (responsible units: provincial department of finance, provincial local financial regulatory bureau, cooperating unit: provincial audit department).in september 2023, hefei city, anhui province, issued the "hefei city angel investment fund management measures", which mentioned the establishment of a risk tolerance mechanism for angel investment funds, allowing the fund to incur losses of no more than 40%. the excess will be compensated by the reward funds allocated to the fund management institution.from june to july 2024, chengdu hi-tech zone issued the angel investment sub-fund application guide and the full life cycle capital support service system, which clarified the loss tolerance scale for various investment funds. the loss tolerance rate of policy funds such as seed, angel, venture capital, industrial investment, and merger and acquisition funds was set from 80% to 30%, and the loss tolerance rate of market-oriented funds was set at 20%. it was also proposed that the duration of the sub-fund should not exceed ten years in principle.in terms of exemption from liability, luzhou city, sichuan province, proposed new regulations as early as 2022. in october 2022, the luzhou state-owned assets supervision and administration commission issued the "trial measures for the exemption of liability from operation and investment tolerance of state-owned enterprises in luzhou city", which clearly stated that when state-owned assets cause economic losses or other adverse consequences in investment, if four conditions are met at the same time, they will be exempted from liability in principle.beijing is the most active city for venture capital in china.beijing's dongcheng district also issued the "dongcheng district government investment guidance fund management measures (draft for comments)" in may this year. it mentioned that in the process of performing their duties, relevant departments and guidance fund management agency staff shouldunder the following circumstances, the person shall be exempted from accountability in accordance with laws, regulations and disciplines:1. the laws and regulations, party disciplines and rules, and related systems do not explicitly prohibit it, or although they do not clearly stipulate, they are in line with the central decision-making arrangements and the city's work requirements;
2. the fund investment is in line with the key support directions and requirements of the central government and the municipal government for the government investment guidance fund, as well as the national industrial policies, the municipal government's key industrial layout planning and the needs of industrial chain development;
3. after sufficient demonstration and due diligence assessment, the investment decision-making procedures are carried out in accordance with the actual situation, and there is no violation of relevant systems and business processes;
4. establish and effectively implement corresponding risk management systems in accordance with laws, regulations and industry regulatory requirements;
5. not seeking improper benefits or enriching oneself, others or other organizations, not knowingly committing crimes or maliciously colluding with other organizations or individuals to harm national interests, public interests and the legitimate interests of others;
6. actively perform duties and responsibilities for losses caused unintentionally during exploration, innovation, and pilot projects, and take reasonable measures to proactively stop and reduce losses in a timely manner to eliminate adverse effects or effectively prevent the expansion of harmful consequences.
implementation is a challengein april last year, wang zhongmin, former vice chairman of the national council for social security fund, said that for state-owned asset management institutions, if they directly invest in 100 projects, 99 of which are successful, but one project fails, they need to bear responsibility for it. even if it is not an investment failure, but a project has a slight flaw in financial records, the state-owned asset management institution needs to bear responsibility. this makes state-owned asset management institutions prone to risk aversion when making 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 assets set a lot of terms for the invested companies, including short-term profits and income in addition to returns. however, many companies did not achieve the expected income and profits. "it is normal for start-ups to have unstable performance in the early stage. it is common for them to make a profit in the previous year and lose money in the next year. however, for state-owned assets, there will be risk control issues."china's venture capital originated in the united states, and the terms such as buyback, performance betting, and listing betting were also first created by us dollar funds. in an article written in august this year, qiming venture partners' founding managing partner kuang ziping mentioned that these terms created by us dollar funds are rarely used in silicon valley. first, investors with independent judgment generally "despise" performance betting, and they believe they have sufficient judgment. second, once a bet is made, the founder and the investor will have different dreams. in order to achieve the indicators of the bet agreement, the management may sacrifice other more important goals. but in the past decade, these terms have become more and more common in rmb funds, and have even been abused by some funds.several investors told caixin that in the past few years, some state-owned investors have been in a relatively contradictory environment.on the one hand, state-owned assets need to be invested in key areas, but actual investment is difficult to plan, and often investment is made "without hesitation". on the other hand, the pressure of review and inspection from different departments is very high, and the mandatory return on investment is required, but many technology-based start-ups that meet policy requirements find it difficult to achieve returns in the short term.in order to cope with the pressure of return, state-owned assets usually choose to enforce the terms or even sue. the aforementioned investor mentioned that this approach is actually unlikely to get the investment back, and the main purpose is to "give an explanation."some investors are positive about whether the new rules on fault tolerance and exemption issued in many places can alleviate similar situations. they believe that the new rules such as extending the fund period and increasing the loss tolerance rate can indeed relieve the pressure on investors. however, some clauses related to specific implementation are still not clear enough, such as how to calculate the rate of return, whether it must be calculated directly after the listing and merger, or calculated according to the current valuation; whether it is calculated 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 incurs losses that exceed the requirements, it will face stricter accountability. "we may become more cautious instead."today, state-owned assets have become an important force in promoting innovation and entrepreneurship. investment and innovation and entrepreneurship are long-term behaviors, and sufficient development space is crucial. from the various relevant policies issued successively from the central to local governments, it can be seen that state-owned assets are constantly exploring and adjusting strategies to play a greater role.
editor: xiao zhenyu
title image｜visual china
