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instead of debating the effectiveness of ipo gambling clauses and the harm of buyback litigation, it may be more practical to explore how to return investment institutions from "creditors" to the role of economic "incubators"

text｜tang yuan yuan

editor｜yang xiuhong

since the beginning of this year, lawsuits arising from triggering gambling agreements have appeared frequently, and these lawsuits have also put entrepreneurs and investment institutions on opposite sides.

in early september 2024, domestic gpu (graphics processing unit) unicorn xiangdixian computing technology (chongqing) co., ltd. (hereinafter referred to as "xiangdixian") announced that it was experiencing a funding crisis and would terminate its contracts with employees and look for external financing opportunities. . previously, xiangdixian had completed more than 2 billion yuan in financing, with a valuation of 15 billion yuan.

xiang di first encountered a financial crisis, perhaps related to the gambling agreement he signed.according to public reports, xiangdixian ceo tang zhimin said at the all-staff meeting that the company had signed a gambling agreement with shareholders, promising that the scale of series b financing would reach 500 million yuan. now, because it failed to achieve its goals, xiangdi was first sued by shareholders and the company's accounts were frozen.

at the same time,capital onlinea piece of content disclosed in the 2024 semi-annual report has attracted widespread attention. the company had a lawsuit with xiang dixian involving a total amount of 18.8117 million yuan, and the beijing arbitration commission has issued a notice of acceptance. on august 1, the yubei district people's court of chongqing froze 8.0404 million yuan of xiang di's money.

xiangdixian’s capital crisis has once again triggered market discussions on “repurchase litigation” and “gambling agreements.” a week earlier, luo yonghao and zihui venture capital partner zheng gang were involved in a public dispute over debt repayment. luo yonghao accused the other party of "initiating a rogue lawsuit to force me to repurchase." this series of events also highlights the complex conflicts of interest between investment institutions and entrepreneurs.

according to the "vc/pe fund buyback and exit analysis report" released by li & fung law firm, approximately 130,000 projects will face exit pressure in the future, involving 14,000 companies. it is reported that among the 12 repurchase lawsuits heard by a shanghai court from 2018 to 2021, the execution cycle was as long as more than 1,000 days and as short as 142 days. the execution recovery rates of the four disclosed cases were all zero.

"after the '8.27 new deal,' investors' expectations for returns from ipos (initial public offerings) have changed." an investor in a dual-currency fund said that the exit channels in the domestic market are very single. "after exit becomes difficult, the pressure will be transmitted downwards, and the repurchase clause is a kind of risk transfer.”

the so-called "8.27 new deal" refers to the measures introduced by the china securities regulatory commission on august 27, 2023 to gradually tighten the pace of ipos.

since the beginning of this year, the new energy intelligent driving track has ushered in the "first year of listing", with successiveblack sesame seeds,horizon,weruan zhixingwaiting for companies to line up for ipo. it is worth noting that many companies in this field are saddled with gambling agreements. previous rounds of financing have not only brought ideal valuations, but also created a huge number ofpreferred stock. if the public offering is ultimately impossible, investors can exercise their repurchase rights and require the company or even the founding team to repurchase their preferred shares.

“generally speaking, if the invested company has hope of going public, it will not go to the stage of litigation. after all, good projects in the market also rely on snatching up. a person who works in institutional ir (investor relations) said, “the gp (general partner) is responsible to the lp (limited partner). exercising the repurchase right and establishing interest are also considered business negotiations. "

in june this year, the "several policies and measures to promote the high-quality development of venture capital" issued by the general office of the state council stated that it is necessary to broaden the exit channels of venture capital and optimize the exit policy of venture capital funds. in the same month, the china securities regulatory commission issued the "eight rules for the science and technology innovation board", proposing greater support for mergers, acquisitions and reorganizations, especially support for companies listed on the science and technology innovation board to carry out mergers and acquisitions and integration of the upstream and downstream industrial chains.

industry analysts say that out of the expectation of high returns from ipos, entrepreneurs and investors stand at both ends of the betting agreement. the repurchase clause is not only the institution's safety rope, but also the entrepreneur's investment certificate. there is no conflict between patience and profit-seeking. broadening the exit channels for venture capital investments and giving entrepreneurs more time may be in line with market expectations.

ipo tightening, private equity exit becomes more difficult

one year after the implementation of the “8.27 new deal”, the number of a-share listed companies has decreased significantly. according tooriental fortuneaccording to choice data, 128 companies were listed in the past year, a year-on-year decrease of 69.69%; 93.844 billion yuan was raised, a decrease of 80.03%. a year ago, the china securities regulatory commission issued three measures, including optimizing ipos and tightening the pace of ipos in stages to promote the balanced development of investment and financing. for investment institutions, the ipo exit path has tightened, and the new policy environment has also prompted investment institutions to make adjustments in the "pain".

in the first half of 2024, the number of new equity investment managers and cancellations of the china asset management association (hereinafter referred to as the "china asset management association") showed a bipolar trend. the number of new registrations was 48, a year-on-year decrease of 78%; the number of cancellations totaled 605, which was the number of new registrations during the same period was 12.6 times, and for the first time the type of “cancellation without management for 12 months” appeared, accounting for 13.1%.

data source: china foundation association

at the same time, according to the "china equity investment market research report for the first half of 2024" recently released by zero2ipo research center, china's equity investment market as a whole continues to decline. among them, the number and scale of newly raised funds were 1,817 and 622.939 billion yuan respectively, year-on-year. a year-on-year decrease of 49.2% and 22.6%; in terms of investment, the number of cases totaled 3,033, a year-on-year decrease of 37.6%.

as for the "exit" level directly related to the "ipo tightening" policy, a total of 746 equity financing exit cases occurred in the first half of this year, a year-on-year decrease of 63.5%. among them, the number of ipo cases of overseas invested companies was 214, surpassing the domestic market with 203 cases. the number of ipo cases of overseas and domestic invested companies decreased by 20.1% and 74.1% respectively year-on-year.

“if you are a u.s. dollar fund, there are various exit methods such as s fund (secondary fund, that is, second-hand share transfer fund) and mergers and acquisitions, and ipo does not count."an investor in a dual-currency fund told us that the exit channels in the domestic market are very single. "after exit becomes difficult, the pressure will be transmitted downwards. "in his view, compared with "performance betting", the essence of "listing betting" is a kind of risk transfer.

another legal person who has been engaged in m&a business for a long time believes that the "pain" of the private equity fund industry is the only way to achieve healthy development. "many small private equity firms sell asset management products behind the scenes, hoping to get hundreds of times returns from ipos. they like to do short-term investing and create a lot of bubbles." he believes that under the new situation of tightening ipos, truly powerful capital will not affected, it is easier to focus on hard technology and do long-term things.

at present, the beautiful vision of "long-termism" may be experiencing challenges from buyback and gambling agreements.in june this year, the "several policies and measures to promote the high-quality development of venture capital" issued by the general office of the state council stated that it is necessary to broaden the exit channels of venture capital and optimize the exit policy of venture capital funds.

s funds and mergers and acquisitions are expected to become the mainstream equity investment exit channels in the future. in june, the china securities regulatory commission issued the "eight rules for the science and technology innovation board", proposing greater support for mergers, acquisitions and reorganizations, especially support for companies listed on the science and technology innovation board to carry out mergers and acquisitions and integration of the upstream and downstream industrial chains. one week after the policy was released, xinlian integration,nanocore micro、aidi pharmaceuticalthree companies on the science and technology innovation board launched mergers and acquisitions and restructuring plans.

but this obviously cannot satisfy lp's ambitions. "high risks and high returns are the pursuit of private equity, and making wealth through ipo is too attractive." a fund ir practitioner said that only the income earned from ipo can satisfy the appetite of lps. "the waist funds rely on investing in ipos." attract lps”.

"betting", this kind of valuation challenge agreement that includes equity repurchase, capital compensation and other conditions, was originally a two-way positive stance of "risk sharing and profit sharing" between investors and entrepreneurs. now it has added the "ipo time window" due to the repurchase conditions of "term", entrepreneurs face a more severe financing environment.

institutional litigation, can’t win profits?

recently, shenzhen venture capital has launched a series of repurchase lawsuits, filing arbitration requests against investment targets that triggered repurchase conditions due to "failure to ipo." at present, there is an obvious trend of equity repurchase litigation in the institutional circle, and this incident is a typical microcosm.

according to the "vc/pe fund repurchase and exit analysis report" released by li & feng law firm, approximately 130,000 projects (an investment by an investor in a company is considered a project) will gradually face exit pressure, involving about 14,000 companies. based on this calculation, excluding the few outstanding players who have successfully "landed" through ipos and mergers and acquisitions, most companies will face the reality of triggering buyback clauses. judging from the amount of repurchase, as of the end of 2022, the amount of investment in investment exceeds 8 trillion yuan, which averages to about 600 million yuan per company.

signing a listing and gambling agreement can transfer risks downwards for institutions and provide themselves with a safety rope. however, if venture capital funds lose their “high-risk, high-yield” characteristics, overly rigid terms seem to turn an investment into a “bond issuance.”

the lethality of "gambling" for entrepreneurs can be gleaned from the case of pony galloping, the producer of "wulin gaiden", and the founder's family. on july 31, 2021, jin yan, the widow of pony galloping founder li ming, was sentenced to bear a joint and several debt repayment of 200 million yuan. in february 2023, all the housing properties in jin yan's name have been executed, leaving only the necessary house that jin yan lives with her mother and daughter, and it is planned to apply for execution without auction.

in 2011, galloping horse became a new star in the film and television industry and received financing from many institutions. among them, galloping pony and the investor ccb culture signed a supplementary investment agreement, stipulating that if galloping pony fails to be listed before "december 31, 2013", the investor can require galloping pony and the actual controller li ming to make a one-time acquired the equity interest in pony galloping held by ccb culture.

on january 2, 2014, li ming, chairman of pony galloping, suddenly passed away due to illness, just two days after the repurchase agreement was triggered. in fact, the ipo review was suspended on november 3, 2012, and was not restarted until january 2014.

after li ming's death, galloping horse quickly fell into a management deadlock, and its road to listing was far away.

according to the "vc/pe fund buyback and exit analysis report", as many as 90.33% of buyback cases listed founders as defendants, and the court's support rate for buyback requests also reached 82.39%. in fact, requiring the target company to assume repurchase responsibilities subject to capital reduction requirements is almost not supported, while requiring the founders to assume repurchase responsibilities is almost 100% supported. according to sampling statistics, 10% of founders have become dishonest enforcers because they were unable to fulfill their repurchase obligations.

a founder of a cross-border logistics small package line told us that he started to contact some investment institutions in 2023, but he was not prepared. "there are too many additional conditions, and i am afraid that everything will be lost. after all, there is only one wang jianlin." the practitioner said that although he was in the initial stage, he did not want to risk his money.

at the beginning of this year, wanda group canceled the gambling agreement signed with its investor pag investment group. even if the h-share ipo of zhuhai wanda commercial management was not realized, it did not need to pay liquidated damages, and the crisis was temporarily relieved. according to the previous investment agreement, wanda must not only return 38 billion yuan of investment principal to investors, but also pay interest at an annual interest rate of 8%.

“the annualized interest rate of 8% is normal, and many are more than 15%.” ir practitioners from the aforementioned institutions told us that if the project can only rely on repurchase proceeds in the end, it is actually impossible to pay the lp. "unless there is a better project, we will not just file a lawsuit to get the money back. there is still hope."

market agency reports show that from 2019 to 2023, the average return rate of pe funds that have actually exited projects is 1.39 times, and the average investment period is approximately 39.21 months; from the overall return point of view, the gap between its actual return rate and the loan interest rate in the same period is not the same. not big, but there is still a gap between the pursuit of "high returns" and private equity investment.

judging from the judgment cases, investment institutions more often fall into the situation of "win the lawsuit but fail to win the income".

li feng law firm sampled and counted hundreds of adjudication cases and found that the average execution recovery rate is only 6%; among the repurchase cases that have entered the execution process, only 4.62% of the cases have 100% payment recovery and completion of execution. in terms of time, the average time from the initial filing of a case to the final judgment is about one year. adding in the execution time of 3 to 6 months, it takes an average of one and a half years to complete all litigation processes.

“it’s better to do due diligence in the early stage.” an investment manager with the prefix guo told us that for some truly excellent projects, it is difficult to throw all the risks of gambling to the founders. “the projects that many institutions are grabbing are if there is no way to strictly limit the founders, the scope of the repurchase responsibility will be very detailed, such as limited to the value of the equity,” he said.the best way to resolve a lawsuit is not to get to the point of litigation.

it becomes difficult to quit, how to resolve it?

instead of debating the validity of ipo gambling clauses and the harmfulness of buyback litigation, it may be more practical to explore how to return investment institutions from "creditors" to the role of economic "incubators."

on june 28, the general office of the state council issued "several policies and measures to promote the high-quality development of venture capital", proposing the optimization of the entire chain of "raising, investing, managing and exiting". among them, in terms of improving the exit mechanism, it will "broaden diversified exit channels", including conducting pilot work on the share transfer of private equity funds in the regional equity market.

the document stated that the pilot work will be conducive to supporting the further development of the second-hand share transfer fund, that is, the s fund. s funds refer to the acquisition of alternative asset fund products from investors. traditional private equity funds acquire corporate equity, while s funds acquire corporate equity or fund shares from investors, and the transaction objects are other investors.

tianjin sequoia’s withdrawal from yingfeng electronics may be a compromise choice in the reality of “exit dilemma”.

in march this year,bydsupplier yingfeng electronics applied for listing on the shenzhen stock exchange. the company is engaged in the r&d and production of automotive grade film capacitors, automotive grade boost inductors and other products. according to the prospectus, the old shareholder tianjin sequoia has cashed out 205 million yuan in may 2022.

in december 2011, tianjin sequoia subscribed for 2.174 million yuan of registered capital of yingfeng co., ltd. (the predecessor of yingfeng electronics) for 50 million yuan. in may 2022, tianjin sequoia subscribed to jiaxing trend and yintai at a price of 16.67 yuan per share. investment and other eight institutions transferred a total of 12.2731 million shares, cashing out a total of 205 million yuan, ending more than ten years of holdings in yingfeng electronics.

it is worth noting that around 2015, due to the failure to complete the initial public offering, the repurchase clause of the gambling agreement signed by yingfeng electronics and tianjin sequoia and other investors came into effect. however, tianjin sequoia clearly gave up the triggering repurchase right and chose to continue to hold it. another investor, suzhou lanjun, transferred its equity to other investors at a price of 25 million yuan.

“in the current environment, it is impossible to hold it for ten years. there is no such thing as time."a car-grade mcu (micro control unit) practitioner said that compared with chongqing's xiang dixian, the investment environment for previous hardware companies was more relaxed. "the competition for domestic gpus is too great and they are easily affected by external factors in the market. the impact is relatively difficult. "

as for other exit channels, the practitioner said that exiting through mergers and acquisitions is currently unrealistic. "at least in the field of automotive semiconductors, most investors still hope to exit through ipos."

according to zero2ipo's "china equity investment market research report for the first half of 2024", in terms of exits, a total of 746 cases occurred in china in the first half of the year, including 214 ipos of overseas invested companies and 203 domestic ones, accounting for 55.9% of the overall number of exit cases. it can be seen that the ipo channel is still the most important exit method for private equity.

guo libo, founder of lp investment consulting, publicly stated that at present, ipo exit is the exit channel with the highest return for venture capital funds and plays an important role in the sustainable cycle and healthy development of venture capital funds. maintaining the normalization of ipos is of great significance for stabilizing investor expectations.

as the ipo market in the a-share market tightens, some companies choose to go to the united states and hong kong for listing and financing.

this year, a number of domestic new energy autonomous driving companies have embarked on their ipo journey, such as black sesame, horizon and weride, among other leading high-end intelligent driving solution providers. judging from the prospectus, the above-mentioned companies are all burdened with huge gambling agreements and face the situation of "buyback without listing".

multiple rounds of financing have brought high fair values ​​of preferred stocks, which are directly included in financial liabilities. companies hope to eliminate book losses through listing. as holders of preferred shares, investors are also waiting for the moment of the ipo, when the preferred shares in their hands will be converted into ordinary shares and flow into the market.

judging from the black sesame prospectus, multiple rounds of financing have brought corresponding redeemable and convertible preference shares. from 2021 to the first quarter of 2024, the company's redeemable and convertible book value is 5.094 billion yuan, 8.279 billion yuan, 12.589 billion yuan and 10.977 billion yuan; if the global offering is completed, the preferred shares in the hands of investors will be converted into ordinary shares and can be publicly traded after the lock-up period. however, if this global offering is not completed before the specified date, investors can exercise their redemption rights and require black sesame to repurchase preferred shares.

weride zhixing, which focuses on driverless cars, submitted a prospectus to nasdaq at the end of july. according to the prospectus, weride zhixing is also facing repurchase pressure. for example, wenyuan yuexing jointly established the company wenyuan yuexing with two investors. the two investors invested 36 million yuan and 28.8 million yuan respectively to obtain 20% and 16% of the company's income. if the terms in the final agreement are not met, investors have the right to require weride to repurchase all shares and obtain a return of no less than 10%.

the aforementioned investment manager said that for high-quality targets, capital is still willing to postpone the exercise of repurchase rights., "gp's patience is essentially profit-seeking. the difference is that some are long-term and some are short-sighted. entrepreneurs and capital are two-way choices from the beginning." he believes that investors in this track will gradually usher in the exit period. "it may be inevitable to go public at a low price."

venture capital, especially hard technology venture capital with long return cycles, has a strong demand for and dependence on patient capital. in june this year, when answering reporters’ questions on “several policies and measures to promote the high-quality development of venture capital investment”, the national development and reform commission made it clear that it would mobilize qualified social capital as “patient capital” to solve the industry’s “lack of money” and “lack of rice”. "get off the pot" issue. the policy clearly encourages capital investment early, small, long-term, and hard technology, giving full play to the role of long-term patient capital to further promote high-quality development of the real economy.

industry insiders believe that there is no opposition between long-termism and the ipo exit path. at a time when other exit paths are unclear, in addition to litigating based on the gambling agreement, companies and institutions standing on both sides of the gambling agreement may seek mutual trust between patience and profit-seeking.