Shanghai State-Owned Capital Fund's "16 Measures" Unveiled to Foster "Long-term Patient Strategic Capital"

◎Reporter Song Weiping

To enable state-owned capital to become long-term, patient, and strategic capital for the development of service industries, the Shanghai State-owned Assets Supervision and Administration Commission has recently issued the “Guiding Opinions on Further Promoting the High-Quality Development of Private Equity Investment Funds of Enterprises Supervised by the Municipal State-owned Assets Supervision and Administration Commission” (hereinafter referred to as the “Guiding Opinions”), forming 16 work initiatives (hereinafter referred to as the “16 initiatives”) from three aspects: strengthening guidance, enhancing capacity, and optimizing mechanisms. Among them, multiple measures such as differentiated payment of management fees, advocating state-owned capital to lead the investment, pricing that keeps pace with the market, and optimization of the investment decision-making mechanism are for the first time clearly proposed in provincial and municipal state-owned assets regulatory documents.

On April 7, the Shanghai State-owned Assets Supervision and Administration Commission conducted a policy interpretation of the “Guiding Opinions.” According to the introduction, the “Guiding Opinions,” together with the “Measures for Business Administration of Private Equity Investment Funds of Enterprises Supervised by the Municipal State-owned Assets Supervision and Administration Commission” (hereinafter referred to as the “Fund Administration Measures”) issued previously and the “Trial Measures for Performance Evaluation and Exemption from Duty Liabilities of Private Equity Investment Funds of Enterprises Supervised by the Municipal State-owned Assets Supervision and Administration Commission,” form a “three-in-one” regulatory institutional framework that supports and organically connects to promote the high-quality development of service funds.

Next, in line with the requirements for Shanghai’s “2+3+6+6” modern industrial system layout, the Shanghai State-owned Assets Supervision and Administration Commission will further deepen city-district coordination around the leading industries of each district, build fund clusters with clear positioning and complementary functions, and guide social capital to cooperate in establishing a relay coordination mechanism for developing enterprises across their full life cycles. First, encourage the establishment of venture capital funds by sponsors, focusing on investing early, investing small, investing long-term, and investing in hard-core technologies. Second, increase efforts to form private equity second-tier market funds (S funds), merger and acquisition funds, and others, and improve the fund matrix. Third, support leading enterprises in laying out and incubating innovation and technology projects by setting up corporate venture capital funds (CVC funds).

Zhang Haiming, a professor at the School of Economics of Fudan University, told a reporter from Shanghai Securities News that the “16 initiatives” are an important lever for Shanghai to actively promote reforms of state-owned assets and state-owned enterprises, including optimizing the layout of state-owned capital and adjusting the investment structure of state-owned capital. It will help give full play to market mechanisms, amplify the guiding role of state-owned capital funds, release vitality in equity investment funds, improve the market ecosystem, and actively cultivate new quality productive forces based on the existing capacity and foundation of state-owned capital.

The main line with the greatest push for marketization

The “Guiding Opinions” closely follow the characteristics of the private equity investment fund industry and clarify the core development direction: first, market-oriented—following the industry characteristics of funds with long cycles, high risk, and human capital-like traits, and promoting that all stages of fundraising, investing, fund management, and exit are connected with market-standard rules; second, rule-of-law-based—clarifying the boundaries of rights and responsibilities among fund contributors, fund managers, and regulators, and promoting lawful exercise of rights and unification of rights and responsibilities among all parties; third, professionalization—cultivating and attracting professional management teams, improving the capacity of state-owned capital funds to lead in investment pricing, and enhancing the operation level of funds across their full life cycles.

Around the fund’s core operating stages, the “Guiding Opinions” proposes targeted measures to address bottlenecks and optimize processes in order to enhance fundraising-investing-management-exit capabilities. Among them, it states that Shanghai should improve fund arrangements. Strengthen linkage among various types of capital, deepen city-district coordination around each district’s leading industries, and build fund clusters with clear positioning and complementary functions. Encourage supervised enterprises to initiate and establish venture capital funds, focusing on investing early, investing small, investing long-term, and investing in hard-core technologies. Encourage leading enterprises to set up corporate venture capital funds and incubate innovation and technology projects around the innovation chain.

Citing the view of Zhongtou Jiacang, “the ‘16 initiatives’ are actually pointing to the same thing: enabling state-owned capital institutions to establish an ecosystem, allocate capital, retain talent, and develop industries in a marketized way—and marketization is the main line that carries the most weight and the greatest breakthrough intensity.” It further clarifies that, by adhering to the industry characteristics of private equity investment funds—long cycles, high risk, and human-centric traits—market-oriented incentive and constraint mechanisms should be improved, and all stages of fundraising, investing, managing, and exiting of state-owned capital funds should be connected with market-standard rules. “This means that regulation of state-owned capital funds can no longer simply apply the thinking and methods of traditional state-owned assets supervision; instead, it should respect the industry development laws of private equity investment funds and formulate operating approaches that are compatible with the rules of the primary market.”

Cultivating and expanding the S-share transfer and trading market

Regarding exits, relevant personnel from the Shanghai State-owned Assets Supervision and Administration Commission analyzed that in the market, the transfer transaction prices of fund shares are often lower than book value due to liquidity discounts, and existing valuation models cannot adequately reflect the requirements of liquidity discounts. Moreover, there is no certain amount of publicly available transaction data to support the market, which leads to difficulty for state-owned LPs in making decisions for discounted transactions and limits active exit channels. In response to the difficulties existing in the exit process of state-owned capital funds, the “Guiding Opinions” proposes the following measures:

First, co-build a private fund S market and improve the ecosystem of the S market. The “Guiding Opinions” proposes to promote the Shanghai Equity Exchange Center—positioned as a regional fund share transfer and trading platform licensed by the China Securities Regulatory Commission—to optimize and improve the fund share valuation system, regularly publish S-fund trading data, and enhance functions such as price discovery, compliance assurance, trade matching, and ecosystem co-building. This will improve the scientific nature and credibility of valuation, and cultivate and expand the market for the transfer and trading of S shares.

Second, optimize the valuation and price-adjustment mechanism to improve the efficiency of share transfer decision-making. The “Guiding Opinions” clearly states that when supervised enterprises transfer fund shares, and when company-form funds transfer equity in invested enterprises, valuation reports issued by third-party institutions based on factors such as project circumstances, comparable market cases, and asset liquidity may be used to reasonably determine the scope of price adjustment, safeguarding the rights and interests of state-owned capital and improving exit efficiency. Subsequently, when supervised enterprises approve the transfer plan for state-owned fund shares, they may also approve, in parallel, the upper and lower limits of the stepwise price adjustment allowed in cases where no intended transferees are collected, in order to improve transaction efficiency.

Following-the-lead investment and profit-sharing of excess returns are incentive and constraint mechanisms commonly implemented by market-oriented funds. To further align with market-oriented funds, the “Guiding Opinions” proposes to optimize the incentive and constraint mechanisms. It encourages funds to implement a following-the-lead investment mechanism, and supports fund management teams in obtaining follow-the-lead investment returns and profit-sharing of excess returns by holding shares of employee follow-the-lead investment platforms (SLP shares) or GP shares, so as to stimulate the team’s initiative and achieve a unity of responsibilities, rights, and interests.

Building a tiered and categorized fund regulatory system

Relevant personnel from the Shanghai State-owned Assets Supervision and Administration Commission said that to further improve the efficiency of market-oriented operations, the “Guiding Opinions,” based on and supplemented to the “Fund Administration Measures,” focuses on the entire fund operation process, including fund establishment, asset valuation, investment decision-making, and other stages, scientifically authorizes and delegates authority, and builds an improved tiered and categorized fund regulatory system.

For example, in simplifying fund establishment and fundraising processes, in response to the special circumstances where supervised enterprises initiate and establish a fund but do not make capital contributions, the “Guiding Opinions” specifies the requirement for post-implementation filing, with overall management handled by each supervised enterprise. For supervised enterprises that initiate and establish single-asset special funds within the scope of their main business, the “Guiding Opinions” clarifies that the subscription contribution ratio may be relaxed and supports supervised enterprises in appropriately simplifying internal establishment procedures. In addition, following the basic principles of tiered and categorized regulation, the “Guiding Opinions” emphasizes that supervised enterprises should clearly define the decision-making authority of enterprises at each tier to initiate and establish or participate in investments in funds, scientifically authorize and delegate authority, and standardize operating procedures.

“We also found through surveys that state-owned LPs in the market have a certain ‘GP-like’ trend. They secure their own rights and interests by striving for nomination of investment decision-making committee members, and most voting adopts an ‘institutional ballot’ model, which to some extent affects investment decision-making efficiency.” The above-mentioned personnel said that for this reason, the “Guiding Opinions” proposes that supervised enterprises may safeguard information rights and supervisory rights by taking approaches such as appointing investment decision-making committee observers or committee members of an advisory committee. For cases where nomination of investment decision-making committee members is indeed necessary, the nominated personnel should have the ability to perform duties and help improve investment decision-making quality, and they should be supported to independently express investment decision-making opinions within the scope of authorization (that is, “individual ballot”). At the same time, it further encourages state-owned capital funds to introduce, as needed, a certain proportion of industry experts to serve as investment decision-making committee members, improving the professional nature of investment decision-making.