Returning to the core of the industry: Local government guidance funds accelerate transformation

Securities Times reporter Zhuo Yong

Recently, Shenzhen Angel Mother Fund launched a “comprehensively relaxing return-to-investment” initiative. In reforms to local government guidance fund return-to-investment mechanisms across the country, it took the lead and fired the “first shot.” Looking back at the entire industry in 2025, it is not hard to see that, across key links such as return-to-investment requirements, fund terms, loss tolerance and risk-mitigation mechanisms, and constraints on place of registration, government guidance funds are actively adjusting their positioning and changing their roles. They are gradually saying goodbye to the old operating model centered on investment promotion and truly returning to the role of an industrial cultivation platform.

The fundamental shift in policy direction and operating model has also brought a contraction in scale. The Mother Fund Research Center recently released the “2025 China Mother Fund Panorama Report,” which shows that by the end of 2025, there were 472 mother funds nationwide with total assets under management of approximately 4.02 trillion yuan, a year-on-year decrease of 11.92%; total investment scale for the full year was 5601 billion yuan, a year-on-year decrease of 15.47%. This is the subtle and gradual change the industry has undergone since the issuance of the “Guiding Opinions on Promoting High-Quality Development of Government Investment Funds” (hereinafter referred to as “Document No. 1 from the General Office of the State Council”). This policy-driven, locally initiated reform is rewriting the underlying logic of the venture capital industry.

Loosening return-to-investment requirements

Guidance funds return to their industrial roots

For many years, “fund investment promotion” has been the core logic of how local government guidance funds operate. Through high-percentage return-to-investment requirements and constraints on the place of registration, they attract funds and projects to land locally. But over time, under administrative intervention, problems such as mounting pressure on fund return-to-investment and distorted investment strategies have become increasingly prominent.

At a mother fund seminar held recently in the new era, Li Yutong, General Manager of Nansha Chengtou, said that under the early government guidance fund 1.0 model, market-oriented general partners (GPs) were under intense strain. The government guidance funds provided all-around investment promotion services to market-oriented fund managers, interfering with their normal investment strategies, and even forcing them to invest locally in some projects that were not that high-quality.

This model saw a turning point in 2025. “Document No. 1 from the General Office of the State Council” clearly guided a transformation of guidance fund functions, and localities quickly followed up with adjustments. Shenzhen Angel Mother Fund took the lead in comprehensively canceling mandatory return-to-investment. It changed the “front-loaded” hard constraints into “back-loaded” incentives: if certain landing results are achieved, parties may enjoy profit-sharing benefits and repurchase preferential treatment; if the targets are not met, they do not enjoy additional incentives.

“In the context of a unified national big market, the traditional logic of fund investment promotion is no longer sustainable.” Li Xinjiang, General Manager of Shenzhen Angel Mother Fund, said, “Government guidance funds should return to their ‘guiding’ position rather than dominate the market. In an economic downturn, government guidance funds can provide phased backstops, but in the long run, they must leverage social capital, focus on technological innovation and industrial cultivation, rather than simply engaging in investment promotion.”

According to the reporter’s sorting and observations, under the policy guidance of “Document No. 1 from the General Office of the State Council,” local government guidance fund return-to-investment rules have seen three major changes: first, in some regions, the hard return-to-investment multiples generally have fallen from around 2 times to around 1 time; second, some localities no longer simply use the enterprise’s place of registration as the judgment standard, but include factors such as industrial cooperation, the landing of research and development centers, and coordination across industrial chains within the scope of statistics; third, restrictions on local GP registration have been removed, and management institutions are selected nationwide on a best-available basis.

Li Yutong also revealed that Guangzhou Nansha has restructured the cooperation logic of mother funds. It is no longer mandatory to register, pay taxes, or have a headquarters located there; instead, it focuses on optimizing the allocation of production factors in the Guangdong-Hong Kong-Macao Greater Bay Area. “We give choice back to enterprises and the market. Investment promotion has shifted from ‘legal-entity landing’ to ‘factor integration.’ Guidance funds and GPs return to a simple, pure partnership relationship—goals are aligned, there is mutual respect, and needs are clearly defined.”

Data from the Mother Fund Research Center shows that there is still a performance gap between government guidance funds and market-oriented mother funds. As of the end of 2025, government guidance funds had achieved a capital return ratio (MOC) of 1.45, a dividend multiple on invested capital (DPI) of 0.78, and an internal rate of return (IRR) of 7.26%, which is slightly lower than that of market-oriented mother funds. Industry insiders believe that as return-to-investment requirements are loosened and market-oriented capabilities improve, the gap between the two is expected to gradually narrow.

Fund terms generally extended—patient capital takes root

Alongside the reform of return-to-investment, another major trend in the mother fund industry in 2025 is that fund terms have been comprehensively extended. In the past, short-cycle designs of 5—7 years were hard to match the characteristic of long-term development in hard-tech fields, forcing the industry toward “long money and long investing.”

For example, the national venture capital guidance fund that was just rolled out last year has a term of as long as 20 years, while the Guochuang Guangdong-Hong Kong-Macao Greater Bay Area fund, which was rolled out in the Guangdong-Hong Kong-Macao Greater Bay Area, has a term of 16 years and can be extended to 20 years. With 70% of investments made “early” and “small,” the industry has fully moved away from a short-term, quick-profit investment orientation.

According to statistics from the Mother Fund Research Center, among newly established guidance funds in 2025, 53% already allow the terms of underlying funds to be more than 10 years, and some reach 15—20 years. Wang Yunzan, General Manager of the Shenzhen Futian Guidance Fund, said: “Now, the fund terms of newly established funds are basically all 10 years and above. It is to give early-stage technology enterprises enough time to grow.”

Li Xinjiang has a deeper understanding of patient capital: “Patient capital is not only about changing the fund term from 10 years to 20 years; it is about establishing a circular investment mechanism, so that exit funds can roll into new investments and form a continuing flow of support for innovation.” It is reported that Shenzhen Angel Mother Fund has also recently introduced a fund repurchase mechanism: underlying funds may repurchase the government’s contributed shares at cost plus an annual interest of 2%, and the returned funds are used for a new round of early-stage investment. In this way, it achieves circular capital support for multiple phases of underlying funds, making it more sustainable than a single long-term fund.

Three major changes in the “playbook” of local government guidance funds

Under policy guidance and market pressure, local government guidance funds’ operating models have undergone a systematic transformation, showing three main characteristics:

First is an upgrade in positioning. Government guidance funds are shifting from being investment promotion platforms to being platforms for industrial cultivation and ecosystem building. Taking Shenzhen Angel Mother Fund as an example, it is reported that over 8 years it has cumulatively contributed nearly 8.5 billion yuan, established 83 angel funds and 17 seed funds, invested in about 1200 hard-tech projects, and nurtured multiple listed companies and unicorns. The core is to build an early-stage innovation ecosystem.

Second is overall coordination of the structure. “Document No. 1 from the General Office of the State Council” centralizes the fund approval power at the provincial level, strictly preventing disorderly establishment of funds at the county level. This means that county-level funds, which used to proliferate under the “a hundred schools contend” pattern, will be coordinated by the provincial level, thereby avoiding homogeneity and scattered resources and improving the efficiency of capital use.

Third is loosening tolerance and error-correction. From local practices, tolerance-for-loss mechanisms have started moving from principle-level statements toward more specific operational standards, and in many places the limits provided are clearly broader than in the past. In Li Xinjiang’s view, venture capital carries risks, and returns are symmetrical with risks. As long as they are compliant and diligent, and there is no private transfer of benefits, effective tolerance-for-error and accountability-exemption mechanisms should be established, so that state-owned capital will dare to invest in early stages and tolerate failures.

From continuous institutional changes to optimization of industry structure, 2026 may become a turning point in the development of local mother funds. Wang Yunzan believes that, currently, externally, the world faces changes unseen in a century and technology competition, while internally, the economy is shifting toward consumption-driven growth and industrial upgrading. Mother funds must keep up with the “15th Five-Year Plan” and focus on hard technology and strategic emerging industries—developing as long-term capital and patient capital, and serving new quality productive forces.

(Editor-in-charge: Dong Pingping)

     【Disclaimer】This article only represents the author’s own views and is not related to Hexun. The Hexun website maintains a neutral stance toward the statements and viewpoint judgments made in the article, and does not provide any express or implied guarantee regarding the accuracy, reliability, or completeness of the content included. Readers are requested to use it only as a reference and bear full responsibility on their own. Email: news_center@staff.hexun.com