Strong guidance, building capabilities, and improved mechanisms: Shanghai’s 16 measures to loosen state-owned asset funds

Securities Times reporter Zhang Shuxian

On April 7, the Shanghai Municipal State-owned Assets Supervision and Administration Commission officially issued the “Guiding Opinions on Further Promoting High-Quality Development of Private Equity Investment Funds Managed by the Entities Under the Oversight of the Municipal State-owned Assets Supervision and Administration Commission” (hereinafter referred to as the “Guiding Opinions”). The Guiding Opinions, from three aspects—strengthening the directional guidance, enhancing capabilities, and optimizing mechanisms—form 16 working measures, to drive state-owned capital to become long-term capital, patient capital, and strategic capital for serving industrial development.

The Securities Times reporter noted that the Guiding Opinions focuses on the entire fund operation process, such as fund establishment, asset valuation, and investment decision-making, and has improved and supplemented the “Business Management Measures for Private Equity Investment Funds Under the Oversight of the Municipal State-owned Assets Supervision and Administration Commission” issued by the Shanghai Municipal State-owned Assets Supervision and Administration Commission in August 2024 (hereinafter referred to as the “Fund Management Measures”).

For example, the Fund Management Measures stipulate that when a supervised entity initiates and establishes or participates in an investment fund, it should, after being approved by the group, conduct advance registration or submit a report to the Shanghai Municipal State-owned Assets Supervision and Administration Commission. The Guiding Opinions, in response to a special situation in which a supervised entity initiates and establishes a fund but does not contribute capital, clarifies the requirements for filing after implementation, and states that each supervised entity is responsible for coordinating and managing the matter.

The Fund Management Measures require supervised entities to give full play to the fund capital amplification effect. Based on different types of funds, they set an upper limit on the subscription ratio on a principle basis. The Guiding Opinions, in light of the results of research and investigation, combines circumstances and clarifies that, for supervised entities initiating and establishing single-asset special funds within the scope of their main businesses, the subscription contribution ratio may be relaxed, and it supports supervised entities in appropriately simplifying internal establishment procedures.

In terms of the investment decision-making mechanism, the Shanghai Municipal State-owned Assets Supervision and Administration Commission said that research found that, in the market, state-owned LPs have a certain “GP-ization” trend. By seeking to nominate investment decision committee members, they protect their own rights and interests; and the voting by far mostly adopts an “institutional vote” model, which to a certain extent affects investment decision efficiency. In response, the Guiding Opinions proposes that supervised entities may adopt methods such as appointing observers to the investment decision-making committee or members of an advisory committee to protect information-rights and supervision-rights. For cases where it is indeed necessary to nominate investment decision committee members, the nominated individuals should be capable of performing their duties and help improve the level of investment decision-making, and it supports them in independently expressing investment decision-making opinions within their authorized scope (i.e., “individual votes”). At the same time, it further encourages state-owned funds to introduce, as needed and in a certain proportion, industry experts as members of the investment decision-making committee to enhance professional capability.

Given that excellent fund managers have strong professional capabilities and can accurately identify the potential value of early-stage hard technology projects, enabling pricing that is more aligned with market rules and industry credibility, the Guiding Opinions further clarifies that, after going through relevant decision-making procedures, supervised entities may set differentiated terms for state-owned capital contribution ratios, hurdle rates, and management fee accrual bases, among other conditions, for excellent fund managers. For funds that mainly invest in seed-stage and early-stage technology-based enterprises, these terms may be further loosened.

In terms of lead-investor pricing capability, considering that early-stage projects have high uncertainty and often lack financial indicators that can be used as references, the requirements for the management team’s valuation and pricing capability are relatively high. The Guiding Opinions emphasizes that state-owned funds should adopt scientific valuation methods that fit different growth stages of technology enterprises, focusing on key indicators such as the core team’s capabilities, R&D investment intensity, technological originality and breakthrough level, patent quality, strategic position in the industrial chain, and growth expectations, to effectively enhance early-stage lead-investor pricing capability in the innovation and technology field.

Co-investment and sharing excess returns are incentive-and-constraint mechanisms widely implemented in market-oriented funds. To further align with market-oriented funds, the Guiding Opinions encourages industrial investment funds and financial investment funds to implement co-investment mechanisms; and supports management teams in obtaining co-investment returns and sharing excess returns by holding employee co-investment platforms (SLPs) or GP interests.

In terms of the performance evaluation and assessment system, the Guiding Opinions emphasizes that supervised entities should follow the规律 of fund investment and operation, and implement an assessment mechanism combining annual and long-cycle elements. It tolerates normal investment risks, and does not simply use the profit and loss of a single project or a single year as the basis for assessment, eliminating concerns about early-stage project investments. At the same time, it requires supervised entities to set differentiated financial and non-financial indicators based on the type of fund and the operating stage it is in.

The Guiding Opinions also clarifies that when a supervised entity transfers fund interests, or when a company-style fund transfers equity in the invested enterprise, it may, based on valuation reports issued by third-party institutions considering factors such as the project situation, comparable market cases, and asset liquidity, reasonably determine the magnitude of any price adjustment to safeguard state-owned capital interests and improve exit efficiency. The Shanghai Municipal State-owned Assets Supervision and Administration Commission stated that when approving the plan for transferring state-owned fund interests, supervised entities may also, simultaneously, approve the amount and lower limits of stepwise price adjustments in the subsequent scenario where no intended transferee is collected, to improve transaction efficiency.