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

Author: Song Weiping

To drive state-owned capital to become long-term capital, patient capital, and strategic capital for the development of service industries, the Shanghai Municipal Commission of State-owned Assets and Supervision and Administration (SASAC) recently issued the “Guiding Opinions on Further Promoting the High-Quality Development of Private Equity Investment Funds of Enterprises under the Supervision of the Municipal SASAC” (hereinafter referred to as the “Guiding Opinions”). From three aspects—strengthening direction, building capability, and optimizing mechanisms—it has formed 16 work measures (hereinafter referred to as the “16 Measures”). Among them, multiple measures such as differentiated payment of management fees, advocating state-owned capital leading the investment, pricing following market conditions, and optimizing the investment decision committee mechanism were clearly proposed for the first time in provincial- and municipal-level SASAC regulatory documents.

On April 7, the Shanghai Municipal SASAC provided a policy interpretation of the Guiding Opinions. According to the briefing, the Guiding Opinions, together with the “Administrative Measures for Business Management of Private Equity Investment Funds of Enterprises under the Supervision of the Municipal SASAC” previously issued (hereinafter referred to as the “Fund Management Measures”) and the “Trial Administrative Measures for Performance Appraisal and Duty Exemption of Private Equity Investment Funds of Enterprises under the Supervision of the Municipal SASAC” (hereinafter referred to as the “Performance and Duty Exemption Measures”), form an interlocking “three-in-one” regulatory institutional framework for high-quality development of service funds.

Next, centered on the deployment requirements of Shanghai’s “2+3+6+6” modern industrial system, the Shanghai Municipal SASAC will deepen city-region coordination around the leading industries in 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 cycle. First, it encourages the establishment and launch of venture capital funds, focusing on investing early, investing in small amounts, investing for the long term, and investing in hard-core technologies. Second, it increases the efforts to assemble private equity secondary market funds (S funds), merger and acquisition funds, and others, improving the fund matrix. Third, it supports leading enterprises in laying out and incubating technology-innovation projects by setting up corporate venture capital funds (CVC funds).

Zhang Mingming, a professor at the School of Economics, Fudan University, said to a reporter from Shanghai Securities News, “The 16 Measures are actually aimed at the same thing: enabling state-owned asset institutions to build an ecosystem, allocate capital, retain talent, and develop industries in a market-oriented way. And market orientation is the main line with the heaviest weight and the greatest break-through intensity. Among other things, it clearly calls for following the industry characteristics of private equity investment funds—long cycles, high risk, and people- and team-related features—improving market-oriented incentive and constraint mechanisms, and promoting the alignment of the fundraising, investment, management, and exit stages of state-owned capital funds with market-wide prevailing rules. ‘This means that, for the regulation of state-owned capital funds, we can’t simply apply the thinking and approaches of traditional SASAC regulation; instead, we should respect the development rules of the private equity investment fund industry and formulate operating methods that are compatible with the prevailing rules in the primary market.’”

**　　Market orientation as the main line with the greatest push for breakthroughs**

The Guiding Opinions closely follows the characteristics of the private equity investment fund industry and specifies the core development direction: first, market orientation—pursue the industry attributes of long fund cycles, high risks, and human-oriented (people-and-team) features, and promote alignment between each stage of fundraising, investment, management, and exit and widely accepted market rules; second, rule of law—clarify the boundaries of rights and responsibilities among fund investors, fund managers, and regulators, and promote each subject to exercise rights according to law with unified rights and responsibilities; third, specialization—cultivate and attract specialized management teams, enhance the capability of state-owned capital funds to lead investment and set pricing, and improve the fund’s ability to operate across its full life cycle.

Focusing on the core operational stages of funds, the Guiding Opinions introduces targeted measures to address bottlenecks and optimize processes, so as to enhance fundraising, investment, management, and exit capabilities. Among them, it states that Shanghai will improve its fund layout. Strengthen the linkage among different types of capital, deepen city-region coordination around each district’s leading industries, and build fund clusters with clear positioning and complementary functions. It encourages supervised enterprises to initiate and establish venture capital funds, focusing on investing early, investing in small amounts, investing for the long term, and investing in hard technology. It encourages leading enterprises to set up corporate venture capital funds and incubate technology-innovation projects in line with the innovation value chain layout.

China Venture and Jiachuan believes that, “what the 16 Measures point to is actually one and the same thing: enabling state-owned capital entities to build an ecosystem, allocate capital, retain talent, and develop industries through market-oriented means. And market orientation is the main line with the heaviest weight and the greatest breakthrough intensity in the whole document. Among other things, it clearly calls for following the industry characteristics of private equity investment funds with long cycles, high risk, and human-oriented traits; improving market-oriented incentive and constraint mechanisms; and promoting the alignment of fundraising, investment, management, and exit stages of state-owned capital funds with market-wide prevailing rules. ‘This means that, regarding the regulation of state-owned capital funds, we can’t simply apply the thinking and methods of traditional SASAC regulation, but should respect the development laws of the private equity investment fund industry and formulate operating modes that are compatible with the rules prevailing in the primary market.’”

**　　Cultivating and expanding the S-share transfer and trading market**

On the exit side, relevant officials from the Shanghai Municipal SASAC analyzed that, in the market, the transaction prices for fund share transfers are often lower than book value due to liquidity discounts, and existing valuation models cannot adequately reflect the requirements for liquidity discounts. Moreover, there is insufficient publicly available transaction data in the market to support decisions, which makes it difficult for state-owned limited partners (LPs) to decide on discounted transactions and limits active exit channels. In response to the difficulties that state-owned capital funds face during the exit process, the Guiding Opinions proposes the following measures:

First, co-build the private fund S-market and improve the ecosystem for the S-market. The Guiding Opinions proposes to promote the Shanghai Equity Exchange Center to position its regional fund share transfer trading platform based on the authorization granted by the China Securities Regulatory Commission; optimize and improve the fund share valuation system; regularly publish S-fund transaction data; and enhance functions such as price discovery, compliance assurance, trade matching, and ecosystem co-building, thereby improving the scientific nature of valuations and their credibility, and cultivating and expanding the S-share transfer and trading market.

Second, optimize the valuation and pricing adjustment mechanism to improve the efficiency of share transfer decisions. The Guiding Opinions makes clear that when supervised enterprises transfer fund shares or when company-form funds transfer the equity of invested companies, the parties may, based on valuation reports issued by third-party institutions taking into account factors such as project circumstances, comparable market cases, and asset liquidity, reasonably determine the range of pricing adjustments to safeguard the interests of state-owned capital and improve exit efficiency. In addition, when supervised enterprises approve the transfer plan for state-owned fund shares, they may simultaneously approve the allowable range and lower limits for stepwise pricing adjustments in cases where no intended transferees are collected, thereby improving transaction efficiency.

Co-investment and the sharing of excess returns are incentive-and-constraint mechanisms commonly used by market-oriented funds. To further align with market-oriented funds, the Guiding Opinions proposes optimizing the incentive and constraint mechanisms. It encourages funds to implement co-investment mechanisms, and supports fund management teams to obtain co-investment returns and the sharing of excess returns by holding shares of employee co-investment platforms (SLP shares) or GP shares, in order to stimulate the teams’ initiative and achieve unity of responsibilities, rights, and interests.

**　　Building a tiered and categorized fund regulatory system**

Relevant officials from the Shanghai Municipal SASAC said that, to further improve the efficiency of market-oriented operations, the Guiding Opinions has been improved and supplemented on the basis of the Fund Management Measures. It focuses on the entire process of fund operations—such as fund establishment, asset valuation, and investment decision-making—scientifically authorizing and delegating powers, and aims to build a complete tiered and categorized fund regulatory system.

For example, regarding the simplification of fund establishment and fundraising processes, the Guiding Opinions clarifies the requirements for post-implementation filing in special cases where a supervised enterprise initiates and establishes a fund but does not make capital contributions, with overall management handled by each supervised enterprise. For a supervised enterprise initiating and establishing a single-asset special fund within the scope of its main business, the Guiding Opinions clarifies that the proportion of subscribed capital contributions may be relaxed, and it supports supervised enterprises to appropriately simplify internal establishment procedures. In addition, following the basic principles of tiered and categorized regulation, the Guiding Opinions emphasizes that supervised enterprises should define the decision-making authority of enterprises at each tier to initiate and participate in investment in funds, scientifically delegate powers, and standardize operating procedures.

“We also conducted research and found that, in the market, state-owned LPs have certain ‘GP-like’ tendencies. They safeguard their interests by seeking nomination to become members of the investment decision committee, and the overwhelming majority of voting takes the ‘institutional ballot’ mode, which to some extent affects the efficiency of investment decision-making.” The officials said. Therefore, the Guiding Opinions proposes that supervised enterprises may protect the right to be informed and the right to supervise by appointing investment decision committee observers or members of an advisory committee, among other methods. For cases where nomination of investment decision committee members is truly necessary, nominations should be made for personnel with the ability to perform their duties and who help improve investment decision-making levels, and it also supports them to independently express investment decision-making opinions within their authorization scope (that is, “individual ballots”). At the same time, it further encourages state-owned capital funds to introduce, as needed, a certain proportion of industry experts as members of the investment decision committee, to improve professional investment decision-making.

(Editor: Xu Nannan)

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