Strong Guidance: Shanghai's 16 Measures to Relax State-Owned Capital Funds

Securities Times reporter Zhang Shuxian

On April 7, the Shanghai Municipal Commission of State-owned Assets (SASAC) officially issued the “Guiding Opinions on Further Promoting High-Quality Development of Private Equity Investment Funds of Enterprises Regulated by the Municipal SASAC” (hereinafter referred to as the “Guiding Opinions”). From three aspects—strengthening guidance, building capacity, and optimizing mechanisms—it forms 16 work measures to promote state-owned capital to become long-term capital, patient capital, and strategic capital for serving industrial development.

A Securities Times reporter noted that the Guiding Opinions focuses on the entire fund-operations process, including fund establishment, asset valuation, and investment decision-making, and improves and supplements the “Administrative Measures for Private Equity Investment Fund Business of Enterprises Regulated by the Shanghai Municipal SASAC” (hereinafter referred to as the “Fund Administration Measures”) issued by the Shanghai Municipal SASAC in August 2024.

For example, the Fund Administration Measures stipulate that when regulated enterprises initiate and establish a fund, or participate in investing in a fund, they shall, after being approved through group deliberation, conduct advance filings or make reports to the Shanghai Municipal SASAC. The Guiding Opinions, targeting the special situation where a regulated enterprise initiates and establishes a fund but does not contribute capital, clarifies the requirements for filing after implementation, and responsibility for overall coordination and management lies with each regulated enterprise.

The Fund Administration Measures require that regulated enterprises should give full play to the fund capital amplification effect, and, based on different types of funds, set a principled upper limit on the subscription-to-capital ratio. The Guiding Opinions, in light of its research findings, clarifies that for regulated enterprises that initiate and establish single-asset special funds within the scope of their main business, the proportion of subscribed paid-in capital may be relaxed, and it supports regulated enterprises in appropriately simplifying internal establishment procedures.

As for the investment decision (investment committee) mechanism, the Shanghai Municipal SASAC introduced that, through research, it found that in the market, state-owned LPs show a certain “GP-like” trend. By securing their own rights and interests through seeking the nomination of investment committee members, and with voting in the vast majority adopting an “institutional vote” model, it affects investment decision-making efficiency to a certain extent. In response, the Guiding Opinions proposes that regulated enterprises may take approaches such as appointing investment committee observers or investment committee members of an advisory committee to safeguard the right to be informed and the right of supervision. For cases where it is indeed necessary to nominate investment committee members, the nominees should have the ability to perform their duties and help enhance the level of investment decision-making, and it supports them in independently expressing investment decision opinions within the scope of authorization (i.e., “individual votes”). At the same time, it further encourages state-owned capital funds, as needed, to introduce a certain proportion of industry experts to serve as investment committee members to enhance professional capability.

Given that excellent fund managers have strong professional capabilities, enabling them to accurately discover the potential value of early-stage hard-technology projects and to form pricing that is more in line with market rules and industry credibility, the Guiding Opinions further clarifies that, after going through the relevant decision-making procedures, regulated enterprises may differentiate the conditions for state-owned capital contribution proportions, hurdle rates for threshold returns, the base used for accruing management fees, and other conditions for excellent fund managers. For funds that focus primarily on seed-stage and early-stage technology-based enterprises, these conditions may be further relaxed.

Regarding lead-investment pricing capability, considering that early-stage projects have high uncertainty and often lack financial indicators that can be used as reference, the requirements for the management team’s valuation and pricing capability are high. The Guiding Opinions emphasizes that state-owned capital funds should adopt scientific valuation methods tailored to different growth stages of technology enterprises, focusing on key indicators such as the core team’s capability, R&D investment intensity, technological originality and breakthrough level, patent quality, the strategic position in the industrial chain, and growth expectations, among other factors, so as to effectively improve lead-investment pricing capability in early-stage science and technology innovation areas.

Follow-on investment and the sharing of excess returns are market-based incentive-and-constraint mechanisms widely implemented in funds. In order to further align with market-based funds, the Guiding Opinions encourages industrial investment funds and financial investment funds to implement follow-on investment mechanisms. It also supports management teams in obtaining follow-on investment returns and sharing of excess returns by holding employee follow-on investment platforms (SLPs) or GP shares.

With respect to the performance evaluation and assessment system, the Guiding Opinions emphasizes that regulated enterprises should follow the rules governing fund investment and operation, and implement an assessment mechanism combining annual assessments with long-term-cycle assessments. It tolerates normal investment risks and does not simply use the profit or loss of a single project or a single year as the basis for assessment, thereby eliminating concerns about investing in early-stage projects. At the same time, it requires regulated enterprises to set financial indicators and non-financial indicators in a differentiated manner based on the type of fund and the operational stage it is in.

The Guiding Opinions also clarifies that when a regulated enterprise transfers fund shares, or when a corporate-form fund transfers equity in invested companies, 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 price adjustments, safeguard the interests of state-owned capital, and improve exit efficiency. The Shanghai Municipal SASAC stated that when a regulated enterprise approves a plan for transferring shares of a state-owned fund, it may also approve—at the same time—the magnitude and lower limits of stepwise price adjustments in subsequent cases where no intended transferee is collected, thereby improving transaction efficiency.

(Editor-in-charge: Zhang Xiaobo ）

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