Strong guidance, capacity building, and improved mechanisms: Shanghai's 16 measures to loosen restrictions on state-owned asset 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 Supervised by the Municipal SASAC” (hereinafter referred to as the “Guiding Opinions”). From three areas—strengthening orientation, enhancing capabilities, and optimizing mechanisms—it forms 16 operational measures to help state-owned capital become long-term capital, patient capital, and strategic capital serving industrial development.

A Securities Times reporter noted that the “Guiding Opinions” focus on the entire lifecycle of fund operations, such as fund establishment, asset valuation, and investment decision-making, and improve and supplement the “Administrative Measures for Private Equity Investment Funds Managed by Enterprises Supervised by the Municipal SASAC” (hereinafter referred to as the “Fund Management Measures”) issued by the Shanghai Municipal SASAC in August 2024.

For example, the “Fund Management Measures” stipulate that when a supervised enterprise initiates and establishes a fund or participates in investing in a fund, it should conduct prior filing with or submit a report to the Shanghai Municipal SASAC after the matter is approved by the group. The “Guiding Opinions” address the special situation where a supervised enterprise initiates the establishment of a fund but does not contribute capital, and specify requirements for post-implementation filing; overall coordination and management shall be handled by each supervised enterprise.

The “Fund Management Measures” require that supervised enterprises give full play to the fund’s capital amplification effect, and set, for different types of funds, an upper limit on the principle subscription ratio. The “Guiding Opinions,” based on research findings, states that for supervised enterprises initiating and establishing a single-asset special fund within the scope of their main business, the subscription contribution ratio can be relaxed, and it also supports supervised enterprises in appropriately simplifying internal establishment procedures.

Regarding the investment decision-making (IC) mechanism, the Shanghai Municipal SASAC introduced that research found a certain “GP-ization” trend among state-owned LPs in the market. By seeking to nominate IC committee members to protect their own interests, and because the voting is overwhelmingly carried out using an “institutional vote” model, the efficiency of investment decision-making is affected to some extent. In response, the “Guiding Opinions” propose that supervised enterprises may take measures such as appointing IC observers or members of an advisory committee to ensure information rights and supervisory rights. For cases where it is indeed necessary to nominate IC committee members, the nominees should have the ability to perform their duties and help improve the level of investment decision-making; and it supports them in independently expressing investment decision opinions within the scope of authorization (i.e., an “individual vote”). At the same time, it further encourages state-owned funds to introduce, as needed, a certain proportion of industry experts to serve as IC committee members to enhance professional expertise in investment decision-making.

Given that excellent fund managers have strong professional capabilities, enabling them to precisely uncover the potential value of early-stage hard-technology projects and form pricing that is more closely aligned with market laws and industry credibility, the “Guiding Opinions” further clarify that after going through relevant decision-making procedures, supervised enterprises may set different state-owned capital contribution ratios, hurdle rates, and management fee accrual bases, and other conditions for excellent fund managers. For funds that mainly invest in seed-stage and early-stage technology-oriented enterprises, such conditions can be further relaxed.

When it comes to lead-investor pricing capability, because early-stage projects have high uncertainty and often lack financial indicators that can be referenced, there is a higher requirement for the management team’s valuation and pricing capability. The “Guiding Opinions” emphasize that state-owned funds should use scientific valuation methods tailored to different growth stages of technology companies, focusing on key indicators such as core team capability, R&D investment intensity, technological originality and breakthrough level, patent quality, the strategic position in the industrial chain, growth expectations, and other key metrics, so as to genuinely improve lead-investor valuation and pricing capability in the early-stage sci-tech field.

Co-investment and the distribution of excess returns are market-based incentive-and-constraint mechanisms commonly adopted by funds. To further align with market-based funds, the “Guiding Opinions” encourage industrial investment funds and financial investment funds to implement co-investment mechanisms; and support management teams to obtain co-investment returns and the distribution of excess returns by holding employee co-investment platforms (SLPs) or GP shares.

Regarding the performance evaluation and appraisal framework, the “Guiding Opinions” stress that supervised enterprises should follow the operational laws of fund investment, promote an appraisal mechanism that combines annual assessment with long-cycle assessment, tolerate normal investment risks, do not simply use the profit and loss of a single project or a single year as the basis for assessment, and eliminate concerns about early-stage project investments. At the same time, it requires supervised enterprises to set financial indicators and non-financial indicators in a differentiated manner based on the type of fund and the stage of operation it is in.

The “Guiding Opinions” also clarify that when supervised enterprises transfer fund shares, or when corporate-form funds transfer equity in the invested enterprises, they may, based on valuation reports issued by third-party institutions considering factors such as project circumstances, comparable market cases, and asset liquidity, reasonably determine the extent of price adjustment, safeguard state-owned capital interests, and improve exit efficiency. The Shanghai Municipal SASAC stated that when approving a plan for the transfer of state-owned fund shares, supervised enterprises may also approve, simultaneously, the range and lower limit for stepwise price adjustments in subsequent situations where no intended transferee is collected, thereby improving transaction efficiency.

(Editor: Wen Jing)

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