• News
• 2024-08-13

Venture Capital Shifts to Restructuring, Anticipates Increased Long-term Funding

At present, China's venture capital industry is gradually shifting from the rapid development phase of the past few years to a phase of restructuring and adjustment. The proportion of state-owned capital in fundraising is increasing, and the importance of equity investment funds and government guidance funds in local investment promotion is further enhanced.

On October 12, at the 2024 (24th) China Venture Capital Forum, Sun Dongsheng, Vice Chairman of the Central Committee of the China Democratic National Construction Association, and Tu Guangshao, the first chairman of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, released the "Annual Report on the Development of China's Venture Capital (2024)" (hereinafter referred to as the "Report"). The "Report" stated that the current venture capital industry in China shows six development trends. In addition to the above two points, the trends also include: After the Central Financial Work Conference and the Third Plenary Session of the 20th Central Committee, the strategic positioning of venture capital has been further enhanced; Difficulty in exiting has become a common phenomenon, and the S fund transaction and M&A market are ushering in development opportunities; In the future, the proportion of long-term capital sources such as pension funds and insurance funds participating in venture capital is expected to further increase; Institutions are facing adjustments in development strategies, and deepening in sub-segments and highlighting professional advantages will become the way for investment institutions to survive.

The Third Plenary Session of the 20th Central Committee clearly proposed, "Encourage and standardize the development of angel investment, venture capital, and private equity, better play the role of government investment funds, and develop patient capital." Qin Boyong, the Executive Vice Chairman of the Central Committee of the China Democratic National Construction Association, said that this is the fundamental basis for the development of the venture capital industry in the next period. The venture capital industry will usher in a brand new development opportunity and must also undertake more important responsibilities and missions.

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The ecological chain of China's capital market is undergoing profound changes.

Wu Xiaoqiu, former vice president of Renmin University of China and dean of the National Institute of Finance, said that venture capital is closely related to the capital market, and venture capital is an important source of vitality for the development of the capital market. If venture capital does not develop, the quality of Chinese listed companies will not be very good, and the development of the capital market provides an exit mechanism and effective incentives for the development of venture capital.

At present, with the announcement of several major financial policies by the People's Bank of China, the Financial Regulatory General Administration, and the China Securities Regulatory Commission on September 24, and the Central Political Bureau meeting held on September 26, "I personally understand that the ecological chain of China's capital market is undergoing profound changes." Wu Xiaoqiu said.

Wu Xiaoqiu said that among the several major financial policies of the three departments, the most important, historically significant, and even milestone significance is the structured monetary policy tool based on the capital market created by the central bank.

These two structural monetary policy tools, one is the creation of a swap facility for securities, funds, and insurance companies, supporting qualified securities, funds, and insurance companies to obtain liquidity from the central bank through asset pledge. The second is the creation of a special re-lending for stock buybacks and increases, guiding banks to provide loans to listed companies and major shareholders to support stock buybacks and increases.

Wu Xiaoqiu believes that this means that the central bank has shifted from solely caring about the stability of deposit financial institutions in the past to caring about the dual stability of deposit financial institutions and the capital market. It means that the functions of the central bank have undergone fundamental changes. "I think this is a huge historical opportunity."

Xi Yongchun, Deputy Director of the Asset Management Institution Supervision Department of the National Financial Regulatory General Administration, said that venture capital has a crucial role in technological innovation, as well as in economic transformation and economic development led by technological innovation."From a systemic perspective, we have also noticed that financing led by equity investment has shown great resilience. Whether it's a significant downturn or a financial crisis, the recovery is often much faster than in a financial system dominated by debt, with the core being a very reasonable risk-sharing mechanism," said Xi Yongchun. Currently, banking and insurance institutions are supporting venture capital through various channels.

Zhang Yiming, an expert on the Expert Consultative Committee of the State Council's Tariff Commission and Managing Director of China International Financial Co., Ltd., stated that venture capital provides strong support for creating new quality productive forces by providing financial support to technological innovation enterprises and accelerating the transformation of scientific and technological achievements into real productive forces.

Citing data, Zhang Yiming said that over the past decade, China's private equity venture capital funds have developed rapidly, with more than 130,000 projects invested in by private equity venture capital funds, providing more than 8.54 trillion yuan in financial support to 70,000 companies. In the past three years, the proportion of venture capital represented by venture capital funds accompanying companies for more than four years has increased from 39% to 53%. Especially since the establishment of the Science and Technology Innovation Board pilot registration system, the support rate of venture capital represented by private equity in newly listed companies on the Growth Enterprise Board, Science and Technology Innovation Board, and Beijing Stock Exchange is 57%, 89%, and 100%, respectively.

Many challenges are faced in fundraising, investment, management, and exit

However, in 2023, the number and scale of China's venture capital funds continued to grow, but the growth rate has slowed down.

The report shows that by the end of 2023, the number of venture capital funds in existence was about 34,200, a year-on-year increase of 15.6%, with a scale of about 7.75 trillion yuan, a year-on-year increase of 10.6%. In 2023, a total of 4,621 new venture capital funds were established, a year-on-year decrease of 14.0%, and the scale decreased by 2.3% year-on-year.

Li Feng, Deputy Dean of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, said when interpreting the report that venture capital faces many challenges in fundraising, investment, management, and exit. For example, in terms of fundraising, the scale of fundraising has decreased, and the sources of fundraising are single; there is a lack of long-term funds, and patient capital is relatively insufficient; the conditions for state-owned capital investment are relatively strict, restricting the flexibility and autonomy of venture capital institutions and increasing the difficulty of fundraising; the dollar fund further withdraws from China.

The challenges in investment are, first, the investment pace of investment institutions has slowed down, and they are more cautious. Second, the average cycle of China's equity investment is relatively short, and the proportion of early and small investments is relatively low. Third, capital is crowded, leading to valuation bubbles.

The report shows that in 2023, a total of 4,629 venture capital funds participated in fundraising, a year-on-year decrease of 13.8%. The total amount of fundraising was 744.953 billion yuan, a year-on-year decrease of 2.1%. In 2023, venture capital funds disclosed a total of 7,178 investment events, a year-on-year decrease of 16.0%; the total investment scale reached 739.309 billion yuan, a year-on-year decrease of 23.8%. Affected by the stricter IPO review, in 2023, venture capital funds had a total of 3,417 exit events, a year-on-year decrease of 27.7%. The exit amount was 459.429 billion yuan, a year-on-year decrease of 39.6%.

The report suggests accelerating the cultivation of diversified, high-quality venture capital entities, especially the need to improve the incentive and error tolerance mechanism of state-owned funds to stimulate the enthusiasm of state-owned capital to invest early, small, and in technology.Expanding the sources of venture capital from multiple channels simultaneously is essential. Efforts should be made to encourage long-term capital such as insurance funds and social security funds, especially to stimulate private and overseas capital to invest in venture capital in China. Strengthening government guidance and differentiated regulation is crucial. The focus should be on establishing a mechanism for venture capital to connect with innovative projects, optimizing the tax system for the venture capital industry, and increasing tax incentives.

Furthermore, the "Report" also suggests improving the venture capital exit mechanism. For companies facing pressure from bet-to-buy buyback obligations, it is recommended to allow them to quickly list on the New Third Board or the Beijing Stock Exchange to quickly escape the bet-to-buy buyback predicament. Providing loans for bet-to-buy buyback to prevent companies from falling into operational difficulties is also important. At the same time, encouraging more innovation and pilot exploration of exit channels is advocated.

Qin Boyong suggests that top-level design should be well-executed, and the policy environment should be continuously optimized. The regulatory framework and guidelines for the venture capital industry should be clearly defined, and a diversified range of venture capital entities should be actively cultivated. Support should be given to the integrated development of venture capital institutions, invested companies, universities, research institutions, and other financial institutions to promote the integration and collaboration of industry, academia, and research. It is also important to encourage venture capital institutions and invested companies to further focus on their main responsibilities and continuously improve their professional capabilities. This will achieve a complementary relationship between attracting investment and providing returns to investors, and an organic unity of strategic value and financial value.