Just now, Shanghai State-owned Assets issued a heavyweight document

Asking AI · How Will the New Strategy Led by State-Owned Capital Change the Early-Stage Sci-Tech Investment Ecosystem?

It’s Shanghai again.

On April 7, the Shanghai Municipal State-owned Assets Supervision and Administration Commission issued the “Guiding Opinions on Further Promoting High-Quality Development of Private Equity Investment Funds Managed by State-Owned Enterprises” (hereinafter referred to as the “Guiding Opinions”), which focuses on strengthening guidance, enhancing fundraising, investment, management, and exit capabilities, and improving fund management mechanisms, proposing a total of 16 measures.

A careful reading reveals that Shanghai is easing restrictions on state-owned funds. Among these, differentiated management fee payments, advocating for state capital lead investments, market-based pricing, optimization of investment decision mechanisms, and other measures are the first in domestic provincial and municipal state-owned asset supervision documents to be explicitly stated.

Such a scene is highly indicative of a market trend.

Eligible Entities May Be Exempt from Asset Valuation

For a long time, LPs from state-owned enterprises have had special requirements in the investment process, such as requiring other investors in sub-funds to transfer funds first, or guiding funds with lower administrative levels to invest initially. Additionally, decision-making processes for local SOICs are generally lengthy, with fund establishment from signing to fund transfer taking as little as two months or as long as over half a year. This creates many uncertainties in fund formation.

In response, the “Guiding Opinions” from Shanghai propose to optimize fund establishment procedures. Specifically, for funds initiated by regulatory enterprises but not contributing capital, the municipal SOA will implement post-filing management. For regulatory enterprises establishing single-asset special funds within their core business scope, the subscription requirement can be appropriately relaxed, and internal establishment procedures simplified.

The earlier “Management Measures for Private Equity Investment Funds Managed by Regulatory Enterprises of the Shanghai SOA” required that economic activities such as non-proportional increases or decreases in fund shares after the fundraising period or after the end of the fundraising period must follow decision-making and evaluation procedures. However, investigations found that some enterprises strictly enforce evaluation procedures for exceptions.

The “Guiding Opinions” now specify detailed rules, clarifying that the following actions can be exempt from asset valuation, with prices directly determined by partnership agreements or articles of association:

• Investment in funds during the fundraising period or non-proportional increases/decreases in fund shares during the fundraising period (excluding additional fundraising);

• Passive increases in fund shareholding ratios caused by other partners’ non-fulfillment of capital commitments after the fundraising period (e.g., without involving cash or non-monetary asset distributions).

The “Guiding Opinions” also state that regulatory enterprises should clarify decision-making authority at all levels for initiating or participating in investment funds, adopt scientific authorization and delegation, and standardize operational procedures. These measures could significantly improve the efficiency of state-owned fund processes.

Management Fees Can Be Paid Based on Committed Capital

A widely discussed point in the venture capital circle is that the “Guiding Opinions” propose that, after relevant decision-making procedures, regulatory enterprises can set differentiated conditions such as the proportion of state capital contribution and minimum return thresholds for excellent fund managers. If management fees are paid based on committed capital, they must be matched with investment progress controls. Funds primarily investing in seed and early-stage tech companies can further relax these conditions.

It is well known that fund managers mainly earn management fees, but this fundamental has become negotiable behind the scenes, with some industry insiders even describing a scenario where “LPs pay based on project funding, and management fees are almost calculated daily.” For excellent fund managers in early or seed stages, this is undoubtedly a significant challenge.

This time, the “Guiding Opinions” for the first time allow management fees to be paid based on committed capital for outstanding managers—meaning fees can be collected before the fund completes investments, providing crucial early-stage funding support.

To some extent, this signals to top GP managers that as long as they possess strong professional capabilities, state capital can proactively lower thresholds, serving as a market indicator.

Of course, the “Guiding Opinions” include the condition of “matching investment progress control” to prevent fund managers from becoming complacent after receiving management fees.

Advocating for State Capital Lead Investments

Looking back at past investment trajectories, state-owned funds have often played a “follow-on” role—participating after market-oriented institutions complete due diligence and valuation, thereby avoiding pricing risks and responsibilities.

However, as state capital becomes the main support in China’s venture capital industry, some startups have faced the dilemma of “having a co-investment but struggling to find a lead investor.” The operational system relying on market-based decision-making needs adjustment.

This “Guiding Opinions” explicitly encourage state funds to better play a leading and pricing role in early-stage tech investments, directly addressing the financing bottleneck where early-stage projects find it difficult to secure lead investors.

In the policy interpretation, the Shanghai SOA mentioned that, given the high uncertainty of early-stage projects and the lack of reference financial indicators, the valuation of management teams requires high expertise. The “Guiding Opinions” emphasize that state funds should adopt scientific valuation methods suited to different growth stages of tech companies, focusing on core team capabilities, R&D investment intensity, technological originality and breakthroughs, patent quality, strategic position in the industrial chain, and growth expectations, thereby genuinely enhancing their ability to lead and price early-stage investments.

This requires a role transformation for state funds—moving beyond reliance on external judgments to establishing professional investment teams and valuation models, while also opening flexible pricing space for early tech investments.

Supporting “Personal Votes” in Investment Decisions

Investigations reveal that some state-owned LPs tend toward “GP-like” behavior by nominating members to investment decision committees to safeguard their interests. Most voting is conducted via “institutional votes,” which can impact decision-making efficiency.

The “Guiding Opinions” propose that regulatory enterprises can appoint observers or advisory committee members to safeguard their right to information and supervision. When nominating members for investment decision committees, enterprises should select qualified individuals who can contribute to decision quality and support their independent expression of investment opinions (“personal votes”) within their delegated authority. It also encourages introducing industry experts as committee members in proportion to the needs.

This innovative approach can significantly improve decision efficiency and reduce formalism. Moreover, the mechanism of observers and industry experts ensures that state interests are protected while enhancing decision professionalism.

Tolerating Normal Investment Risks

At the end of 2024, the Shanghai SOA and the Municipal Financial Office jointly issued the “Trial Measures for Performance Evaluation and Due Diligence Exemption of Private Equity Funds Managed by State-Owned Enterprises,” clarifying that the overall evaluation of state-owned funds should not be based solely on individual project losses or underperformance.

This is the first provincial-level document on performance evaluation and due diligence exemption for state-owned funds nationwide, aiming to address the reluctance or hesitation of state funds to invest, thus opening a path for risk tolerance.

The “Guiding Opinions” reiterate that regulatory enterprises should follow fund investment and operation principles, implement combined annual and long-term assessments, tolerate normal investment risks, and avoid using single projects or annual profits/losses as sole evaluation criteria to eliminate concerns about early-stage investments. They also require differentiated financial and non-financial indicators based on fund type and operational stage.

Addressing Exit Challenges

Pricing difficulties and lengthy approval processes have long hindered exits for state-owned funds.

Market transactions of fund shares often involve liquidity discounts, causing transfer prices to fall below book value. Existing valuation models cannot fully reflect liquidity discounts, and the lack of sufficient public trading data makes it difficult for LPs to decide on discounted transactions, limiting proactive exit channels.

To address this, the “Guiding Opinions” propose measures such as:

• Building a private fund S-market and improving its ecosystem

The document suggests promoting the Shanghai Equity Exchange Center’s reliance on the regional fund share transfer platform authorized by the CSRC, optimizing the valuation system for fund shares, regularly releasing trading data, and enhancing functions like price discovery, compliance, transaction matching, and ecosystem development to improve valuation credibility and foster a robust S-share transfer market.

• Improving valuation adjustment mechanisms to enhance transfer decision efficiency

The “Guiding Opinions” specify that when regulatory enterprises transfer fund shares or transfer equity in invested companies of corporate funds, they can rely on valuation reports from third-party agencies based on project conditions, comparable market cases, and asset liquidity to determine reasonable adjustment ranges, safeguarding state assets and improving exit efficiency.

Subsequently, when approving transfer plans, regulatory enterprises can also approve staged price adjustments in the absence of interested buyers, further streamlining transactions.

In Conclusion

Today, state capital has become a vital support for the primary market.

According to data from the Zero2IPO Research Center, by 2025, China will have established approximately 2,164 government investment funds with a total target scale of about 11.08 trillion yuan, and a cumulative committed capital of approximately 7.19 trillion yuan. Statistics show that by 2025, disclosures from state-controlled and state-participated LPs account for 85.5% of the total committed capital.

In other words, over 80% of VC/PE funds are sourced from state capital. This scene is undoubtedly profoundly influencing China’s venture capital ecosystem, with structural changes occurring across fundraising, investment, management, and exit stages in recent years.

In this context, Shanghai’s “Guiding Opinions” arrive timely, with several detailed rules directly addressing pain points: clarifying procedures in fund establishment, asset valuation, investment decision-making, performance evaluation, and more. While relaxing restrictions on state funds, they also require these institutions to develop independent judgment and effective competition capabilities.

As stated in the “Guiding Opinions,” “market-oriented” is placed at the forefront, emphasizing adherence to the long-term, high-risk, human-centric characteristics of private equity funds, improving market-based incentive and constraint mechanisms, and aligning fundraising, investment, management, and exit processes with market rules.

This scene is highly exemplary. Many other cities may follow suit, and the ecosystem of state-owned funds could thus enter a new chapter driven by marketization.

Below is the full text of the “Guiding Opinions”——