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 Managed by Regulated Enterprises Under the City SASAC Supervision” (hereinafter referred to as the “Guiding Opinions”). It has put forward 16 work measures from three aspects: strengthening the directional guidance, enhancing capabilities, and improving mechanisms, to help state-owned capital become long-term, patient, and strategic capital for serving industrial development.

A Securities Times reporter noted that the “Guiding Opinions” focuses on the entire fund operation process, including fund establishment, asset appraisal, investment decision-making, and more. It further improved and supplemented the “Measures for the Business Management of Private Equity Investment Funds of Regulated Enterprises Under the City SASAC Supervision” (hereinafter referred to as the “Fund Management Measures”), which the Shanghai Municipal Commission of State-owned Assets issued in August 2024.

For example, the “Fund Management Measures” stipulate that when a regulated enterprise initiates the establishment of or participates in an investment fund, it shall conduct a prior filing or report to the Shanghai Municipal Commission of State-owned Assets after the group review and approval. The “Guiding Opinions,” for the special scenario where a regulated enterprise initiates the establishment of a fund but does not contribute capital, clearly set requirements for filing after implementation, with each regulated enterprise responsible for overall coordination and management.

The “Fund Management Measures” require that regulated enterprises should fully leverage the fund’s capital amplification effect. Based on different types of funds, it sets an upper limit on the subscribed contribution ratios on a principled basis. The “Guiding Opinions,” in light of survey findings, states that for regulated enterprises initiating and establishing single-asset special funds within the scope of their principal business, the subscribed contribution ratio may be relaxed, and it supports regulated enterprises in appropriately simplifying internal establishment procedures.

In terms of investment decision mechanisms, the Shanghai Municipal Commission of State-owned Assets explained that the research found that state-owned LPs in the market have a certain “GP-ification” trend. By seeking to have their representatives nominated as members of the investment decision committee, they ensure their own interests, and that the votes are overwhelmingly implemented in an “institutional vote” mode, which to some extent affects investment decision efficiency. In response, the “Guiding Opinions” proposes that regulated enterprises may safeguard information rights and supervisory rights by appointing investment decision committee observers or members of an advisory committee, among other methods. For cases where it is indeed necessary to nominate investment decision committee members, it should nominate personnel with the capability to perform their duties and can help improve the level of investment decision-making, and it also supports them to independently issue investment decision opinions within their authorization scope (i.e., “individual votes”). At the same time, it further encourages state-owned venture funds to introduce a certain proportion of industry experts as members of the investment decision committee according to needs, in order to enhance the professional capability of investment decision-making.

Given that excellent fund managers have strong professional capabilities and can precisely uncover the potential value of early-stage hard-technology projects, forming pricing that is more aligned with market rules and industry credibility, the “Guiding Opinions” further clarifies that after relevant decision procedures, regulated enterprises may, in a differentiated manner, set conditions for state-owned capital contributions by excellent fund managers, such as the proportion of state-owned capital contributions, hurdle return rates, and the bases for calculating management fees, and that for funds primarily investing in seed-stage and early-stage technology-based enterprises, the requirements may be further relaxed.

For lead-investment pricing capability, considering that early-stage projects have high uncertainty and often lack financial indicators that can be referenced, the investment team’s valuation and pricing capability is required to be higher. The “Guiding Opinions” emphasizes that state-owned venture funds should adopt scientific valuation methods that are suitable for different growth stages of technology companies. It highlights key indicators such as the core team’s capabilities, the intensity of R&D investment, technological originality and breakthrough potential, patent quality, the strategic position in the industrial chain, growth expectations, and more, so as to genuinely enhance lead-investment pricing capability in early-stage technology innovation fields.

Co-investment and profit-sharing of excess returns are incentive-and-constraint mechanisms commonly implemented in market-oriented funds. To further align with market-oriented funds, the “Guiding Opinions” encourages industrial investment funds and financial investment funds to implement co-investment mechanisms. It also supports management teams to obtain co-investment returns and excess return profit-sharing by holding employee co-investment platforms (SLPs) or GP shares.

In terms of the performance evaluation system, the “Guiding Opinions” emphasizes that regulated enterprises should follow the laws governing fund investment and operation, and implement an evaluation mechanism that combines annual assessments with long-cycle considerations. It will tolerate normal investment risks and not simply use the profit and loss of a single project or a single year as the basis for evaluation, thereby eliminating concerns about investing in early-stage projects. At the same time, it requires that regulated enterprises set financial indicators and non-financial indicators in a differentiated way according to the fund type and the operational stage.

The “Guiding Opinions” also clearly states that when a regulated enterprise transfers fund shares, or when a company-style fund transfers equity of investee companies that have already been invested in, it may reasonably determine the magnitude of pricing adjustments based on valuation reports issued by third-party institutions, taking into account factors such as project circumstances, comparable market cases, asset liquidity, and more, in order to safeguard the rights and interests of state-owned capital and improve exit efficiency. The Shanghai Municipal Commission of State-owned Assets stated that when approving a state-owned fund’s plan to transfer its fund shares, regulated enterprises may also synchronously approve the upper limit and lower limit of stepwise pricing adjustments in cases where no intended transferee is collected later, thereby improving transaction efficiency.

[Editor-in-charge: Dong Pingping]

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