NIE 2023 | Roundtable Forum: The New Venture Capital Ecosystem in China's Equity Market

Host Chen Qingpeng:In the first half of the year, the entire Chinese equity investment market continued its overall downward trend. The number and scale of new fund subscriptions on the fundraising side decreased by 0.3% and 23.5% year-on-year, especially for foreign currency funds, which saw a 54.9% and 35.4% year-on-year decline in subscriptions and scale; the investment side was also sluggish, with the number of investment cases and amounts dropping by 37.5% and 42%, respectively; on the exit side, a total of 1,326 exits occurred in the first half of the year, a year-on-year decrease of 32.6%. Currently, IPOs account for 77.8% of VC and PE exits. Another particularly noteworthy statistic is that the five-year survival rate of small and medium-sized enterprises is less than 7%.

Therefore, the situation of the entire Chinese equity investment market in the first half of the year was indeed severe, posing greater challenges to parent funds, investment institutions, real enterprises, and even our intermediary service institutions.

So, my first question is, in the face of the current market downturn, what preparations do we have made as both fund-of-funds and investment institutions, as well as venture capital firms and intermediary service providers? What adjustments have we made to our strategies?

Suzhou Industrial Park Guidance Fund Management Office, Qin Da

Qin Da from the Fund Management Office of Suzhou Industrial Park Guidance Fund:Firstly, although we are a parent fund, we also have the label of a government-funded guiding fund. In this year's increasingly severe investment environment and exit situations, whether it is a state-owned asset parent fund or a direct investment fund of state-owned assets, we should assume the role of a counter-cyclical regulator.

From the perspective of our actual business operations, we have always maintained a steady and gradual approach. Whether it's direct investment or parent fund management, overall, most of our support is directed towards early-stage projects and early-stage investors. We have been implementing the strategy of investing early and in smaller, harder-tech companies since a very long time ago. Therefore, under the current environment, we will not make too many adjustments and will continue to maximize the counter-cyclical regulatory role that state-owned assets can play in this context.

As state-owned assets, as a guiding fund, and as direct investment from state-owned assets, in times of capital winter and difficult times, we may be more inclined to help enterprises. We will also provide support to enterprises from the perspective of the entire policy service system, and we will work with financial institutions to provide them with policy-based financial products to support enterprises.

Zhang Wei, Partner of Baojiang Capital Management:Judging from the investment situation of Baojiang Capital in the first half of the year, in fact, the number of projects we are investing in has not decreased, remaining relatively consistent with that of previous years' first halves. This is because most of our LPs are high-net-worth individuals, and to date, we have not yet connected with more government resources.

In the context of such a general environment, our country's relevant policies are to invest early and in technology, which is also a new trend at present. Therefore, there are not significant changes in our investment direction or stage.

However, we have also made some new adjustments, mainly in four areas. The first point is that we have increased our services to the invested companies, especially focusing on their revenue and the integration and coordination of their internal industrial chains. The second point is that we have adjusted our investment breadth, for example, increasing the depth of our investment, including research depth, in hard technology areas or investment directions that show clear growth prospects over the next 3 to 5 years. The third point is that at this stage, we have reduced the amount invested per transaction, hoping to collaborate more with other investment institutions to ensure the support of existing shareholders in the future of the invested companies. The fourth point is that we have greatly strengthened the level of in-depth communication with companies we intend to invest in and those we have already determined to invest in, to ensure that we can understand them more profoundly and achieve greater coordination in their future growth processes, including refinancing, industrial planning, and product technology development paths.

Overall, the investment direction of the company has not changed much, only that it has been deepened and refined, with more collaboration in serving enterprises.

Xiao Xia, Vice President of Investment and Head of Research Department at Great Wall Capital

Xiao Xia, Vice President of Research and Investment at Great Wall Capital and Head of the Research Department:As a relatively new investment institution, our feelings may not be exactly the same. This is because we have only been in this market for a short time and we are in a very hot sector, which is the integration of automotive intelligence with chips. From our overall perspective, we are quite optimistic. Although the number of investment projects is not large, our investment focus is quite concentrated.

This is also based on several main reasons. Firstly, the entire equity investment process is a long-term one, so the impact of short-term fluctuations is relatively smaller in the long run. Secondly, at present, whether it's sensor or algorithm changes, or the support of related chassis technology, the entire intelligent driving sector is actually in the pre-explosion phase. This phase may be similar to the situation of battery new energy in 2014 or 2015. Therefore, we are very optimistic about this industry.

Partner Yao Jiaqian of Zhongxing Huasu Certified Public Accountants:As an intermediary service institution, ZTE Hua Certified Public Accountants shares some resonances with the thoughts of the previous speakers but also has some differences.

I believe that the first point is to build confidence, and at the same time maintain a calm mindset. ZTE Hua has always been committed to playing the role of an investor's companion, focusing more on post-investment management and exit strategies. We will provide more value-added or empowerment services in post-investment management, such as building equity structures and models, including financial and tax consulting services. On the other hand, we need to be prepared ourselves. Although the current market is cold, when the next opportunity comes, we can seize it and wait patiently for the flowers to bloom.

Q&A

Host Chen Qingpeng:I have also recently captured some consensus from conversations with leading investment institutions. One consensus is that the current period is a great opportunity for layout; another consensus is that in the long term, it is possible that the time that parent funds and investment institutions spend with invested companies will be extended, and invested companies will seek more help from parent funds and investment institutions. Parent funds, investment institutions, and intermediary service providers actually each have their own capacity boundaries and hope to introduce ecological partners to leverage the strength of others to continuously empower their invested companies.

Therefore, we also invite all the guests to share with us how their institutions are currently establishing their own ecosystems to continuously empower the invested enterprises.

Qin Da from the Fund Management Office of Suzhou Industrial Park Guidance Fund:From the perspective of fund ecosystem, our park's guiding fund, including the entire Suzhou Industrial Park, has actually started very early. Relying on the Suzhou Industrial Park Enterprise Development Service Center, which is a directly affiliated institution under the Management Committee, it provides one-stop services for all policies related to enterprises within various bureaus and offices of the park management committee. It serves as a window for all enterprise needs, whether they involve investment and financing, talent, or even children's education and housing purchases.

Based on such a platform and capabilities, we have established our park's guiding fund and direct investment fund: the Suzhou Industrial Park Science and Technology Innovation Fund. We have been investing in building a deeper ecosystem for several years. Initially, we established an empowerment and cultivation program for 'leading venture capital firms', organizing visits and connections between large enterprises for projects they invest in, whether direct investments or early-stage sub-funds. This allows them to form their own 'circle of friends'. We also form a 'Listed Seedling Plan' for more mature enterprise clusters, screening all enterprises in the park that have the potential to go public according to the relevant requirements of the China Securities Regulatory Commission. Currently, there are nearly 400 enterprises in the listed seedling plan. We have stratified these 400 enterprises into basic, key, and pre-listing tiers, which can be said to mean that new listed companies must have graduated from the seedling program.

The courses of the Nursery Program are slightly different from the empowerment system of leading venture capital firms mentioned earlier, as it is targeted at mature large enterprises. In addition to common corporate governance demands and assistance, they also need the connection with intermediary institutions, including securities firms, law firms, accounting firms, and consulting agencies like Frost & Sullivan. In the future, enterprises will encounter various problems during the listing process, and we will break them down into specific categories based on the issues that enterprises may face during this process.

In addition to the enterprise itself, we have segmented our courses for corporate teams into CEO classes, corporate secretary classes, and corporate sales teams. We also aim to help enterprises improve their capabilities in various aspects from a government perspective, while building a relatively solid 'circle of friends' that can truly foster cooperation.

In addition, we are also actively empowering the ecosystem of post-investment enterprises from various dimensions. On one hand, this includes collaborating with consulting firms like Frost & Sullivan. For enterprises' development issues and those during the listing process, we strive to provide relevant services and support.

Zhang Wei, Partner of Baojiang Capital Management

Zhang Wei, Partner of Baojiang Capital Management:At the beginning of establishing Boyang Capital, we formed a post-investment team. Over the years, our investment team has grown from a few individuals to a large department with over a dozen people now. There is a dedicated vice president who oversees the post-investment team directly. As a result, there have been significant improvements in its functions, service scope, and other aspects.

Bojiang Capital has always adhered to the basic principle of 'helping without causing trouble'. We have witnessed significant changes in the overall economic state, which are no longer about investment institutions simply providing funds or gathering information to solve problems for enterprises. Therefore, in recent years, we have gradually formed two cycles. The first cycle is the establishment of an internal data chain among nearly 90 invested enterprises. The first is our product sales cooperation with the invested enterprises; the second is resource orientation, leading to resource exchange among invested enterprises, even complementing each other; the third is the establishment of talent exchanges among all enterprises through talent construction.

The second loop involves providing training to the enterprises themselves. We have a large internal value alliance platform, which allows us to invite leaders and managers from invested companies to Bojiang for in-depth communication. We also invite experts, professors, leaders from large enterprises, and resource providers to give lectures and hold discussions there.

In terms of external cooperation, we are actively building several very important sectors. The first sector is the marketing and promotion of our invested companies; the second sector involves collaborating with listed service companies like Frost & Sullivan, which enables us to detect issues that may arise during the future listing process of enterprises, ensuring a smooth subsequent listing for these companies.

Xiao Xia, Vice President of Research and Investment at Great Wall Capital:As a strategic investment institution among private enterprises in the industry, Great Wall Capital may have a different positioning after investment compared to most financial investment institutions. This is because we are not only investors; for the companies we invest in, we are also influential players in the industry. Our focus is relatively narrow, and among the projects we deal with each month, we include both the companies and their competitors. Even after making investments, we may need to meet with competitors, suppliers, or customers due to business requirements. Therefore, overall, our role in the industry is to connect these new, including domestic products, to accelerate the development of intelligentization across the automotive industry.

Post-investment management has also become an increasingly important part of us, and I believe that cooperation among institutions is very important.

Partner of Zhongxing Huasu Certified Public Accountants Firm, Yao Jiaqian

Partner Yao Jiaqian of Zhongxing Huasu Certified Public Accountants:ZTE Hua hopes to deepen cooperation with more and more investment institution partners. On one hand, in terms of post-investment management value-added services, we can provide more financial and tax consulting services, including financial and tax pain points that investment institutions face during development; on the other hand, our capital market business department will also offer pre-IPO health checks and IPO accountant services, aiming to empower the invested enterprises comprehensively and provide support for VCs/PE exits.

Host Chen Qingpeng:Speaking of this, I would also like to briefly add that YUAN CAPITAL is a private equity fund management platform established by Frost & Sullivan in collaboration with the LeadLeo Research Institute, implementing the concept of pan-region investment management. Leveraging Frost & Sullivan's strengths in consulting and research, we have built an internal knowledge-sharing system. The first aspect is project sharing; Frost & Sullivan and LeadLeo come into contact with a large number of companies planning to go public every year, whether domestically or internationally, providing us with a pool of high-quality projects. Based on our accumulated experience as industry advisors and researchers in the IPO sector, our understanding of the industry may be deeper, which can be shared internally.

Frost & Sullivan has long maintained a high market share as a listed industry advisor, which is inseparable from our long-term close cooperation with many intermediary institutions such as securities firms, law firms, and accounting firms. Moreover, we make some new attempts every year. For example, last year at the summit, we established an expert committee on science and technology innovation; this year, we set up an expert committee on specialized and innovative technologies and an expert committee on life science and technology. We hope these committees will play a positive role in promoting technology and judgment in the coming period.

Q&A

Host Chen Qingpeng:Currently, it is actually a very good time for investment layout. Many investment institutions are very confident about the present. Asset prices are relatively more rational than before. So, I would also like to ask all of you, guests, what your outlooks are for the equity investment market in the next 3 to 5 years?

Qin Da from the Fund Management Office of Suzhou Industrial Park Guidance Fund:In the long run, it is believed that the future will always be bright. However, in the short term, investment institutions have shifted their focus to post-investment management. Additionally, the current composition of fund capitalization shows that state-owned assets account for a very high proportion, which is a clear change. The funds raised by state-owned assets inherently carry local government demands, thus increasing the requirements for the capabilities of investment institutions.

Overall, whether it's the parent fund or investment institutions, the duration of their support for enterprises has been extended. Currently, IPO exits account for nearly 80%, but will this proportion remain high in the future? My belief is that the proportion of exits through listing may decline in the future, and there may be more and more serial entrepreneurs. By doing one thing well, selling it off to start another, the entire ecosystem will operate like a catfish effect, where experienced individuals with historical performance re-enter the entrepreneurial industry, which will promote a better overall innovation and entrepreneurship environment.

Zhang Wei, Partner of Baojiang Capital Management:Bojiang Capital's understanding of the future equity investment market is mainly viewed from several aspects. First, consider the superposition of several events: the first is the global economic cycle point, the second is the competitive relationship between China and the US, and the third is the development of Chinese society, especially the understanding of the foundation of economic development, which is crucial.

In addition, there are several situations that we can analyze clearly. The first point is that we can see whether the European and American markets, which we have previously focused on, will remain key markets in the future? Emerging markets such as the Middle East and Asia-Pacific will also become important markets for us in the future.

Secondly, the state is making efforts in interest rate policies and various financial measures, including the integration of the securities market. Through these integrations, it can be seen that the state is striving to promote the construction of China's secondary market and equity market. Only when the cost of corporate financing is reduced will there be greater growth opportunities for enterprises in the future. We can refer to the social development process of European and American companies for this.

As we all know, equity investment, including the reform of financial markets, has been somewhat extensive in our previous development. Therefore, we are now gradually making reforms, optimizing and enhancing them. What we need most at present is confidence, which comes from the belief that we can make money in the secondary market and see these profitable projects refinance and go public on our equity market.

We must also firmly believe that we need to see the strength of the country, especially the strength of the Chinese government.

Xiao Xia, Vice President of Investment and Head of Research Department at Great Wall Motor:We focus on the field of automotive intelligence, so from the perspective of the automotive industry, the changes that may occur in the past few years and in the future are actually quite clear. For example, ten years ago, the competitiveness of domestic full-vehicle brands was very limited, but in recent years, domestic cars have demonstrated strong competitiveness.

Not only the complete vehicle, but about five years ago, companies like Bosch and Continental were still considered high-end. However, today, for Bosch, whether it's the chips in the chassis, millimeter-wave radars, or electric drives, they are actually being eroded by domestic Tier 1 suppliers. Although there may still be some gaps in some details compared to Bosch and Continental, overall, the technological gap is rapidly narrowing.

In the field of analog chips, the situation is currently similar. The progress of analog chips or major digital chips may be slightly slower than that of tier-1 chips, but they are currently at a critical point where a breakthrough is imminent. Especially in terms of the market, China accounts for more than one-third of the global automotive market, and mobile phones are mainly produced in China. China is also the largest market for industrial and security products. These factors have actually led to the conclusion that from a global perspective, the best entrepreneurial opportunities are in China.

In deep learning algorithms, such as machine vision, in the past eight to ten years, the proportion of first and second authors from Chinese people among the top 50 to 100 influential papers in the industry was probably over 80%. This is a very exaggerated number. From these detailed perspectives, it gives us great confidence. From an investment perspective, the best opportunities are definitely in domestic private equity, which offers very high cost-effectiveness in terms of investment.

Chen Qingpeng, Deputy General Manager of YUAN CAPITAL

Host Chen Qingpeng:Actually, I've been working on some research projects recently, mainly focusing on the exit market of private equity funds between China and the United States, and another one is studying the impact of the registration-based system reform on the exit of private equity investment funds.

The United States can be considered a relatively mature market. The proportion of private equity exits is quite high, accounting for nearly 50%. IPOs only account for about 20%, with nearly 30% coming from mergers and acquisitions.

However, China is different. Currently, almost 80% of VC/PE fund exits in China still come from IPOs. The state has also recognized this issue and has been vigorously promoting the development of S funds in recent years. Especially after the new asset management regulations in 2018, the equity market has faced a significant liquidity problem. The vigorous development of S funds has greatly promoted liquidity and sustainable development in the entire equity investment fund market. Therefore, it can be predicted that S funds will make significant progress and development in the entire Chinese equity investment fund market over the next few years.

With the growth of China's economy and the vigorous outburst of innovation, equity investment has now become an important engine driving technological progress and economic growth. We can foresee more startups emerging, more VC/PE institutions participating in the market, and more technological innovations that will change our lives. This will not only provide a better entrepreneurial environment for us entrepreneurs but also create more value and returns for our investors and society.