context: The State Council executive meeting on 16 June approved an action plan to strengthen the financing of technology-based enterprises. GGFs (government guidance funds) combine public and private capital with the aim of generating profit while also advancing the government's strategic objectives. A number of large GGFs have been announced in 2023.
Large-scale GGFs (government guidance funds) continue to transform the domestic venture capital ecosystem, reports China Economic Weekly. Traditionally, the article explains, the Chinese private equity market heavily relied on foreign capital, backing tech companies like Tencent, Baidu, Sohu, Netease, Alibaba, Xiaomi, Bytedance and Meituan. However, over the last two decades, the article explains, GGFs rose to prominence with
- local experiments with state-owned venture capital in Beijing and Shanghai around 2000
- the first national GGF in 2007
- guiding opinions on the standardised establishment and management of GGFs in 2008
- temporary management measures for government investment funds in 2015, which kickstarted rapid growth of central and local GGFs
According to the article, by 2022, the number of GGFs had risen to 2,107, accounting for an impressive 60 percent of domestic private equity investment, with a total capital scale of around C¥6.5 tn (target scale of C¥12.8 tn). Within just a few years, GGFs have transformed from venture capital newcomers to the most important LP (limited partner) fund investors in equity funds.
This has transformed expectations for GP (general partners) such as fund managers, an unnamed partner at a leading investment institution says. While US-based venture capital funds only aimed for capital returns, state-owned LPs have additional expectations for contribution to national policy or local employment, he explains.
The article highlights the increasing importance of local GGFs, as summarised in the table (2022 data):
|
share of GGFs |
share of capital |
capital scale y-o-y growth |
|
|
national |
1.50% |
7.47% |
-:- |
|
provincial |
24.31% |
38.44% |
19.81% |
|
municipal |
53.4% |
42.69% |
12.62% |
|
district/county |
20.78% |
11.40% |
53.87% |
The emergence of GGFs in less affluent western regions of the country comes with complications, says Huang He 黄河 Northern Light Venture Capital partner. He suggests that GGFs alone cannot overcome weak industrial foundations and business environments. He warns against establishing GGFs in counties that lack viable investment targets, as this could lead to the squandering of resources.
The rapid emergence of large-scale GGFs also raises concerns about potential market bubbles in sectors like energy storage, NEVs and integrated circuits. Huang underscores the problem of an imbalance between primary market investments (where new securities are created) and the secondary market (where securities are traded), particularly in the industrial technology sector. This discrepancy may be indicative of a lack of capacity to absorb the volume of investments in the secondary market.
Supervision remains a tough challenge, an unnamed previous employee of a provincial GGF says. Given the high-risk nature of venture capital, assigning culpability for individual failures can be difficult; yet without repercussions for failure, there may be tendencies towards inaction, arbitrary investments and corruption. An additional challenge is created by inexperienced personnel among state-owned LPs who often task unqualified GPs with fund management.