21st Century Business Herald reporter Chen Zhi reported from Shanghai
With the tightening of IPOs in the A-share market, venture capital is feeling the pressure of new project exits.
According to the data, due to the impact of the new IPO regulations and other factors, as of June 24, the number of projects withdrawn since June reached 83, nearly twice the number of projects withdrawn in May (42).
This has put new pressure on venture capital management teams (GPs) to hold their LPs accountable.
"These days, LPs have called to ask why venture capital institutions chose these companies since the investment projects could not meet the requirements of A-share IPO review, and whether there was a problem of interest transfer." A partner of a venture capital institution said to reporters.
At present, he has been clarifying to LPs that there is no benefit transfer problem, and that the rejected projects mainly suffer from defects such as equity incentive compliance and business compliance, and once the internal rectification of the enterprise is completed, they will promote the company to choose the opportunity to submit the IPO application again.
The venture capital partner admitted that at present, LPs are anxious about the prospect of project exit, and if the investment project fails to IPO for a long time, it is very likely to affect the interest of LPs in investing in PE/VC in the future.
The reporter learned that with the tightening of A-share IPOs, more and more venture capital institutions are actively lobbying investment companies to list overseas. The reason for this is that most venture capital institutions believe that the operation progress of overseas listing of enterprises is faster than that of A-shares, which may alleviate the dilemma of the current IPO exit of projects to a certain extent.
Wu Meng, director of the Second Department of Market Supervision of the China Securities Regulatory Commission, said that the China Securities Regulatory Commission will continue to maintain the smooth channels for overseas listing of enterprises. After the implementation of the "Trial Measures for the Administration of Overseas Issuance of Securities and Listing of Domestic Enterprises" in March last year, as of June 21 this year, a total of 158 enterprises have completed the filing of overseas listings, of which 85 are listed in Hong Kong and 73 are listed in the United States. Subsequently, the China Securities Regulatory Commission will continue to strengthen coordination and cooperation with all parties, strengthen the dynamic evaluation of policies, and promote the implementation and implementation of measures such as "improving the exit mechanism for venture capital".
A number of venture capital institutions pointed out to reporters that at present, they have taken the promotion of overseas listing of enterprises as the most important work this year. After all, only when more projects achieve IPO exits, they can return the investment principal income to LPs as soon as possible, and persuade them to continue investing in PE/VC funds.
It is worth noting that while actively lobbying enterprises for overseas listing, more and more venture capital institutions are also looking forward to the acceleration of the exit of A-share listed companies. Affected by the new regulations on the reduction of shares of listed companies, the GP teams of many venture capital institutions have also encountered doubts from LPs about whether they can liquidate all the shares of A-share listed companies before the maturity and liquidation of the fund, so as to achieve the IPO exit of all projects and the return of investment principal income. In this regard, the GP team of many venture capital institutions frankly admitted that they "have no bottom in their hearts".
At present, the relevant departments are also aware of this problem.
In recent years, the China Securities Regulatory Commission (CSRC) and other relevant departments have carried out a pilot project on the physical distribution of shares by private equity venture capital funds, allowing the former to distribute the shares of listed companies held by them to investors (LPs) through non-transaction transfers, and on the other hand, they have paid attention to the role of the "reverse linkage" mechanism of private equity venture capital fund share reduction and investment period, and adopted differentiated regulatory measures for the IPO withdrawal of venture capital fund projects.
According to the data, as of the end of the first quarter of this year, the relevant departments have handled more than 2,000 applications for "reverse linkage".
Xu Zewei, chairman of 91 Technology Group, believes that whether it is the "reverse linkage" initiative or the promotion of the pilot of private equity venture capital funds to distribute shares in kind to investors, it will help improve the efficiency of venture capital funds' project IPO exit operations, promote the virtuous cycle of "investment-exit-reinvestment", and then smooth the exit channels of private equity venture capital funds, attract more capital to participate in long-term equity investment, and expand the scale of "patient capital".
The above-mentioned venture capital partner believes that at present, some LPs also recognize the adoption of in-kind allocation of shares by venture capital funds when they are settled at maturity, because they have also noticed that if venture capital institutions sell all their shares before the fund is liquidated at maturity, it will cause the stock price of listed companies to fall and weaken the real rate of return on project exit.
The reason for venture capital is to re-promote the overseas listing of enterprises
In the face of the tightening of A-share IPOs, more and more venture capital institutions are promoting the overseas listing of investment companies.
"At present, we are convincing the companies in the Internet services, biomedical R&D, and large consumption sectors that we have invested in to consider listing in Hong Kong." The head of the post-investment management department of a venture capital institution told reporters. Although many investment companies are worried that the valuation and stock trading activity of Hong Kong-listed companies are not as good as those of A-shares, compared with the repurchase pressure of entrepreneurs caused by the failure of the IPO VAM agreement, listing in Hong Kong is still a "cost-effective" option.
In his view, another factor driving venture capital institutions to push for overseas listings of enterprises is that relevant departments are speeding up the progress of overseas listing filings.
The head of the post-investment management department of the venture capital institution pointed out to reporters that they were worried that it would take a long time for the company to get the notice of filing for the overseas issuance and listing of the enterprise approved by the International Department of the China Securities Regulatory Commission. However, in practice, a number of mainland authorities have reviewed and confirmed within a relatively short period of time that the personal information protection and cross-border data flow security measures of the investment enterprises comply with the relevant policy requirements, resulting in a significantly shorter than expected time for the relevant enterprises to obtain the filing notice for overseas issuance and listing.
The reporter learned that in terms of personal information protection and cross-border data flow security assessment, the assessment and review requirements faced by 2C-end enterprises for overseas listing are relatively higher, including whether the enterprise has established effective measures to protect personal information, whether it over-discloses personal information in terms of cross-border data flow, etc., in contrast, the overseas listing of 2B-end enterprises focuses more on whether to take effective measures to avoid the leakage of key scientific research and technology information, and the corresponding business rectification pressure of the enterprise is relatively small, and the probability of approval is relatively higher.
An investment banker told reporters that the current regulatory focus of relevant departments on the overseas listing of enterprises is mainly focused on the compliance of enterprise equity incentives, business compliance, whether to conceal related party transactions or fictitious profits, data and network security, etc. In response to the current trend of regulatory inquiries on overseas listings of enterprises, investment banks and venture capital institutions are actively cooperating to enhance the guidance of investment enterprises on corporate governance and equity structure compliance, equity incentive compliance, data security protection, business compliance, taxation and other aspects, so as to further improve the operational efficiency of enterprises in obtaining overseas listing filings.
It is worth noting that more and more PE/VC fund contributors (LPs) are supporting overseas listings. Originally, they preferred to list on the A-share market, so as to obtain a higher valuation and project exit return. Nowadays, they are more focused on the early exit of fund investment projects and the return of investment principal profits as soon as possible.
The person in charge of the post-investment management department of the above-mentioned venture capital institution told reporters that there are actually differences between different LPs for the overseas listing of enterprises. For example, LPs who participate in early-stage venture capital fund investment generally hope that the company can go overseas as soon as possible, because the early-stage investment of the project has created relatively rich investment returns; On the other hand, LPs participating in pre-IPO funds oppose the "bleeding listing" of enterprises, because the lower valuation of enterprises given by overseas capital markets will increase their investment losses.
A multi-pronged approach to solve the problem of exiting A-share listing projects
It is worth noting that in the face of stricter regulations on the reduction of shares of A-share listed companies, more and more LPs are worried that when the venture capital fund is due for settlement, the projects invested (after the A-share listing) will still not be able to cash out all the shares.
The partner of the above-mentioned venture capital institution revealed to reporters that recently, he has been asked about this topic by many LPs. At present, what they can do is to seek stock exits through the block trading market to mitigate the sharp stock price volatility caused by the reduction of holdings.
"However, some mid- and late-stage investment projects still face stricter shareholding reduction regulations after the A-share listing; In addition, in order to obtain a higher rate of return on project exit, we need to wait for a better time to reduce our holdings of stocks, which may result in the stocks not being fully cleared and cashed out when the fund is liquidated at maturity. He confessed. This is likely to further affect LPs' interest in continuing to invest in PE/VC funds. After all, when many LPs decide to invest in a new PE/VC fund, they will refer to the financial data such as DPI (return on capital investment) and IRR (internal rate of return) of previous PE/VC funds.
At present, the relevant departments are also aware of this problem.
In recent years, the relevant authorities have promoted pilot projects in Shanghai, Beijing and other places for private equity venture capital funds to distribute shares in kind to investors, and on the other hand, they have implemented the "reverse linkage" measure for private equity funds, that is, the listing release period of private equity fund investment enterprises is "reverse linked" to the length of the investment period before the investment project is listed. If the private equity fund invests in the enterprise for a longer period, the shorter the lock-up period for the relevant company to be released after listing.
In addition, the relevant authorities have also lifted the restriction on the proportion of private equity investment funds with an investment period of more than five years.
The venture capital partner told reporters that at present, they have applied for a "reverse linkage" for individual A-share listing projects, which will also help alleviate LPs' concerns about the withdrawal of related companies' stock holdings.
Xu Zewei believes that compared with the traditional practice of venture capital funds first reducing their holdings of stocks and then distributing cash to LPs, private equity investment funds can not only effectively avoid the stock price impact caused by large-scale shareholding reductions, but also meet the differentiated investment needs of different investors, improve the efficiency of project independent exit decisions, and further break through the "obstruction" of private equity investment fund project exit.
The above-mentioned venture capital partner said that at present, they have also begun to talk internally about the feasibility of in-kind distribution of shares, and what needs to be solved in this work is the valuation corresponding to the in-kind distribution of shares, because this affects whether GPs can obtain considerable excess profit dividends.
He said frankly that in the current venture capital environment, in order to improve the overall return on investment of the fund, the GP team of some venture capital institutions has made a lot of concessions in excess profit dividends, such as raising the threshold for GPs to obtain excess profit dividends, and not charging excess profit dividends for a single exit project that fails to achieve the expected rate of return. The main purpose of this move is to enable LPs to enhance the "sense of gain" of equity investment returns, attract them to continue to invest in PE/VC products, and smooth the virtuous cycle of "exit-fundraising".
For more information, please download the 21 Finance APP