Beijing-backed technology funds that manage nearly $900 billion are struggling to meet their dividend targets, according to executives who say their capital is stuck in companies that cannot launch initial public offerings and are unattractive to investors.
“Traditional exit strategies for private equity funds are not working well for us,” an executive at Zhongyuan Science Innovation Venture Capital, a state-backed investment fund in central Henan province, told the Financial Times.
“Our investment decisions are more about policy considerations than market principles,” added the executive, who asked not to be named.
Since its creation in 2015, ZSI, which has invested in more than a dozen start-ups in one of China’s poorest provinces, has been unable to offload stakes in two-thirds of its portfolio companies.
These range from agricultural machinery makers to social media sites, many of which are hardly enough. As a result, ZSI is unlikely to meet its six-year liquidation deadline in December.
ZSI is just one of thousands of Chinese government’s Guidance Funds, or GGFs, that may not be able to liquidate their investments on time. GGFs, which operate similarly to private equity funds, represent one of Beijing’s most important efforts to nurture domestic innovations such as the rivalry between the United States and China. squeezing How much Western technology is available to the world’s second largest economy.
However, the initiative has come under scrutiny, with GGFs policy-driven investment strategies and market-based performance objectives facing conflict.
“There will be a real account of the government’s guidance money,” said Andrew Collier, managing director at Orient Capital Research in Hong Kong.
While Chinese GGFs emerged in the early 2000s, they didn’t take off until 2014, when the State Council announced plans to aggressively expand the industry to address Financing technology startups Shortage.
The initiative was intended to replace direct government subsidies, which Beijing began to scale back in mid-2010 when the practice came under pressure for being ineffective and undermining fair competition.
This led to an increase in intergovernmental funds, the capital of which came from central and local financial budgets. Chinese provinces and cities had hoped that investment vehicles could build industry leaders.
By the end of March, China had 1,877 GGF funds managing a total of 5.7 trillion renminbi ($892 billion), according to Beijing-based advisory firm Zero2IPO. A decade ago, there were 71 funds under management of 83 billion renminbi.
“GGFs are one of the largest and most active players in the private equity industry in China,” said Li Lei, CEO of GGF in Beijing. “No one can compete with the government’s resources.”
The investment boom has breathed life into some local businesses. Nio, the once-struggling electric car maker, has changed his fortune afterwards Receiving an investment of 7 billion RMB last April of three GGFs. Since then, the shares of the New York-listed auto company have risen more than 10 times as the company reported a jump in sales.
successful bet on Nio, However, many failures followed. Public records show that China’s GGF funds have withdrawn less than a quarter of portfolio companies that have received funding for more than six years. This has put many funds, which are nearing the end of their life cycle, under pressure as they struggle to implement their exit strategies on time.
As with private equity funds, most public investment funds are regulated on a fixed-term basis so that their capital can be reallocated to new investments.
“I can’t think of a quick fix to the problem given our flawed business model,” said Lee, who faces a December deadline to part with seven companies.
Poor investment decisions are partly to blame for the exit delay. Most GGFs, especially those funded by local governments, face geographic and industry constraints on where they can allocate their funds. These requirements are driven more by policy priorities than business logic, and have led to the emergence of many underperforming investments.
Li said her fund, backed by Beijing’s municipal government, has a mandate to invest at least 70 percent of its money in specialty chemicals and advanced manufacturing firms in the capital, where those industries are underdeveloped.
“We had to buy into companies that were not qualified to meet the quota,” he told me. “It affected investment results.”
To improve performance, many GGF funds have changed their startup-based investment strategy to focus on established companies seeking a public offering, the traditional exit channel for private equity funds.
However, the axis was hampered by Beijing’s decision Tighter approvals for stock lists This year to protect investors. Official data showed that nearly half of the IPO applications on the Shanghai and Shenzhen stock exchanges failed to move forward in the first four months of this year.
“We have given up hope of divesting through IPOs due to regulatory tightening,” said Wang Qi, investment director of GGF in Zhejiang Province.
With few other options and liquidation deadlines approaching, some GGF funds have decided to divest their investments with lower-than-expected profits — or even losses. In April, Wang’s fund sold a stake in a local machine tool factory it bought five years ago for a 20 percent profit, a low return by industry standards.
“Our priority is to achieve policy goals and prevent the loss of state assets,” Wang said. “We are not a market-based entity that only cares about investment returns.”