Beijing primes market for proliferation of VC fund launches

China’s central government has said it will invest in start-up and existing venture capital funds that meet a new set of requirements in strategically important emerging industries.
Beijing primes market for proliferation of VC fund launches

The market could see a wave of venture capital fund launches in China after the government said it plans to invest capital into start-ups in strategically important emerging industries.

The measures, just announced by the finance ministry and National Development and Reform Commission, will see the government become a minority shareholder in qualifying VC funds.

The requirements are precise as authorities strive to channel appropriate private sector investment into emerging industries such as energy conservation and environmental protection, IT, bio-technology and new medicine, alternative energy, aviation and aerospace, manufacturing of advanced industrial machinery and high-tech services and enterprises.

To qualify, a start-up fund needs to raise no less than Rmb250 million, at least 60% of which must then be invested into designated emerging industries. However, such funds cannot invest in listed securities and real estate, nor are they allowed to offer loans or credit guarantees.

The government can invest up to 20% of a fund’s size, either into a new start-up or an existing enterprise. The total investment from non-government investors, including local governments and the private sector, must be more than Rmb150 million.

Each investor must commit more than Rmb10 million, and the number of investors should range between three and 15.

Existing funds applying for government funding should have an operating history of more than 12 months and should have already started investment.

Fiona Fu, analyst at Beijing-based consultancy Zero2IPO, notes that the stipulations are designed to be strict to underpin the quality of VC investors, to deter hot-money inflow from the private sector and to ensure the fundraising capability of VC fund managers.

At the same time the relatively low investment threshold has been introduced to encourage more VC funds to participate in the programme.

“The requirements reflect the central government’s intention to help the growth of start-ups and enterprises in emerging industries that are hungry for funding,” says Fu. “These measures will incentivise the setting up of VC funds focused on emerging industries.”

The government also stipulates that any general partner (GP) of a qualified VC fund must have registered capital of more than Rmb5 million, at least three senior managers with relevant experience and have successfully completed at least three VC investment deals.

“The requirement on past performance should ensure the management capability of the GPs,” notes Fu.

Venture-capital funds with central finance participation will be allowed to charge a management fee of between 1.5-2.5% of committed capital and 20% carried interest.

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