On September 24th, at a press conference held by the State Council Information Office, Pan Gongsheng, Governor of the People's Bank of China, Li Yunze, Director of the China Banking and Insurance Regulatory Commission, and Wu Qing, Chairman of the China Securities Regulatory Commission, introduced the relevant situation of financial support for high-quality economic development. The conference was rich in content, with many references to venture investment, such as: multiple measures to invigorate the mergers and acquisitions market, encouraging listed companies to strengthen industrial integration, supporting listed companies to transform and upgrade in the direction of new quality productive forces; implementing a "reverse linkage" between the investment period of private equity funds and the lock-up period of shares obtained through reorganization, and smoothing the circulation of "raising, investing, managing, and exiting" for private equity venture capital funds; expanding the scope of equity investment pilot for financial asset investment companies under large commercial banks, etc.

In this regard, many primary market investors expressed to the Economic Observer Network that this conference is a major benefit for the primary market, providing very good policy support for encouraging private equity institutions to participate in mergers and acquisitions and for bank financial asset investment companies to inject funds into the primary market.

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The policy combination is a "major benefit"

On September 24th, the China Securities Regulatory Commission issued the "Opinions on Deepening the Reform of the Market for Mergers and Acquisitions of Listed Companies," releasing six measures to promote mergers and acquisitions. It mentioned supporting the merger of upstream and downstream assets of listed companies on the Science and Innovation Board and the Growth Enterprise Market; supporting well-operated listed companies to carry out cross-industry mergers and acquisitions that meet business logic around the needs of industrial transformation and upgrading and seeking a second growth curve; implementing a "reverse linkage" between the investment period of private equity funds and the lock-up period of shares obtained through reorganization, promoting a virtuous cycle of "raising, investing, managing, and exiting".

A primary market investor in Shenzhen told the Economic Observer Network that many funds have reached the exit period and have encountered situations where they cannot exit. Now that the policy supports mergers and acquisitions, it is conducive to enriching the exit methods of private equity investment. Previously, IPO (initial public offering) was a more conventional exit path for domestic primary investment institutions. However, due to factors such as increased listing thresholds, a slowdown in the IPO pace, and unsatisfactory market performance, many investment projects cannot go public or have a "price inversion between the primary and secondary markets," making it difficult for investment institutions to exit through IPO in recent years.

The above-mentioned person further stated that old share transfers are also another way to exit, but it is difficult to find a satisfactory buyer under the current market conditions, unless they are willing to transfer and sell at a very low valuation. This situation is only considered by investments that entered at a particularly early stage, otherwise, investment institutions basically have no way to accept it. Therefore, when the market environment is relatively poor, with policy support, investment institutions can consider merger and acquisition exits according to the actual situation in a timely manner, which is also a good choice.

On September 24th, the China Securities Regulatory Commission publicly solicited opinions on the "Draft Decision on Amending the Measures for the Administration of Major Asset Reorganizations of Listed Companies" (hereinafter referred to as the "Draft for Comments"). Its content clearly mentioned encouraging private equity funds to participate in the mergers and acquisitions of listed companies: to better cultivate patient capital and promote a virtuous cycle of "raising, investing, managing, and exiting," a "reverse linkage" is implemented between the investment period of private equity funds and the lock-up period of shares obtained through reorganization; for private equity funds with an investment period of 5 years, the lock-up period in third-party transactions is shortened from 12 months to 6 months, and the lock-up period for small and medium shareholders in reorganized listings is shortened from 24 months to 12 months.

According to the Economic Observer Network, the so-called reverse linkage mechanism means that the lock-up period is inversely proportional to the investment period before the IPO, meaning that the longer the investment time in the early stage, the shorter the lock-up period. The above-mentioned primary market investor believes that this "Draft for Comments" further shortens the lock-up period, encourages private equity funds to participate in mergers and acquisitions, helps to solve the problem of fund exit siltation, and will also promote a virtuous cycle of "investment—exit—reinvestment".

Another Shenzhen merger and acquisition fund investor also told the Economic Observer Network that the advantage of mergers and acquisitions lies in the ability to traverse cycles, and short-term market fluctuations have a limited impact on the merger and acquisition market because the value creation of mergers and acquisitions comes from the target itself. If a good target is acquired, the value of the merger and acquisition can be further improved through subsequent management and industrial synergy.

However, there are also certain problems and challenges in the domestic merger and acquisition market. The above-mentioned merger and acquisition fund investor stated that for mergers and acquisitions, both sellers and buyers now have a relatively strong demand, but the problem is that after several rounds of financing, the valuation of the target company is already at a relatively high level, but buyers mainly refer to the valuation level of the secondary market. In this way, when conducting merger and acquisition negotiations, the secondary market valuation level of the target company has already decreased a lot, but the seller's expectations have not been adjusted, so there is a large difference in the expectations of the valuation of the target company between the buyer and the seller, which may lead to the failure to conclude a deal even if the negotiations progress smoothly in the early stage, causing certain difficulties for investment institutions that facilitate merger and acquisition transactions.According to data from the "2024 First Half-Year China Equity Investment Market Research Report" released by Zero2IPO Research Center, the merger and acquisition (M&A) activity involving domestic enterprises continues to decline: In the first half of 2024, the total number of M&A cases involving domestic enterprises was 952, a year-on-year decrease of 29.1%; the total transaction amount exceeded 280 billion yuan, with a year-on-year decline of over 40%. Among these, the number and amount of large-scale cases exceeding 5 billion yuan were significantly lower than the same period last year.

"New Vitality" Brought by Bank-Affiliated Funds

At the aforementioned press conference held by the State Council Information Office, Li Yunze, Director of the China Banking and Insurance Regulatory Commission, stated that currently, in China's total social financing, indirect financing still occupies the main position. This implies the need to forge a development path for technology finance, especially sci-tech investment, with Chinese characteristics. Previously, financial asset investment companies established by large commercial banks initiated pilot equity investments in Shanghai, exploring paths, accumulating experience, and training teams, thus meeting the conditions for expanding the pilot.

Li Yunze said that to effectively leverage the pilot's leading role and encourage the development of venture capital, the following three measures will be taken to promote this: First, expand the scope of pilot cities from the original Shanghai to 18 large and medium-sized cities with active technological innovation, including Beijing; second, appropriately relax restrictions on equity investment amounts and ratios, raising the ratio of book investments from the original 4% to 10%, and the proportion of investment in a single private equity fund from the original 20% to 30%; third, guide relevant institutions to implement the requirement of due diligence exemption and establish a long-term, differentiated performance assessment system.

Investment professionals interviewed by journalists believe that these measures provide significant support for bank-affiliated financial asset investment companies to lay out in the primary market, which is conducive to broadening the fundraising sources for private equity institutions. Long-term capital sources have always been one of the key issues constraining the development of China's venture capital industry. In the current situation where private equity investment institutions are under fundraising pressure, bank-affiliated financial asset investment companies, with their strong financial strength and rich risk control experience, can inject vitality into the primary market.

Currently, there are a total of five financial asset investment companies established by large commercial banks, namely ICBC Financial Asset Investment Co., Ltd. (hereinafter referred to as "ICBC Investment"), Agricultural Bank Financial Asset Investment Co., Ltd., Bank of China Financial Asset Investment Co., Ltd., CCB Financial Asset Investment Co., Ltd., and BOCOM Financial Asset Investment Co., Ltd.

Previously, bank-affiliated funds contributed little to equity funds, but starting from 2020, the policy level began to support the investment function of commercial banks' subsidiaries, insurance institutions, trust companies, etc., to contribute to venture capital funds, government industry investment funds, etc., and encouraged the exploration of deepening cooperation between banking institutions and external equity investment institutions to develop a variety of technology financial products.

On June 26, the State Council Information Office held a regular policy briefing to introduce the "Several Policy Measures to Promote High-Quality Development of Venture Capital Investment." At the meeting, Li Chunlin, Deputy Director of the National Development and Reform Commission, stated that China is a bank-dominated financial system, with bank assets accounting for more than 90% of the total assets of financial institutions. Under the premise of strictly controlling risks, guiding banks to increase support for scientific and technological innovation and venture capital investment can be said to "have great potential."

Under the clear policy signal, recently, bank-affiliated funds have been active in the equity investment industry: In August 2024, Bank of China successfully established a sci-tech mother fund with a target total scale of 30 billion yuan, intending to guide more market resources to invest early, small, long-term, and hard technology; in August 2024, ICBC Investment successively established three funds with a total contribution of 26 billion yuan, including ICBC Green Energy (Beijing) Equity Investment Partnership (Limited Partnership), Beijing Guoneng ICBC Strong Chain Equity Investment Fund (Limited Partnership), and Xinjiang ICBC Double Carbon Equity Investment Partnership (Limited Partnership).

Investment professionals interviewed by journalists believe that now, the participation of LPs (Limited Partners) is becoming increasingly diversified, with state-owned capital, listed companies, insurance capital, and other entities accelerating their entry. Against this backdrop, the participation of bank-affiliated funds as LPs in the equity investment industry brings not only funds but also support for scientific and technological innovation and industrial upgrading.