Author：Yi Xian Translator: Kunyang Wang
Publisher: GPLP
What happened to city A is not an individual case, but a universal phenomenon. On one hand, the government had plenty of money but failed to invest. On the other hand, the difficulty of raising funds was prevalent in the investment circle. Who is wrong on earth? GPLP would show you what FoFs of city A has encountered.
In 2016, the municipal government of the city decided to set up an industrial Fund of Funds (hereinafter FoFs). The primary allocation would be 2 billion yuan. The news was a stone with its waves and shook the market intensely. Why? This was absolutely a big deal at the time. GPs were tempted just as a pack of wolves. Three years later, how is the fund running?
A GP conversion：Upgrade from VC to FoF
“Where can I find reliable GPs?” In charge of the FoFs, Xiao Zhang was distressed. Major finance though, he’s a layman in venture capital. How could he get contacted with the VC circle as a governmental secretary? Moreover, how could he know whether a fund performed well or not? What if the funds lost the government’s money?
Xiao Zhang was extremely reluctant, but as a political task, he had no choice but to press on.
So why did city A want to establish FoFs?
In fact, it’s a long story.
Twenty years ago, the city committee and government had swiftly sold their few remaining state-owned enterprises (hereinafter SOE) as one lot. City A turned to the vigorous wave of private enterprises. Today in the city A, SOEs were absent from the market except for the major ones such as city investment and infrastructure.
“Either success or failure boils down to the same person”. The forces released by private enterprises have faced a substantial loss in this wave of economic downturn. But the GDP of City A accounts for one-fourth of the province for 18 consecutive years! That’s an absolute leader. Yet the neighboring city B seemed to be catching up with A, both in quality and quantity.
Leaders of city A were burning with anxiety. What should they do to deal with enterprises crying piteously for idle funds?
Someone proposed: Government subsidy! Municipal leaders vetoed and asked: “Whom to subsidize? If the subsidy works, Suntech will not go bankrupt! PV industry will not face the problem of excess production, and Europe will not launch anti-dumping investigations against us!”
Someone proposed: Government becomes a shareholder! Municipal leaders vetoed and asked: “Whom to buy shares? The bonding company which we have cooperated last time just went out to swagger and swindle with the government’s reputation, therefore was blocked at the municipal government gate. Is that lesson not enough?”
Someone proposed: It is said that one city is running a FoF, so how about us?
Everyone became interested in this. Setting up a FoF cannot only develop local industries, but also enjoy primary benefit and find excellent enterprises with venture capital. It’s really a good news for all.
Thereupon, the leaders of city A had the final word, we will set up a FoF, do LPs, the length of time could be longer to 5 years, earn the primary incomes and find good GPs. I just don’t believe our economy can’t grow!
Of course, the economy of city A is optimistic with a deep pocket, so the Fiscal Bureau itself and the city investment and infrastructure companies controlled by the Fiscal Bureau, jointly established a FoF with a first phase of 1.5 billion yuan and ready to select good fund managers from the public.
Just like locusts, various GPs were truly followers of fashion, swarmed over this city in southeastern China.
Among them, there was a Mr. Lin. He had a close relationship with the municipal government and was one employed in it. Feeling fishy in the authority, he switched to a government-run company. Perhaps because of his business acumen, when the private placement license was not such strict, he won a private placement management license and set up an investment company.
Every time the leader of the city A came to visit, Mr. Lin always pointed to the sign on the door of the office: Nonsense Investment Management co., Ltd. and Nonsense Venture Capital co., Ltd. Look, two licenses! Both are independent offices. Then the leader said: Lao Lin. It’s from soup to nuts! They smiled knowingly at each other.
The office of Nonsense Venture Capital seemed decent and grand, consequently brought the municipal leaders a substantial feel during each reception. In addition to Mr.Lin’s idle boast, the company dramatically got the favor of municipal governments and set up several so-called industrial funds. Although invested in only a few projects, charging fund management fee satisfied him enough. There’re few things quite as sweet as earning an estimated 10 million in this way. Mr.Lin’s previous Sagitar directly upgraded to Mercedes-Benz, combined with a driver.
The municipal leaders and subordinates in fact are uninitiated in this field. Under these circumstances, Mr.Lin’s fund was opened. They operated in the east and operated in the west. After a few months’ manipulation, all the procedures were completed according to the formal process. Nonsense Investment Management co., Ltd. has unexpectedly become a FoF.
Mr. Lin and the government agreed on that a time limit of five years, the government will receive a minimum return on time deposits for the same period, and 70% of all funds must be invested in local enterprises. The management fee is paid at 2% of the scale of the management fund, and the excess income is divided into 2/8. But! The government fund has a veto!
Of course, due to his huge contribution to the company, he firstly raised his annual salary to 1 million yuan, and then organised a celebration party. A splendid future lead ahead.
The annoyance of Government FoF
“A good beginning is half the battle.”
The whole situation tended to be an avalanche when Mr.Lin was ready to taste his gratification.
It wasn’t anticipated by him that the process could be such complicated, and he couldn’t imagine how hard it is to invest using the outwardly unprofitable government FoF.
“The market is lack of money everywhere and has lots of good projects, so how is it possible to reserve uninvited money?” Mr.Lin couldn’t believe himself.
But their 1.5 billion FoF were still laying on the account.
Mr.Lin has inquired from door to door and realized what they have imagined wasn’t the case at all.
“Most of these funds are totally unreliable and boastful, even worse than I do!” Mr.Lin said indignantly. He has worked as LP previously with a poor performance, thus refused to rollback.
Mr.Lin turned up his nose at small funds. Although he preferred well-known funds, they wouldn’t give him a thought, either. There’s no reason for them to choose his small rube fund in the queue of investors.
Failed in the GP investment, the FoF switched directly to invest in projects.
From now on, Mr. Lin began to deal with various projects.
Recently, Mr.Lin has spotted a jewelry listed company and got connected with their actual controller through grassroots level relationship. The actual controller said that he agreed to set up a fund with Mr.Lin to invest in a project of his nephew exclusively. Three years later, he would take the fund back to the system of his listed company. If it wasn’t back eventually, he would buy it back at the annualized return rate of 10%.
It seemed to be reliable.
Mr. Lin was pleased beyond all expectation to hear this. Aware of his limited ability, he sent his only two professional men to work on due diligence. (Someone will doubt that how can three people get a license? Although regulated to be a certain number, due to China’s national conditions, a big part of them are just nominal workers. Actually only three people were at work.)
The result of due diligence guaranteed the good quality of the company, and the share of 18 million was reasonable. Then they hurried to prepare for materials and apply for IPO.
Each step went smoothly and that made Mr.Lin self-congratulated. The deadline for payment is June 16th. He made his boast to everyone a month ago: No problem! 18 million!
The actual controller of the listed company also kept the share to the end, but still didn’t see the payment from Nonsense Fund. So he gave the share to others.
Which part of this business was wrong?
It turned out that the government’s veto power was the finality!
The person in charge of the government has been wondering about this business. He felt that investing in one’s startup, who is the nephew of a listed company’s real controller was crazy, for its inconsistent with the general orientation of supporting the real economy. It was at variance with the government’s intention! Finally he decided to give up.
This hurts Mr.Lin’s self-respect and reputation. Originally he planned not only to make money, but also to establish a good relationship with the listed company! He wanted to kill two birds with one stone. Despite showing respect because of his public office, the listed companies were just expressing synthetic friendliness. Finally he grabbed this ice breaking chance to build a closer relationship, only to see this fucking thing happen! Since then, he never dared to contact with that company.
Of course, Mr.Lin’s enthusiasm has been frustrated a bit, but he is still able to work.
Since the first project has failed, how about the next one? Sure enough, no one would not welcome a new project. People in the government have all come to check on and consult for you, which are exactly what Financial Advisor does in the mature market. But if the people in the government act as FAs, you must give them faces.
However, this leaves you to be the whipping boy. FA in mature market finds the fund for you with the style you like. The people in the government are totally different. They think that the money is from the government. Thus they all have to gain their own shares.
This is what they mean by treating everyone equally.
However, this has made Lao Lin truly depressed – what are these projects. For example, Director Chen recommended a project of a paint company with a net asset of 40 million yuan, whose boss used 400 million yuan of private borrowing to go to engage in real estate. After capital chain has been broken. Now it is listed as bankruptcy reorganization by the government. But he wouldn’t dare not to appreciate the kindness of Director Chen. After all, Chen has contributed his own effort to the fund in some way. Mr. Lin had no way but to say: “Director Chen, I think this project is rather good. Shall I find someone in the same industry to take a look?” Then he spared no effort to introduce people to Director Chen, with little time to take care of him.
Of course, the ending is very obvious. Which listed company will become the whipping boy for the failure of others?
So, after a busy year, no single one of the city’s FoF has invested so far.
Admittedly, Lin is also desperately looking for good projects and reliable GPs, but his ability is truly limited, coupled with the government’s veto power, a consensus can never be reached. In the end the fund was established, but the money is nowhere to be used.
The above story is just a small epitome in the current tide of the government FoF. Compared with the direct administration of funds and financial subsidies, which are highly administrative, the FoF is more beneficial, with more comprehensive marketization. This is an improvement that cannot be underestimated.
Although this kind of FoF with special purpose encountered a lot of problems in its specific implementation, but this is still a greater improvement than before.
Of course, Mr. Lin’s investment career is still expanding. The size and numbers of the funds he manages is growing. Of course, he also constantly faces the government’s involvement as a funder. But when it comes to dealing with government relations, Mr. Lin, who has started from the government, was a matter that cannot be underestimated. We’ll wait to see how Mr. Lin would compete with the government. After all, not anywhere has a LP who just wants the minimum return of current interests.
How would Mr. Lin’s fund and government end up being? Let’s wait and see what happens.
