Author： Helen Wang
Publiser: GPLP
Recently, with the difficulty of fund-raising, VC industry has begun to sluggish.
Under this circumstance, a lot of people with their petty tricks hope to make money out of the S fund.
Of course, there are also many friends who come to consult GPLP, whether the S fund is worth investing.
So, will S-funds become the savior of this market? Does it have investment value?
GPLP has only one question: please distinguish who is always advocating the S fund, you must know that people are waiting for selling their shares to you. You know what I mean!
The life story of Secondary fund
What is internationally called secondary refers to buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Essentially, Secondary fund equally to the secondary transfer of private equity.
During the history of VC, the earliest S fund was the Venture Capital Fund of America, established in 1982 and followed by the skyrocketing development of VC in the US. Before the bubble in 2002, the development of Secondary fund entered a peak, and many people thought that secondary market transactions were a good withdrawal channel.
Objectively speaking, S-funds have the characteristics of price concessions, clear investment targets, and effective reduction of the J-curve effect in general, so they are sought after by many institutions in the market.
According to a 2014 research report by alternative asset data and information provider Preqin, there are four most important reasons for purchasing a private equity transfer (S fund) fund:
- Purchase an asset at a discounted price;
- Alleviate the J-curve effect (the private equity fund’s cash outflow continues to be greater than the cash inflow before maturity, LP needs to wait 3-5 years before it can get the benefits of the private equity fund, so the cash flow reflow will resemble a J-shaped curve);
- The initial year of the fund is dispersed;
- Famous fund manager.
Therefore, in the United States, the S fund is gradually developing after its emergence. In 2004, the US private equity transfer (S fund) fund transaction volume was 7 billion US dollars, and in 2013,the transaction volume was 27.5 billion US dollars. In 2014, it rapidly increased to 42 billion dollars, and 40 billion dollars in 2015
Could we duplicate the US’s success in China VC market?
Call me a pessimistic but I believe in China, S fund is a dead end in 2018.
Why is that?
China’s market is not mature. Many time the forerunners fought in heavy battles will die martyrs’ death. It may be nothing to an investment institution, but it would cost everything of investors. Even in the United States, there are not many people involved in the success of S funds. For example, several companies after Nyppex wanted to follow suit, but they did not succeed.
First of all, China’s GP participation is not high. According to the data, nearly 60% of Chinese VC/PE institutions surveyed said they will not consider participating in S-funds. Even if they choose to participate, only 32% of institutions consider participating in share transactions of private equity funds. Other types of transactions are less involved.
Why is that?
Why on earth do you want to sell good project investment institutions that make money?
If it is not a good project to transfer, who is willing to take over the bad project?
Imagine you are in the investor’s shoes, would you do that?
Moreover, there are too few qualified S fund managers.
S funds need GP managers to be professional, but in China. GPs themselves are a mixed bag, not to mention that becoming S fund managers need to be the best among the top. But in China, S fund professional managers are very few. In this context, which investor is willing to invest in S funds?
At last, the issue of evaluation.
The mystery of S fund evaluation
Everyone in China knows that the value of the primary market is full of mysteries.
This value is like passing the parcel, after round and round of financing finally landing in the capital market, which is of course an ideal state; by contrast, the secondary market value has at least a fair statement.
However, if the company transfers before the company is listed, including the LP share transfer, how should this value be calculated?
This is a problem.
No one has made the evaluation of the primary market clear. If there is no reasonable way of pricing, where does this price come from?
In 2018, we often see many listed companies, such as Xiaomi, fell on its first day of trading, which is because the primary market is overvalued.
Of course, another typical example is NIO, an auto company.
On August 13, 2018, NIO Automobile submitted an IPO prospectus to the US Securities and Exchange Commission (SEC) for an initial public offering of American Depositary Shares (ADS). NIO Automobile plans to list on the New York Stock Exchange under the symbol “NIO”.
According to its prospectus, NIO lost a total of 2.573 billion yuan in 2016, with a loss of approximately 759 million US dollars in 2017, about 5.021 billion yuan. In the first half of 2018, the loss was about 503 million US dollars, with 3.326 billion yuan. The loss during 2016-the first half of 2018 totaled approximately 10.919 billion yuan. In 2018 alone, there was a revenue record of $6.71 million, or about 4.44 million yuan. This relative loss is simply a drop in the bucket.
However, before the listing, NIO had already raised a number of rounds and raised a total of not less than 15 billion yuan. But as they say, “a new startup company does not have the ability to melt 20 billion yuan, it may be more difficult to start a new car brand”. There is a huge gap, and the huge deficit forces NIO to face the real pressure.
Therefore, according to industry insiders, if you don’t land in the capital market, there is almost no one to take over NIO. If no one picks it up, what will happen with the next round of evaluation?
There is another true story.
An entrepreneur known by GPLP once raised $30 million in 2016 and valued $300 million. However, when GPLP Jun saw him again in 2018, the company was seeking financing with a financing amount of 8 million yuan. The value is 80 million yuan.
The valuation adjustment is so large, which objectively makes the transfer of the S fund face a mystery.
Therefore, if anyone invests in S fund in 2018, it is obviously a dead end.
