A Post-Mortem on a 300-Day VC State-Asset-Linked Secondary Transaction

"How to Reach a Happy Ending When Debuffs Are Maxed Out" By Zhiyan Chen

Among the various remedies for revitalizing existing assets, S funds have emerged as the one carrying the heaviest expectations.

In the past six months, multiple provinces including Zhejiang, Fujian, Jiangxi, and Anhui have established S funds one after another. Most recently, on August 5, the central bank and six other ministries jointly issued the Guiding Opinions on Financial Support for New Industrialization. The document proposed: developing secondary market funds for venture capital, optimizing the transfer process and pricing mechanisms for venture capital fund shares, and promoting coordinated development between regional equity markets and venture capital funds.

Yet, in conversations between Waves and industry practitioners, those on the front lines of "exits" often describe a different reality: the ironclad rule that state assets must not depreciate clashes with the 20-30% discounts that S funds typically demand; the awkward situation where state-backed players dominate while market-oriented S funds remain scarce.

Right now, the massive wave of funds born during the "mass entrepreneurship and innovation" era is reaching a critical exit juncture. The inexperienced state capital that entered back then has also come of age. How does a real, typical S transaction actually begin and conclude in this market? Is the S fund truly a cure for the capital market in this era of existing assets? What problems remain urgently unresolved?

In April this year, early-stage investment firm Atom Ventures completed its first-ever S transaction since founding, with Bochen Capital becoming the new LP in its Fund IV. What made this deal unusual: the seller was state-backed, the buyer was a market-oriented S fund, and the underlying assets were among the least desirable in the market — early-stage shares that were "too early, too risky, too vague." In short, every conceivable debuff was maxed out.

So what challenges did this 300-day S transaction face? And how did it ultimately reach a happy ending despite the obstacles? Feng Yiming, founding partner of Atom Ventures, spoke with unusual candor to Waves about the story.

The following is Feng Yiming's account, as edited by Waves —

Atom Ventures had a state-backed LP that had invested in our Fund IV for five years, and the fund had reached its exit period. Last May, this LP presented us with an "expectation": they wanted to "revitalize state capital" and "open up the regional equity exchange process." In plain language: among all the funds they had invested in, Atom's Fund IV was one of the better performers. Could we turn the paper gains on the books into real cash for the LP?

We thought it over carefully and decided to give it a shot. The reasons were simple. First, their support for Atom had truly come at a critical moment. Second, they indicated that if we could pull off a successful exit, they would be willing to back our next fund.

Of course, you could call that an empty promise. But the reality is, LPs still willing to make empty promises — still willing to invest in blind pools — are already few and far between.

The next question was: how to exit?

Honestly, IPOs and M&A were both unrealistic. Atom is an early-stage, first-round investor. For our Fund IV, individual projects were still some distance from listing exits. So an overall LP stake exit was really the only path — find someone to take it over. Either our management team takes it, or find an S fund. This is how Atom, in its 13th year, first came into contact with S funds.

Part 01

Mismatch

We reached out to many S funds and had in-depth discussions with six or seven. The breakdown roughly matched the overall S fund market: about 70% were state-backed, 20% were insurance capital, and less than 10% were private institutions.

Very quickly, one major problem emerged: the dominant buyers of S stakes struggled to price early-stage funds.

Pricing a fund is far harder than pricing a single project. You have to break apart the portfolio, judge which projects have outsized returns, which will return principal, and which need to be written off. For example, in a fund, some projects that haven't raised follow-on rounds in years might be self-sustaining and highly valuable, while others could be near death. From the buyer's perspective, each must be examined individually — the workload may be no less than doing direct investments.

Currently, a large portion of S fund buyers are state-backed. After engaging with some, we found their standard practice is "par in, par out." Say an LP invested RMB 20 million in a fund five years ago; today's state-backed S fund buyer would at most offer RMB 20 million to take over the stake. The vast majority of state buyers can only accept one-to-one, or perhaps one-to-0.8. Premium is virtually impossible, because driving the price down is always the safe move — but anything above the original cost, the premium portion, becomes very difficult to justify. Is it 1-to-1.3, or 1-to-1.5?

Our state-backed LP seller also repeatedly emphasized that they hoped this transaction could provide useful exploration for S stake valuation. From any perspective, blindly using traditional methods like "par value plus interest" or "last-round valuation" cannot reflect an objective, fair, accurate, and complete valuation philosophy.

There were also process issues. State-backed S fund buyers taking stakes from state-backed GPs is the smoothest path. But whenever a state-backed S fund deals with a private GP, extremely cumbersome procedural problems arise. This is commonplace in peers' actual operations.

So we began reaching out more to market-oriented S funds.

After talking around, we found that despite their different backgrounds, their feedback was remarkably consistent: they all felt our fund was "too early."

What does "early" mean? The projects in the fund were still some distance from IPO or M&A exit, with relatively high uncertainty.

Upon reflection, I realized the S fund market ultimately pursues "extreme certainty" and "extreme bargain-hunting." They want to buy a stake today, have a project file for IPO tomorrow, and fully exit with principal returned the day after. Ideally, the fund stake they buy already contains a listed project still in lock-up, and the seller is desperate for cash. Then they can buy at a deep discount and steadily earn from the secondary market.

What we were trying to revitalize — underlying assets still in growth stage, with the original LP having certain return expectations — was precisely the least welcome type in the market.

Just when we were about to give up, we came to know Bochen Capital. They are also among the few private, market-oriented S funds currently willing to sit down and seriously study early-stage fund stakes.

Part 02

Negotiation

Engaging with Bochen was less a transaction than a prolonged, mutual "due diligence" between GP and S fund buyer.

Starting from the height of summer 2024, we accompanied them through in-depth, detailed on-site interviews with 5 projects they deemed most promising out of the fund's 26. These 5 were hard tech companies Atom had invested in at angel round, whose subsequent investors were all state-backed or well-known market-oriented funds, with solid paper gains — as high as 10x, and no lower than 3-4x.

The entire process lasted nearly three to four months. At first, they built trust with our GP team through conversations. Their core partners came to our office again and again, talking for three hours at a stretch, from investment philosophy to hard tech transformation, then sifting through projects one by one, repeatedly validating our judgment logic and exit strategies for each project.

Once initial trust was established, we took them to visit the companies one by one. Fundamentally, an LP change has nothing to do with the portfolio companies' founders, so we had to do extensive coordination and communication, explaining to founders why a new LP wanted to interview them. Fortunately, we had invested early and had very solid relationships with the founders, so everyone was relatively cooperative.

Through this process, we also fully experienced Bochen's professionalism and patience. Unlike many institutions that only look at materials, they really dig deep, applying direct investment logic to S transactions. Their willingness to invest so much time stemmed partly from their investment experience and intuition, and partly from having achieved high returns in previous early-stage fund S transactions.

Of course, the hardest part was always price.

For pricing, we had at least three offline meetings with Bochen, and seven or eight online meetings. The core dispute was how to classify and value the asset package. Of the 26 projects in Atom Fund IV, which were "stars," which would "return principal," which should be "written off" — how to reach consensus on both sides' lists was the crux.

For example, we had one project that had never done a follow-on round but was very profitable through its own cash generation. We believed it should command high returns and could be valued by applying a discount to the P/E ratio of comparable market companies. But the other side would say, no funding round in so many years means the market doesn't recognize it; the valuation should be more conservative. Similar back-and-forth ran through the entire process.

But throughout this process, our entire team was clear on one point: before the transaction closed, our stance had to be "ensuring the value of the old LP's stake is objectively reflected in the S transaction," making the S transaction a pricing mechanism rather than a "zero-sum game." There are even individual GPs in the market who profit from the spread between S transaction buyers and sellers, but we don't do that.

Part 03

Closed Loop

While negotiating with Bochen, we needed to solve another problem: how to accommodate the compliance requirements of our state-backed old LP while maintaining market-oriented valuation?

Within the state asset system, the greatest risk is "loss of state assets." Why do they tend to favor "last-round valuation"? Because this requires the least explanation. But if we got bogged down in debates over valuation logic without considering whether that logic itself is objective, fair, accurate, and complete, S transactions would never get off the ground.

The reason Atom's state-backed old LP had strong motivation to make this S transaction happen was our long cooperation; we had deep understanding of each other's style and philosophy. On this foundation of mutual trust, we jointly found a "three-party checks and balances" solution that kept the entire transaction process compliant with laws and regulations while following market principles, with someone ultimately "accountable" for the pricing.

First, a professional third-party valuation firm. This firm had to be engaged by the state-backed LP seller, not us. Its purpose was to establish an initial valuation range that complied with rules without violating各方 expectations; ultimately, "pricing" was entrusted to a professional, market-oriented third party.

Second, full bargaining between buyer and seller. Through prolonged negotiation, Bochen and we repeatedly compared our respective judgments on projects and price expectations, finally forming an acceptable price range for both sides. This range ultimately aligned with the "valuation opinion" formed by the valuation firm after reviewing all materials from a neutral perspective, with demonstrable reasonableness. Because if their report was obviously too low, they too could be held accountable if problems arose later.

Third, the "auction" process at the Shanghai Equity Exchange. Once the valuation report came out, we took it to the Shanghai Equity托管交易中心 for display, listing, and competitive bidding. The significance of this process was that it put the final seal of "compliance" on the transaction. It proved to all that this price was generated through competitive bidding in an open market.

In this way, through "valuation firm sets price, equity exchange sets process," we built a complete, compliant, market-law-abiding closed loop for this transaction.

From initial conception at the end of June last year to final closing in early April this year, the entire transaction took a full 10 months.

Part 04

Combined Effort

Now Bochen has become the new LP in Atom Fund IV. In their portfolio, they define our fund as growth assets with explosive potential, and are willing to share excess returns with the GP when ultra-high returns materialize.

Looking back, the entire process felt like walking a tightrope, trembling with caution.

Due to process requirements, we first had to buy the stake from the old LP, then sell it to Bochen. So we had to take Atom's operating funds to advance the payment for buying the stake — money meant for employee salaries. It was extremely tense at the time, because in last year's market environment, Bochen was the only serious buyer of early-stage fund stakes we had encountered. If anything went wrong and they backed out, the consequences would have been unthinkable.

Fortunately, everything went smoothly. Around April this year, Bochen's funds finally hit our account. Only then did I finally exhale deeply — back from the dead. Afterwards, Bochen's Mr. He would always half-jokingly say when meeting us: thank you for Atom's trust in Bochen.

Looking back, this S transaction succeeded precisely because of multi-party trust; it was the result of combined effort.

First, the state-backed LP seller understood both compliance and the market, trusted us, and was willing to explore market-oriented methods together, closely cooperating with the Shanghai Equity Exchange to run through the process. Second, we encountered a professional, honest, patient market-oriented S fund buyer willing to take risks. Finally, we as the GP were willing to invest enormous effort to coordinate and push forward, without counting gains or losses. Everyone in the entire chain was aimed at the single goal of "making the transaction succeed." If any one person had dropped the ball, this would have been impossible.

What was our motivation for persisting? In the short term, there was indeed no profit to be made. But we wanted to blaze a trail for early-stage fund S stake transactions.

I believe the future S fund market is enormous. A core reason is that starting from 2014-2015, the "mass entrepreneurship, mass innovation" wave saw massive government guidance funds invest in numerous funds now facing exits. I believe more and more GPs will have similar needs in the future, and with this experience, Atom will be more从容 next time.

Image source | Unsplash

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