DPI > 1 — it's a magic spell.

By Xuemei Guo

Edited by Zhiyan Chen

DPI — Distributed to Paid-in Capital — only began appearing regularly in China's primary market discourse around 2018. Yet this metric, which displaced IRR (Internal Rate of Return) and MOIC (Multiple on Invested Capital) as the benchmark, has become the gold standard that LPs and GPs obsess over.

Recently, alternative asset data platform Preqin, in partnership with the Beijing Private Equity Association and the Shanghai International Private Equity Association, released its latest performance benchmark report, The China Private Capital Landscape (2023). The report, which traces a decade of private capital markets, reveals a striking figure: among all funds with initial investment years between 2015 and 2020, only four USD PE funds, four USD VC funds, six RMB PE funds, and four RMB VC funds achieved a DPI of 1 or higher.

To be sure, DPI as a single yardstick may not be entirely fair for cross-comparison among funds of different sizes. But there's no denying that "DPI equals one" has become something of an incantation. Any GP who can utter those words while presenting their track record — in this capital winter colder than any before — holds at least a few more matches to sketch out dreams than their peers.

Yet counting from 2014, when the "mass entrepreneurship and innovation" era began, the VC and PE firms born amid the convergence of policy tailwinds, abundant capital, and mobile internet dividends have gradually reached their exit horizons. The dream, it turns out, must eventually end.

As early as 2022, Zero2IPO Research Center surveyed over 400 domestic institutions and 1,500 funds on their performance. The results on DPI were sobering: among funds with first closings between 2011 and 2021, only those from 2011 and 2012 had surpassed a DPI of 1. The median ten-year fund had merely broken even. Funds established after 2015 showed DPI figures almost uniformly at 0.5 or below.

In an increasingly cautious capital environment, weak DPI means harder fundraising. For GPs, DPI truly is the sword of Damocles hanging overhead. The pressing question now is finding a viable path to exit.

What Makes a Dignified Exit?

The China Private Capital Landscape (2023) shows that among funds with initial investment years from 2015 to 2020, the USD PE funds achieving DPI ≥ 1 were: Loyal Valley Capital USD Fund I, Hillhouse Capital USD Fund II, Oceanpine Capital USD Fund I, and HighLight Capital USD Fund II. The comparable USD VC funds were: Fengshang Capital USD Fund I, Lyfe Capital USD Fund II, GGV Capital V, and Foresite Capital's healthcare fund launched in 2018.

Several factors underlying strong exit performance emerge from this list.

First, timing. Vintage year determines harvest. In high-risk equity investing, the vintage year often matters more than investment strategy in determining a fund's fate. After 2015, as "too much money chased too few deals," primary market valuations in China soared — especially among USD funds facing intensifying competition — making it difficult for post-2015 funds to match the returns of earlier vintages. Against this backdrop, whether a fund from that era could deliver strong returns hinged largely on whether it managed to invest in star companies during mobile internet's final crescendo. Loyal Valley Capital's USD Fund I, for instance, invested in Bilibili; GGV Capital V invested in Xiaohongshu.

Second, investment focus. After 2015, China's venture industry saw "trends come and go in waves," with investment winds shifting roughly every eight or nine months. Major themes ran from sharing economy to innovative drugs, consumer brands, and more recently semiconductors and new energy.

Given the report's measurement period, this cycle happened to capture the peak of healthcare, consumer, and semiconductor investing around 2020 — a time when later-round funds were willing to pay premium prices to "take over." Hence the appearance of sector-focused funds like consumer-focused Fengshang Capital, healthcare specialist Lyfe Capital, and Oceanpine Capital's USD Fund I, which invested in companies like Nexperia and Horizon Robotics.

In theory, sector-focused funds that can transcend cycles should number in the hundreds. But achieving a truly dignified exit demands something more: hard-earned "exit technique."

GPs with a public market perspective may hold certain advantages here.

In 2018, CMC Capital, IDG Capital, and Legend Capital were all major shareholders when Bilibili listed on Nasdaq. Yet starting late that year, various institutions began gradually unwinding their Bilibili positions for multiple reasons. Loyal Valley Capital did not join the retreat. Because it had entered later and exited less, it reaped enormous profits from this single investment — a result not unrelated to founder Lin Lijun's secondary market experience.

A similar pattern holds for Hillhouse Capital. Even during the "capital winters" of 2015 and 2018, it continued investing heavily. But Hillhouse was not reckless. While deploying capital aggressively, 2018 also marked a year of exceptionally high exits — 17 projects according to Zero2IPO's PEdata, far exceeding its typical annual pace of one to three exits.

If sophisticated understanding of secondary markets is a required course for PE firms seeking clean exits, VCs operate by a different algorithm.

In this report, Fengshang Capital ranked first in DPI on both the RMB and USD VC fund performance tables — with USD fund DPI reaching 3 and RMB fund DPI at 2.

As a consumer-focused fund that has successfully backed companies including Genki Forest, Happy Elements, Huang's Commune, and Fourth Paradigm, Fengshang has maintained a distinctive exit style across different investments: decisive, unromantic.

Fourth Paradigm, which successfully IPOed in late September this year, was an early Fengshang investment. In May 2016, Fengshang co-invested several million dollars in the Series A alongside Hongshan and Sinovation Ventures. The company's valuation surged thereafter, reaching $2 billion by its Series C+ in 2020.

Yet a year before that round, Fengshang had already begun planning its full exit. On one hand, an ~6x return over eighteen months had met their exit expectations. Considering Fourth Paradigm's shareholder structure and profitability at the time, Fengshang chose to exit decisively at that window.

In their view, rather than waiting for a distant IPO exit, it was better to use the capital from a premature but solid exit to make more investments and generate further returns. Fengshang does not treat IPO as the sole exit criterion; instead, it identifies and acts on every suitable exit window.

Another illustration of Fengshang's exit style is Genki Forest.

As the most closely watched consumer company around 2020, Genki Forest saw its valuation climb from 300 million RMB to 1 billion, 4 billion, then straight to 6 billion and $15 billion USD by 2021 — a nearly hundredfold increase. Fengshang became one of its investors in 2019, and among the largest external shareholders at that time.

As Genki Forest's valuation soared and consumer investing heated up, Fengshang did not bask in the euphoria. The mismatch between valuation growth and revenue scale growth signaled to them that it was time to consider exit arrangements even as they continued supporting the company's development.

From 2020 to 2022, while other investors crowded into Genki Forest, Fengshang chose to gradually exit through various means. It remains one of Genki Forest's major shareholders today, while also having delivered strong returns for its LPs. Decisive exits at key moments — this unromantic style follows Fengshang's exit logic: secure stable returns first, then reach for higher upside.

The Investor's "Exit Mindset"

When to exit? How to exit? These are the questions GPs cannot avoid yet struggle to articulate.

Fengshang Capital founder Feng Gao described today's exit opportunities to An Yong Waves as "fewer, further in between." To achieve ultimate high returns, preparation must begin from day one — GPs must even "reverse-engineer investment logic from exit logic." Gao believes this style developed significantly from humbly learning the financial wisdom of LPs, and as a fund manager, carefully listening to and executing their advice during "windows." What he emphasizes most internally to his investment team is training themselves to rethink investing and exiting from the "boss's perspective."

In internal talks, Gao proposed the concept of "if the fund were an operating company." A fund can travel light in its first vintage, he said, but by the second and third, the dynamics change entirely. Having managed multiple blind pool funds, Fengshang must account for ever more factors. Gao believes fund management should be benchmarked against corporate management. In this process, "clearing inventory matters more than profit per deal" — only realized exits constitute true revenue.

When selecting investments, Gao prioritizes how to secure returns even in downside scenarios, minimizing losses. In weekly meetings, he habitually reviews existing portfolio holdings before discussing new deals, and tracks company developments on a monthly basis.

Gao told An Yong Waves that a GP's pursuit of fame-making deals and the fund's pursuit of high returns are, to some extent, at odds. Chasing super deals inevitably means entering a "probability war." Success stories typically represent survivorship bias; most projects in any firm's portfolio are "denominators" in the market. In the investment process, any assumption slightly off target compounds into vastly different outcomes.

A GP's primary mission is not fame but making money for LPs. Rather than pursuing maximum multiples on a single deal, securing stable capital recovery for LPs as early as possible is what matters most. Fengshang has had loss-making projects too — its overall capital loss rate sits around 10% currently. It has also experienced companies that performed poorly post-IPO. Rather than letting these sit, Fengshang exits decisively when future trajectories become clear. Even when the final return falls slightly below 1x, appearing as a loss, the exit represents the best choice for LPs given the circumstances.

Decisive exit does not equal short-termism in founder relationships. Especially in today's market, as exit channels grow more uncertain and different LP types demand more versatile GP capabilities, exit approaches increasingly depend on portfolio companies' self-sustaining ability and steady growth. Screening criteria have grown stricter. But once convinced, Fengshang will unhesitatingly double down, becoming a long-term industrial partner to companies for mutual success.

Investing with exit in mind — or "always looking from upstream" — may not be what classical VC celebrates, given an industry born of aspirations to "change the world." But viewed differently, as times and society evolve, the equity investment industry, while still reaching for the stars, has entered a phase that demands more grounded pragmatism.

After all, before being responsible for a new world, GPs must first be responsible to their LPs.

Image source | Visual China

Layout | Xuemei Guo