Will the Primary Market Get Better? 9 People Talk About Some Real Problems

By Lili Yu

Is the sluggish primary market finally loosening up? A recent development worth watching: Shenzhen — widely regarded as a bellwether for China's homegrown venture capital industry — has, following its push for "patient capital," now coined the term "bold capital" for the first time. The policy proposal also addresses several long-standing pain points plaguing the primary market, such as easing reinvestment requirements and introducing fault tolerance and due-diligence exemption mechanisms for state-owned capital.

There's no question that China's venture capital market has entered the era of state capital. Data shows that in the first half of 2024, state-controlled and state-participated limited partners accounted for a combined 81.2% of disclosed capital commitments — meaning over 80% of primary market funding now comes from state sources. State capital has become an indispensable part of China's venture ecosystem.

But in this new era, how should private GPs navigate their relationships with state LPs? What bottlenecks and chokepoints still constrain the primary market? And is there a better path forward?

Recently, six investors and three venture capital insiders joined CCTV's Dialogue program for a discussion titled "The 'Patience' and 'Reality' of Venture Capital." Their conversation lifted the curtain on a rarely seen corner of China's state-capital-driven venture ecosystem.

The participants were: Suhua Liu (President of Shenzhen Capital Group), Jin Tang (Chairman of Shuimu Capital and Founder of the China Venture Capital and Private Equity Research Institute), Lei Mi (Founding Partner of CASSTAR), Wei Chen (Chairman of Oriental Fortune Capital), Jianhua Fang (Founding Partner of Guoke Xinneng), Feng Li (Founding Partner of FreeS Fund), Wenjing Shen (Deputy Director of the Ministry of Science and Technology's Department of Resource Allocation and Management), Zhiqun Shen (Chairman of the Equity and Venture Investment Committee of the China Investment Association), and Xiaolei Yang (CEO of ChinaVenture).

Below are selected excerpts from the discussion, edited and compiled by Anyong Waves:

On the Exit Crunch

> Everyone is banking on the 5% IPO path

Feng Li: The hardest part of today's primary market is exits. By international convention, roughly 60% of portfolio companies exit through M&A, slightly over 30% through secondary fund transfers, and less than 5% through IPOs. China's challenge is that both M&A and secondary transfers remain underdeveloped — so everyone is left counting on that sub-5% IPO route.

> When the stock market is healthy, nothing's a problem; when it's not, everything becomes one

Wei Chen: Looking at fundraising, investing, portfolio management, and exits in isolation is meaningless — you have to frame them within national strategy. Policy tailwinds are already picking up. When the stock market is healthy, none of this is a problem; when it struggles, everything becomes a problem. Why does China see so few M&A exits? Why is secondary transfer so limited? The core issue is that the main exit channel — IPOs — remains blocked.

Another critical chokepoint is regulatory specialization. Historically, there's been more regulation than support. Why did this latest policy shift boost confidence? Because it signaled a move from a long-standing regulatory mindset to a development-oriented one.

> We didn't do the right things 10 or 20 years ago

Lei Mi: The reason exits are difficult is IPO restrictions. It's like the gaokao: in the past, it mainly tested financial metrics; now it tests scientific innovation credentials. The yardstick has changed, so investments made under the old criteria are harder to exit. But the real bottleneck, I believe, lies in investing early, investing small, investing for the long term, and investing in hard tech. Why does the US capital market keep rising? Because it does exactly that — early, small, long-term, hard tech — enabling high-quality corporate growth. The weakness in our secondary market actually stems from the fact that over the past 10 to 20 years, we haven't invested in real hard tech. We didn't do the right things.

On Fundraising in the State Capital Era

> To take government money, you must deliver reinvestment and investment attraction

Suhua Liu: To do venture capital in China, you have to learn how to raise state capital. State-owned insurers, social security funds, and financial institutions invest primarily for financial returns. They want to see whether you're investing early, investing small, and investing in technology. If you're doing consumer investments, you probably won't get their money — it has to align with national strategy.

Some local government funds can contribute substantial portions, 30% or more. To take this money, you must commit to reinvestment and investment attraction. This is where the volume is, and it's relatively accessible. But you have to choose your region carefully. The requirements may be identical whether you pick a western city or a coastal one, but the ease of fulfillment is completely different. I know many private GPs have now set up "value-added service departments" — essentially teams helping local governments with investment attraction.

> Due-diligence exemption for state-owned investment institutions

Jin Tang: Exits are definitely the biggest bottleneck, and private fund managers largely can't raise money right now. But I'd add that investment itself has a major blockage too: the lack of due-diligence exemption for state-owned investment institutions is a significant problem for China's venture capital industry.

State institutions face relatively high investment risks. They essentially face four types of oversight annually — discipline inspection, inspection tours, audits, and supervisory reviews. Not long ago, the State-owned Assets Supervision and Administration Commission issued a document calling for bold implementation of fault-tolerance mechanisms at state enterprises. At a previous Financial Street Forum, it was also made clear that China's financial sector should begin adopting fault-tolerance mechanisms. These oversight mechanisms are absolutely necessary, but could they be streamlined or consolidated to reduce pressure on state-owned venture institutions and, by extension, the private fund managers they back? If genuine due-diligence exemption can be achieved for state-owned venture enterprises, it would deliver enormous confidence and support to the industry.

What Is Patient Capital?

> Supply falls massively short compared to the US

Xiaolei Yang: Take insurance companies' long-term capital — the US has roughly 2.7 times what we do. Certain US pension funds can enter the market; they're the second pillar. In China, this segment has been slow to open up. As for government guidance funds, officials' terms don't match fund lifespans, so leadership changes often disrupt allocation strategies. An official's term might be just five years, which creates enormous pressure for funds with five- to seven-year cycles, let alone 15-year ones.

> Insurance is better long-term capital than banks

Feng Li: The best long-term capital is inherently long-dated — like insurance. Banks' liabilities are deposits: demand deposits, one-year, two-year, three-year. Turning that into long-term capital isn't easy. I believe insurance companies' financial assessments need to change. Currently, there's an annual financial metric for how much cash needs to be recouped from LP investments, which creates major challenges for fund managers. So beyond policy changes, we need specific mechanisms to align this capital with industry requirements and regulatory oversight.

> Three things for patient capital

Wei Chen: First, policy incentives. For instance, could long-term capital receive favorable tax treatment, or have IPO lock-up periods tied inversely to holding periods?

Second, state capital needs to lead on patience, especially guidance funds. Before 2023, the average time from founding to IPO for A-share companies was 26 years; even STAR Market listings took over 14 years. So can we find 15-year funds in China?

We're now seeing many state funds, including major ones, extending fund terms beyond 10 years. This should be the baseline: funds should原则上 be no shorter than 10 years, angel funds no shorter than 15. Only then can patient capital truly take shape.

Third, the exit ecosystem needs work beyond IPOs. Fund liquidation regulations, business registration and filing mechanisms — these may all need to change.

> Converting financial capital into industrial capital

Zhiqun Shen: We need to study how to channel China's massive financial assets into industrial capital through venture capital and equity investment. This is already happening. For example, financial asset investment companies' equity investments are being piloted in 18 cities — a good start, but far too limited.

Having bank personnel do venture capital — I don't think that's the right approach. They're more inclined to avoid risk. I've told financial asset investment companies: respect professional venture institutions, collaborate more, do less direct investing. If everyone with money does it themselves, what do we need specialized firms for? Professionals should do professional work. Respect expertise.

A Human-Nature-Is-Good Industry

> We need to create wealth effects

Xiaolei Yang: Venture capital has to make money to attract more capital into the industry. Nowadays, many people are embarrassed to talk about wealth creation, even afraid to speak publicly. If we keep suppressing people's willingness to express themselves, how can we give prospective market entrants greater possibility and higher expectations? We need more ways to generate liquidity and create wealth effects.

Looking at this year's IPO market: as of today, roughly 73 deals. We project the year may not reach 100. Next year, I've surveyed nearly 100 investors — the vast majority predict under 100. Without wealth effects, there's no way more capital flows into this market. The cycle won't turn.

> Understanding remains genuinely difficult

Feng Li: Even though we live in an age of ever more information, understanding each other is actually harder than before. I used to face all kinds of misunderstandings. If someone wasn't in my industry, they'd either say I did investment banking or that I worked in finance. Even my mom wasn't entirely sure what my main business was. Understanding is genuinely difficult. Where exactly are the chokepoints in fundraising, investing, portfolio management, and exits? What we're really hoping is that policymakers and the state understand us, and that more relevant mechanisms can be established clearly and transparently.

> Resolving venture capital's position and status in China

Zhiqun Shen: For over 20 years, China's venture capital has had neither position nor status in the national economy. The National Bureau of Statistics' industry classification still doesn't include venture capital to this day — it uses AMAC data instead. Is AMAC data venture capital data? It's incomplete.

The 2005 Interim Measures for the Administration of Venture Capital Enterprises — "interim" to this day. We've repeatedly called for accelerated venture capital legislation, but there's been no response yet. Once position and status are clarified, the four major bottlenecks of fundraising, investing, portfolio management, and exits will surely be resolved quickly.

> A human-nature-is-good industry

Jianhua Fang: Hu Shi once said tolerance is more important than freedom. I think in today's emphasis on technological innovation, inclusiveness may be more important than innovation itself. Some indirect financing puts risk first — in their eyes, every person could be a risk. That's determined by their financial nature: they earn spreads. Invest in 100 projects, lose money on one, and the whole thing might collapse. But venture capital is different. We might do 10 projects. One success covers multiple losses. This product nature means our industry is more like one where human nature is inherently good.

(CCTV Finance Dialogue will air this Saturday) Image source: IC Photo