ZhenFund's First Secondary Transaction

By Zhiyan Chen

On the morning of February 24, Coller Capital and GSR Ventures announced the completion of a GP-led secondary transaction worth RMB 229 million. Based on publicly available information, this marks the first time GSR Ventures has used an S transaction to provide an LP exit.

A GP-led secondary transaction differs from the more common scenario where an LP initiates the sale and the GP divests assets. Instead, the GP proactively orchestrates the transfer of one or more assets, or fund interests, to a new fund while continuing to manage them under the existing GP.

According to Tianyancha data on partner changes, the transaction was completed in mid-January and involved a single fund raised by GSR Ventures in 2015. As the "new LPs," lead investor Coller Capital and follow-on investor Taihu Aisi (under Wuxi state-owned asset manager Guolian Group) subscribed to 81.5% and 13.8% respectively, while legacy LPs including Guochuang Yuanhe, Litong Industry, Gopher Capital, Shengjing Union, Xiaocun Capital, and Herun Linghang achieved exits after a full nine years.

How did this ten-year fund actually perform? Based on the original subscription amounts from the legacy LPs, the fund's original size was approximately RMB 200 million. The announced transaction size was RMB 229 million, though the specific transaction price was not disclosed. The fund had also invested in Ofo. According to previous media reports, GSR Ventures' stake in Ofo should have been exited in 2017 and converted to DPI.

Regarding this transaction, Allen Zhu stated externally: "China's private equity secondary market is becoming increasingly active, and S funds are emerging as an important exit strategy for private equity funds, placing higher demands on GPs' transaction capabilities and the quality and sustainability of underlying assets. GSR Ventures will continue working to create diversified exit opportunities and consistently deliver strong returns for investors."

According to An Yong Waves (Anyong Waves), unlike the common practice of using S transactions to establish continuation funds that roll existing portfolio companies into new vehicles, this transaction adopted a "restructuring model" where legacy LPs exit and new LPs enter. All original LPs achieved full exits, while Coller Capital and Taihu Aisi entered into new investment management agreements with GSR Ventures.

Typically, continuation funds involve multiple parties: the original fund's LPs, the original fund's GP, the continuation fund's GP, new investors in the continuation fund, the underlying portfolio companies, their founders and other existing shareholders, as well as various lawyers, auditors, and financial advisors participating in the transaction. The "restructuring model" used in this transaction maximally simplified the parties involved, leaving the existing portfolio company structures unaffected.

London-headquartered Coller Capital is among the earliest investment firms globally to engage in S fund activities. This transaction was led by Coller Capital's RMB private equity secondary fund, "Coller Capital Private Equity Secondaries Fund I RMB." The fund held its first close in April 2023, with its debut transaction completed with Legend Capital totaling approximately RMB 315 million. That transaction was described by Coller Capital Investment Director Yang Zhan as "the first classic GP-led transaction in the RMB S fund market."

The joint press release noted that this transaction "covers eight high-quality, high-growth assets in China's consumer and technology sectors." An Yong Waves research found that the eight companies involved were founded between 2014 and 2017, mostly TMT-era companies where GSR Ventures entered as an early-stage investor.

Rao Zhi, founding partner of Xiangxiang Capital, which specializes in S transactions, told An Yong Waves that this transaction provided liquidity for legacy LPs while allowing new LPs to acquire quality assets at reasonable valuations — a "win-win outcome."

"The core of S transactions is trading time for space. You earn three types of money: discount money, growth money, and capital markets money. Among these, the price discount is the foundation of all returns," Rao Zhi told An Yong Waves.

Due to shifts in primary market investment hotspots, venture capital from the TMT era has faced considerable "demonization" in recent years. "The TMT era certainly had its problems, but it's far from worthless. Assets from this period need comprehensive re-evaluation," Rao Zhi believes. Though the eight assets in this transaction hail from the TMT era, many possess characteristics of data assets, which retain long-term value.

With business and investment having fully entered the hard tech and AI era, how should we understand the future value of assets from the previous era?

Yang Zhan previously discussed in interviews how Coller Capital understands "good assets" — "Good assets are those that can survive relatively comfortably even in less-than-ideal market environments." He offered an example: "A small noodle shop might be worth RMB 100 million at peak valuation, or RMB 50 million, or even RMB 10 million at lower valuations. But regardless of valuation, the shop's cash flow itself isn't affected. In a sense, this is a sustainable, high-quality asset."

Regarding this S transaction, Yang Zhan's statement was: "Coller Capital's established investment platform in the China market, combined with our deep expertise in handling complex GP-led transactions, were key to our successful initiation and completion of this transaction at an attractive valuation."

Image source | IC Photo