China’s Spin on the 'Listed Company + VC' Model

The synergy between the two sides, with public companies building the industry ecosystem and VC firms sourcing appealing investment targets, makes the model more than the sum of its parts.
FOF WeeklyFeb 15,2021,20:09

Yusys Technologies, a Chinese tech group that focuses on computer applications, partnered with OCBC Capital (Shanghai) Equity Investment Management Co. Ltd to jointly set up a big data-focused fund in 2019. And it has returned the classic Chinese business model to the spotlight.

Under the model, listed companies and venture capital (VC) firms co-launch VC funds for equity investment. The synergy between the two sides, with public companies building the industry ecosystem and VC firms sourcing appealing investment targets, makes the model more than the sum of its parts.

While this model had a predecessor, the “PE + listed company” buyout fund, recent developments represent an exciting spin on the idea with the potential for significant impact.

The Development Story

Back in 2011, China witnessed the landing of its first investment fund co-launched by a listed company and an investment manager. But that didn’t make any big splashes – IPO was still a smooth exit channel, and investment managers didn’t have to rope in public companies as the future buyer of their invested firms.

Things remained the same until 2012, when the sluggish Chinese stock market made IPO no longer that available for filing candidates.

In this context, it has become common practice for investment managers to cooperate with listed companies to co-launch funds. 35 and 133 of these new investment funds were established in 2013 and 2014, respectively. In 2017, the number reached 365, an increase of 107.39% from the 176 in 2016. A growing momentum of 150 new funds per year has continued since then.

How Does 1+1>2 Really Work?

Public companies have a key role to play in this model. First of all, they can raise large amounts of money by selling equities or bonds; secondly, their core business equips them with experience and resources; moreover, their management team can go hands-on to help VC-invested firms in strategic decision-making and running daily affairs.

VC firms, on the other side, are better at systematic selection, evaluation, investment and management of portfolio companies. In addition, VCs also bring many industry resources such as their important clients, industry associations, and insights into future trends and opportunities. It looks like VCs enter the public company as a mentor and thus makes a difference to the company’s business decisions.

In this synergetic model, VC firms no longer hustle and sweat for fundraising or cash-out, as there will be public companies, the wealthy limited partner (LP) and potential buyers. Public companies can also sigh with relief that their corporate venture capital (CVC) investment can put them in an advantageous position, even in this ever-changing tech era, by acquiring the most cutting-edge technology.

Dong Shiping, board secretary of Yusys Technologies, admits in a special interview with FOF Weekly that, “As a business in the real economy, Yusys can’t source as many potential targets as a VC firm does. And some firms are just unsuitable for direct investment, given Yusys’ limited capital resources, so working with VC firms and investing through funds can help a lot.”

“Corporate investors’ participation in funds will be the big trend. In today’s dynamic tech era, they need to know all the avant-garde new species using a fund lens to avoid being outdated by the market,” says Guo Yanni, managing co-founder of OCBC Capital (Shanghai), in a special interview with FOF Weekly.

Sub-Categories

The “listed company + VC” model is further divisible into two categories, using capital contribution as the main criterion.

The first is that the listed company invests as a single LP, and the fund manager is responsible for the investment process. The good side of this sub-category is that general partners (GPs) are freed from raising funds; the bad side is that GPs work exclusively for a single LP, demoting themselves into an investment team outside the listed company who must submit to the will of listed companies. That often deviates from normal equity investments.

The second category is when the listed company only partially contributes to the fund as an LP, and the rest is raised by the GP. Under this structure, the GP and listed companies have fairly equal rights. However, the GP in this case often leans towards other financial investors, while the listed company prefers a full reflection of its investment strategy.

If listed companies and VCs adopt the mode of Co-GP or open up the management team to operate jointly, it will be conducive to deeper integration of the two parties and a more balanced and consistent investment philosophy. In terms of feasibility, the second category is more reasonable. A system featuring double key persons – one from the fund manager and one from the listed company – should be crucial to its success.

Some Final Words

For a long time, due to market mechanism imperfection and PE market players’ immaturity, Chinese GPs have worried about fundraising and investing – that’s even truer in recent years. In this context, and considering the fact that corporate investors are increasingly aware of market competition and industry eco-system investing, the classic “listed company + VC” model will only undergo more derivation and spur more market changes.

CapitalWatch Disclaimer

CapitalWatch has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice.

Topics:venture capital, investment, fofweekly, GP, LP
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