A Way-out to Exit Difficulty of Investment Funds?

The RMB private equity funds underwent a vigorous growth period similar to a "baby boom" approximately ten years ago. During that period, a large number of private equity investment funds were established in China. Currently, these approximately 10-year-old funds have begun to enter their exit and liquidation phases, but they are caught out by a different economic situation, international environment and regulatory landscape. As a result, issues related to exit routes and even the fact of "difficulty to exit" have been the buzzword topics in the realm of RMB private equity funds at this time. In the process of selecting exit paths for RMB private equity funds, there is a lot of contention about the different interests of multiple parties such as fund GPs, LPs, founders of underlying portfolios, other shareholders of underlying portfolios, and third-party purchasers.

人民币私募股权基金在大约十年前经历了一个类似“婴儿潮”的蓬勃壮大时期，那段时间里中国迅速涌现设立了大量的私募股权投资基金。现在，这些设立于十年前的私募股权投资基金开始纷纷进入退出期、清算期，却又恰逢经济形势、国际环境和监管的变化。因此，有关退出路径、甚至“退出难”，成为了当下人民币私募股权基金领域的最热门话题之一。人民币私募基金在选择退出路径的过程中，交织着基金GP、LP、底层项目创始人、底层项目其他股东、第三方买家等多方利益的角逐。

The Dilemma of Traditional Exit Nethods: IPO and Repurchase

传统退出方式的困境——上市和回购 

Back in the years when market was booming, having the investment portfolio company go public through IPO and achieving severalfold returns was the most ideal exit approach for private equity funds. Numerous of those investment success and wealth stories in China were told then. However, things have changed. Now with tightened IPO reviews in some sectors over the past years, the listing plans of some enterprises have been postponed by years, and an IPO exit has been considered less feasible and less profitable.

在行情好的年份，等待投资项目通过IPO上市、实现收益连翻数倍，是私募股权基金最为理想的退出方式，也创造出无数的中国投资神话。但随着部分行业领域的IPO审核在近两年呈收紧趋势，一些标的企业的上市计划被以年为单位进行延期，IPO退出的可行性和获益性总体有所下降。

In some cases, private equity fund managers might have to consider alternative exit methods, such as exercising their rights as financial investors and demanding that the portfolio company or its founders repurchase equity shares held by the investment fund. The exercise of the repurchase right was once merely a fallback option. The agreed repurchase price often could only cover the hurdle rate of fund return or even be lower than the hurdle rate, and thus it is nearly impossible for GPs to obtain performance awards calculated based on excess fund returns when the fund exits by using repurchase right. Additionally, the actual payment amount of repurchase price will also be subject to the disposable property held by the portfolio and its founders. However, considering the current environment where capital craves the timely return of funds, those private equity funds which have repurchase rights in the deal could almost be deemed as the fortunate ones in the nowadays exit wave. When exercising the repurchase right, it might be necessary to engage dispute resolution lawyers in advance to facilitate the smooth recovery of the repurchase funds from the perspectives of right consolidation, property enforcement and advance preservation.

某些情况下，私募股权基金管理人有可能不得不考虑转而选择其他退出方式，例如行使其作为财务投资人的权利、要求公司或创始人回购股份。行使回购权曾经仅是一项保底选项。回购权对应的可回收价款往往至多能覆盖基金门槛收益率（不少回购情形下的回报率甚至可能低于基金门槛收益率），很难帮助基金普通合伙人进一步赢取绩效分成所需的超额收益，并且实际回收价款的数额还受制于公司、创始人的账面可支配现金。但是，考虑到当前环境下资本对资金按期回笼的渴望，当初谈判下来回购权的私募股权基金几乎成为了如今退出大潮下的幸运儿。打算通过行使回购权退出的私募股权基金，可能需要提前引入争议解决律师，以便从权利固化、财产执行和提前保全等角度促进回购款项的顺利收回。

The Development of New Exit Channels: S Funds and Continuation Funds

新兴退出渠道的发展——S基金和接续基金

Between the dilemma choice of either waiting for an IPO of a portfolio company or choosing to exercise repurchase right in order to meet the fund LP's demand for fund return, a novel alternative solution has emerged in China's private fund market, which is buying out those fund LPs, who have lost patience in ever waiting for other cash-in opportunities, through S Fund transactions. S Funds, which mean secondary share transaction funds, are a type of private equity fund whose principal investment strategy is to purchase existing fund interests from investors of other private equity funds, and/or to acquire equity share in the portfolios held by other private equity funds. In order to support the development of S Fund transactions, Beijing, Shanghai and other regions have been pushing forward pilot work of allowing transfer of private equity and venture fund interest in equity transfer platform managed by regional governments since 2021 and 2022. The number of S Fund transactions in China has therefore risen continuously for several years, and they have become a significant force in diversifying exit channels for private equity funds.

在选择等待标的企业IPO，或是为了满足基金LP的资金回笼诉求、而被迫选择回购的矛盾困境之外，中国私募基金市场上出现了另一个新的解决方案：即通过S基金交易，买退那些已没有耐心继续等待良好变现机会的基金LP。S基金（又名二手份额交易基金），是以受让二手私募基金份额、或私募基金所投标的股权为主要投资策略的一种私募基金。中国政府为了支持S基金交易的开展，北京、上海等地从2021、2022年开始持续推进在区域性股权市场开展私募股权和创业投资份额转让的试点工作。中国境内的S基金交易数量由此连续多年上扬，现如今S基金成为了参与盘活私募基金退出渠道的一股重要力量。

S Funds in China now mainly encompass two categories: one is independently managed by professional S Fund managers, and the other is jointly established and managed by both of the GPs of funds nearing expiration of its term and professional S Fund managers. This second type of S Funds is also referred to as Continuation Funds. The purpose of establishing a Continuation Fund is usually to acquire some promising underlying portfolios held by near-expired funds.

当下的S基金主要包含两类，一类是由专业的S基金管理人独立管理，还有一类是由临近到期基金的GP与专业的S基金管理人共同设立并管理。第二类S基金又称接续基金，接续基金的设立目的是收购临近到期基金的优质底层项目。

The commercial drivers for all parties involved in the Continuation Funds are as follows:

接续基金参与各方的商业驱动因素在于以下几方面:

From the perspective of GP, firstly, the operating period of the existing funds managed by this GP is approaching expiration, and the GP aims to provide certain liquidity support to the fund LPs who have been investors for many years. Secondly, by setting up Continuation Funds and transferring promising portfolios from near-expired funds to the Continuation Funds, the GP can continue to await the IPO or other superior exit opportunities of high-quality projects in the newly-built Continuation Funds, in order to achieve favorable returns ultimately.

从接续基金的GP端来看: 第一，GP在管基金经营期限即将到期，其希望向已投入多年的LP提供一定的流动性支持；第二，通过参与设立接续基金，让接续基金受让优质项目权益，该GP能够继续在接续基金中等待优质项目的IPO或其他更好的退出机会，最终获得良好回报。

From the perspective of LP, in contrast to blind-pool funds, Continuation Funds have identified well-developed and high-quality investment targets, which offers higher certainty of returns and faster exit in expectation.

从接续基金的LP端来看: 与投资标的不确定的盲池基金相比，接续基金设立前已经锁定了发展良好的优质投资标的，收益确定性更高，退出速度更快。

Compared with conventional private equity funds, the establishment of Continuation Funds places greater emphasis on the due diligence of underlying portfolios and the execution of underlying transfer transactions. In some instances, it involves a package of transactions with numerous entities, and constitutes a challenge for the GP's capabilities of coordination and communication among multiple shareholders of the target companies and between the LPs of the newly-built fund and existing fund.

与设立一般的私募股权基金相比，接续基金设立项目更强调对底层项目的尽调及底层转让交易的执行。有的情况下，还会涉及一揽子交易，这类交易所涉主体多，极其考验GP在多个标的公司股东之间、以及在新老基金LP之间的协调沟通能力。

Policy support available for the New Exit Channels - Non-cash Distribution

新型退出方式的政策支持——非现金分配

In addition to the above ways to cash out in the aspect of funds or fund LPs, regulatory authorities have promoted the exit method for private equity funds through non-cash distribution to LPs. In 2022, the China Securities Regulatory Commission officially announced the start of a pilot programme for private equity funds to distribute stock directly from fund to its investors. In 2024, relevant authority issued several documents, specifying requirements for stock distribution, as well as connections of the general rules on selling shares of listed companies. Through stock distribution, private equity funds can directly transfer the securities assets they hold to the fund LPs without cash transactions, thus achieving exits from the investment portfolios.

除了通过上述方式实现基金或基金LP层面的变现退出外，监管机构层面也在推动基金通过向LP作出非现金分配的方式实现退出。2022年，中国证监会首次官宣启动私募股权基金向投资者实物分配股票的试点工作。2024年，私募基金主管机构数次发文，明确了私募股权基金进行股票实物分配的多项具体要求、与上市公司层面减持规则的衔接方式等。通过股票实物分配的方式，私募股权基金能够直接将所持有的股票证券资产划转至基金LP名下，从而无需通过现金交易、但实现基金投资的退出。

It can be observed that new opportunities often lie within challenges. The practice of private equity funds in China has now entered a new stage. An increasing number of opportunities have emerged during the management of post-investment and realisation, and it even has given birth to a nascent S Fund market, as well as new policies in support of stock distribution. Outstanding practitioners are anticipated to snap the chances and further grow in this exit wave of RMB private equity funds.

我们可以看到，挑战中总是蕴含着新的机遇。目前中国私募股权基金的实践已进入了一个新的阶段。越来越多的合作机会生发于投后管理、退出管理环节，乃至催生出了新兴的S基金市场以及股票实物分配新政等。优秀的从业者预计将能在人民币私募股权基金的这次退出浪潮中把握机会和获得进一步发展。