Government Guiding Funds as Effective Means

to Boost PE/VC Investments

in Advanced Technology Sectors

Lei Li, Ph.D., CFA

Chairman, Beijing Summit Capital, China

Chairman, Beijing Summit Capital, China

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About Government Guiding Fund (GGF)

A GGF is a fund of funds (FoF) whose funding source comes from government agency tax revenue either at local or national government level.

GGFs employ rigorous selection process to recruit qualified PE/VC fund managers to form funds to accept GFF injected seed money, typically ¼ to 1/3 of the size of the projected funds. The selected funds raise the remaining ¾ or 2/3 of the funds through their own effort.

GGFs have stringent guidelines as to which sectors, minimum percentage of investment in a specific targeted geographical region, pace/progress of investment, exiting methods/strategies, etc.

GGFs engage in close monitoring on selected funds. Periodic reporting, regular examinations, and end-of-period auditing are required to prevent misuse of government funds.

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Missions of GGFs

Two folds:

Promoting investments through direct financing (vs. bank loans) to start-up tech sectors, upgrade/tranform of traditional industries, etc.

Boosting PE/VC industry in China

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The Inherent Natures of Start-Up Tech Firms

These characteristics make them inherently unsuitable to be financed through indirect financing such as bank loans.

Natures of Start-ups from the perspective of financing：

Asymmetric information

High level of uncertainty

Assets are primarily intangible

Needs for finance are periodic

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Government agencies

Lack of transparent selection/monitoring process

Lack of sustainability

Funding unstable

Only available to limited firms

Ineffective results

Unaccountability/ Promoting corruptions

What have traditionally been done in China

Direct injection Early-stage/

Start-up Firms

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GGFS FoF (leveraging)

Guarantee

Follow-up Investments

Boosting PE/VC Early-stage/

Start-up Firms

Government Service + Market Force

Guiding (local) industry development

Professional PE/VC management

Fiscal leveraging Effects

Transparency and Accountability

Boosting PE/VC industry in China

Government Guiding Fund – A New Approach

4 24

94

129

6 39

189 209

0

80

160

240

0

50

100

150

2006 2008 2013 2014

Growth of GGFs in China

Deal value Deal count

Bil RMB

Data source: CVSource, 2015 6

PE/VC

Economic Development

Mitigate Financing hurdles facing startups

Promote Innovations and entrepreneurship

Facilitate corporate restructure and re-vitalization

Assist company/industry upgrade and transformation

Stimulate

Social Economic Impacts of a Developed PE/VC Industry

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Social Economic Impacts of a Developed PE/VC Industry

-- at the National Level

Help improve the structure of national Financial system

Increase proportion of direct finance

Facilitate deleveraging

Enable financial markets to play more important roles in resource allocation

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History of Equity Investment Fund’s

development in China

1980’s, government-oriented.

Research of“industrial investment fund”.

2004, launch of Shenzhen SME

Board* broadened the exit channel and gave birth to a large number of investment institutions

Around 2000 the Internet bubble burst caused great loss. Many foreign investment institutions then withdrew from China.

2013, suspension of IPO in Shanghai and Shenzhen stock markets caused reshuffle of PE/VC industry.

2008 financial crisis, the rate of return declined

1990's, surge of Internet investment opportunities. Many foreign investment entered China. The successful listing in the US of Sina, Sohu, NetEase, AsiaInfo etcs. brought huge returns.

2007, implementation of the "New Partnership Law” popularized partnership - type equity investment funds. Fiscal & tax incentives promoted rapid growth of "equity investment funds".

2014，reopening of IPO in Shanghai and Shenzhen stock markets. Expansion of NEEQ***.

2009，launch of Shenzhen GEM Board**. Government’s “4 trillion RMB stimulus”, greatly promoted the venture capital fund's development.

* Shenzhen SME Board : Small and Medium Enterprise Board of Shenzhen Stock Exchange

** Shenzhen GEM Board: Growth Enterprises Market Board of Shenzhen Stock Exchange

*** NEEQ : National Equities Exchange and Quotation.

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History of Equity Investment Fund’s Development in China

Deals value in Greater China (Bar) Deal count in Greater China (Line) 15 vs.

10-14(avg) CAGR

(14-15)

Deal count

＞$1B $0.1B-$1B ＜$0.1B

Source: Bain & Company Greater China Private Equity Report 2016

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Source: amac.org.cn/

Regional Distribution of China’s PE/VC Industry

Beijing: Number of GP: 4,357 Number of funds: 12,308 Subscribed fund size: ￥3,657.03 billion

Paid fund size: ￥3,256.56 billion

Shanghai: Number of GP: 3,923 Number of funds: 13,339 Subscribed fund size: ￥2,261.92 billion

Paid fund size: ￥2,179.77 billion

Shenzhen: Number of GP: 2,787 Number of funds: 6,607 Subscribed fund size: ￥1,060.04 billion

Paid fund size: ￥1,050.01 billion

Guangdong Province: Number of GP: 3,937 Number of funds: 8,943 Subscribed fund size:￥1,412.56 billion

Paid fund size: ￥ 1,331.80 billion

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Growth of PE Funds in China

Venture

Buyout

Growth

Angel

Private placement

Fund o funds

Mezzanine

Composite

Real-estate

Construction

Trends of Newly-raised PE funds Types (Growth rate from 2014 to 2015)

Source: www.chinaventure.com.cn

In 2015, China‘s M&A market completed 4,156 deals, increasing by 62% compared to 2,574 deals done in 2014.

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The Internet sector has been dominating in the Chinese PE market’s deals recent years, accounting for 25% of PE deals in value, and for more than 20% of PE deals in counts, far ahead of other industries’ deals.

China’s PE Market Investment Distribution by Sectors

3.672 22.914

0.058 0.072 0.134 0.72 1.124 1.864 2.75 4.255 4.974 5.104

9.443 10.571 10.614 11.918 13.48

15.892 17.178

23.791 28.376

32.595 46.158

86.439

0 20 40 60 80 100

Not revealedOthers

SemiconductorBroadcasting

EducationConstruction

Food & beverageRetail

Textiles & apparelAgribusiness

Clean techAutomobile

Electronic & optoelectronicEntertainment & media

Chemical industryLogistics

ITMachinery Manufacturing

Biotech/Health CareReal Estate

Energy & miningTelco

FinanceInternet

1H-2016 China PE Market Investment Sector Distribution (deal value, billion Yuan)

55 56

1 1

11 13 14 15 16 22

29 29 35

45 48 49 53 53

91 92 98

122 160

286

0 50 100 150 200 250 300 350

Not revealedOthers

BroadcastingSemiconductor

Textiles & apparelConstruction

EducationFood & beverage

LogisticsAgribusinessAutomobile

RetailEnergy & mining

Real EstateClean tech

Chemical industryElectronic & optoelectronic

TelcoEntertainment & media

FinanceMachinery Manufacturing

Biotech/Health CareIT

Internet

1H-2016 China PE Market Investment Sector Distribution (deal count)

Data source: www.pedata.cn

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The Development Trends of China‘s PE/VC Industry

Online retailing /O2O

Internet Finance

Logistics/transportation related to e-commerce Tourism

Wealth and asset management

Green Technology

Medical treatment (online/offline)

Agribusiness (Health care/High-end aliment)

Robots & CNC equipments

Electric vehicles and parts

Pharmaceuticals & medical equipments

IT (IT chips, communications sets, industrial

operating systems and software)

Online-Offline Integration Consumption upgrade

(wealth & health oriented) Created-in-China 2025

Source: Bain & Company Greater China Private Equity Report 2016

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Overseas M&A has brought great changes to the structure of Chinese PE industry. In the context of domestic economic restructuring, Chinese enterprises need overseas M&A to obtain the core of cutting-edge technology as well as to increase their global brand recognition. Meanwhile there exist a large number of high-quality overseas firms being undervalued, overseas M&A will be an un-ignorable trend in the future.

The Development Trends of China‘s PE/VC Industry

Internet

Technology

Retail

Technology

Internet

Industrial

Health Health

Others Industrial

Technology

Industrial Health Internet

Tourism/Hotels

Financial services

Financial services

Others Others

($1B)

Chinese PE investment abroad, by sectors

Technology and Internet dominate Chinese investment activities abroad The volume and count of Chinese PE investment abroad are increasing

Chinese PE investment abroad, by volume ($1B)

Deal count

Average deal volume($ 1M)

Source: Bain & Company Greater China Private Equity Report 2016 Source: Bain & Company Greater China Private Equity Report 2016

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About Us

Contacts:

Lei Li, PhD., CFA

Chairman, Beijing Summit Capital Ltd.

China Central Place, Tower 2, Suite 2607

79 Jianguo Road

Chaoyang District, Beijing 100025

China

+86-10-59696998 (China Office), +86-18618386498 (China Mobile) +1-908-608-7777 (US Mobile) lileiusa@gmail.com, or lilei@summitcapitals.com URL: www.summitcapitals.com

Beijing Summit Capital Investment Co., Ltd is a private equity investment company, focusing on advanced technology sectors such as industrial robotics, drones, advanced materials, new energy, internet, advanced technology as applied to automotive industry, etc. Previously we have invested in minerals (primarily gold), bio-pharmaceutical, and agriculture industries. We operate funds both in RMB and USD.

Our unique competitive advantage resides in combining in-depth understanding of inner working of the Chinese market with the expertise of US and European trained financial professionals. We look forward to working as conduits and liaisons of international capital’s interests in participating the great growth story of China.

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Thank you!

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