Guo Feng, Managing Director of Gopher Assets: The best time for S funds to buy in the past decade has come

In 2021, the entire global PE secondary market will be very active, ushering in a blowout growth, which reflects that the PE secondary market has attracted the attention of GPs and LPs around the world.

On August 10, at the “16th China Investment Annual Conference · Annual Summit” hosted by Touzhong Information and Touzhong.com, Guo Feng, Managing Director of Gopher Assets, delivered a speech entitled “Development Trend of China’s PE Secondary Market in 2022” and Prospects” keynote speech.

Guo Feng believes that the best time for S funds to buy in the past ten years has come. Starting from June and July 2021, Hong Kong stocks, A shares and U.S. stocks in the past six months have been greatly adjusted. Assets of the same value can now be bought at cheaper prices than in the past seven or eight years.

The following is the record of the live speech, organized by the investment network:

I have participated in many conferences and forums about the S Fund this year. The biggest impression to me is that the weather is the same as the weather in Hangzhou. It is very hot, maybe a little overheated. Here are some figures to report to you how the Chinese market has changed in the past year.

Global PE secondary market

In 2021, the entire global PE secondary market will be very active, and it can be said to be a blowout growth. Last year, the second-hand share of US$134 billion was traded globally, an increase of 123% compared to the previous year and more than half of the transaction size in the second half of the year. This reflects that the PE secondary market has attracted the attention of GPs and LPs around the world.

Earlier I saw that Wang Mingyao always mentioned finding certainty from uncertainty. Why the S fund was so hot in the past is related to the performance of the S fund and the attribute of seeking certainty through uncertainty. From the perspective of S funds, FOF, Buyout, direct investment funds, etc., after the new asset management regulations, the annualized rate of return and rate of return of S funds clearly outperform the strategies of direct investment funds, FOFs, VCs, and Buyout .

As a practitioner of the S fund, Gopher started doing it in 2013. At the beginning, the transactions were relatively light, mainly LP and LP transactions. In the past 5 years, we have seen great changes in the entire market. In the past, GPs were reluctant to participate in the shares of the S fund because it was a transaction between LPs. Before 2020, GPs began to realize that S funds are a very important means of exit, whether it is a follow-up fund, the transfer of old stocks, help in docking, or the transaction of S funds. We have seen that in the past year, the transaction size of GP-led S funds has doubled, becoming a major category of transactions.

In the past five years, succession funds, especially assets with relatively high certainty and close to maturity, accounted for 20% in the past, including multi-asset succession funds. There are about 80% new increments in it. We as buyers, and practitioners of S funds, we are very happy to see such a change. Because once GPs realize that the S fund is an important exit method and fund restructuring method, they are willing to take out some good projects and shares and cooperate with LPs.

China PE secondary market

The large market of China’s S funds is related to investment and fundraising. After the new regulations on asset management in 2018, in the past three years or so, the new increase has been on a downward trend. In 2021, whether it is due to exit or other factors, 2021 will return to a level that is almost close to the new addition in 2017. Of course now that we are in 2022, the start of the epidemic in Shanghai in March has greatly slowed down the rate of new fundraising this year. When we release next year, we will see that the number of new funds established in 2022 will be another big decline compared to 2021. But in general, the number of active and established new funds each year is still a very large base. According to the China Fund Association, the RMB market has a stock of about 13 trillion. This puts a lot of pressure on quitting.

From the perspective of exit, the exit amount in that year did not exceed 18% in the past, and only 10% last year. But this is not fair, because the number of new funds is gradually increasing. If you go back to the figures from five years ago, the figure will not exceed 30%. That is to say, the vast majority of funds and projects have not withdrawn from suitable projects. The reason why the trading of S funds is now slowly entering an asset class that has attracted much attention is that there is a lot of supply.

Judging from the market of RMB S funds in the past year and the actual transaction situation, the transaction scale will reach about 60 billion in 2021, which is also nearly doubled compared with the 30 billion in 2020. There’s a number in there, the number of deals hasn’t grown that much, it’s up around 30%. The core reason for this is that the amount of a single transaction has increased from 20 to 30 million, 30 to 40 million in the past, to one billion at every turn. Because GPs lead some transactions, the scale has increased.

From the sell-side and buy-side, the current sell-side of S funds is still dominated by large institutional investors. Especially after the new asset management regulations, banks, insurance, and trust-led institutions are the biggest sellers. Then there are individual investors. For the sell-side, FOFs and trust funds have not yet formed a dominant force. But the buyer is different, and the number one is still institutional investors such as the China Banking and Insurance Regulatory Commission. Of course, since the big money in China’s renminbi market is within the state-owned system, it is very easy to understand both the buyer and the seller as the largest. As professional buyers, FOFs and S funds have become an important position in the role of buyers of second-hand shares of S funds. Looking overseas, 98% of the buyers of S funds are professional funds of funds and S funds.

What kind of institution in China’s PE secondary market, as the GP of the S fund, how to get good assets. From an overseas point of view, one must have experience in the fund of funds and complete PSD experience in order to obtain it. The first is the relative scarcity of shares. Since the primary market is not very conferred, as a parent fund, whether it is the annual, quarterly or natural dimension to obtain project information, or even the information that LP wants to transfer or even the information of future DPI, for the parent fund For funds, being an S fund is a natural assistant.

Another ecology is also very important. If it is just a pure parent fund, without complete direct investment and industry coverage, and without the ability to deeply judge the underlying assets, it is difficult to have a suitable fund share transfer and asset package transfer. Pricing. This is what we see in China and overseas. In the second-hand share market, fund of funds institutions will become more and more dominant buyers in this market.

Opportunities and Challenges

The third is to share with you some of the opportunities and challenges we have seen as practitioners, especially in the past year. I see changes in the macro environment, or adjustments to real estate and financial markets. And the epidemic in the past three years has caused the government’s investment in epidemic prevention, resulting in capital problems and other reasons. We see that the sellers of S funds in the RMB market are becoming more and more diversified, except for banks and individuals who had new asset management regulations in the past. In the wealth category, real estate companies have encountered very big problems in the capital chain because they do not speculate on housing and housing. A large number of investments in the primary market in the past are seeking investment.

The second is that non-standard categories are not accepted. Some asset management institutions represented by real estate are seeking to sell in the primary market due to some problems caused by the adjustment of real estate.

The third is epidemic prevention, which has caused local governments to use new funds to invest in government guidance funds. There may also be some problems with funds. We have recently come into contact with a lot of local government guidance funds, hoping to take down their shares and sell them.

Finally, in the RMB market, this happened in less than a year, especially after the epidemic in Shanghai in 2022, GP began to be very active and enthusiastic with the buyers of the S fund, whether it was continuation, transfer or various methods, Come and talk to potential buyers about quitting jobs. I think it is related to the adjustment of the secondary market and the exit sale.

In addition, Beijing, Shanghai, Sanya, Wuxi, Guangzhou and other local governments have established S-fund exchanges, as well as supporting policies, which have created policy convenience for local state-owned evaluation and transfer. Local governments around the country also very much hope to see a suitable place for the transfer of their fund shares locally.

In the past, starting from around June and July 2021, from Hong Kong stocks and A shares to the major adjustments of US stocks in the past half a year, as a buyer, I think that compared with the past seven or eight years, it is very good. Now Assets of the same value can be bought at cheaper prices, and this is the best time for S funds to buy in the past decade.

There are a lot of opportunities and enthusiasm mentioned earlier. We have been working on the S fund for eight or nine years, and we feel that it is quite difficult. We bought fund shares or one or two asset packages, and it seems that there is investment from the fund of funds in it, but the core is from the exit at what value to buy, when to exit and at what price to exit. There are many Regarding evaluation, various technologies such as future exits and capital markets are included, and the threshold for doing S-funds is very high. Today, a lot of S funds have entered the market. I estimate that they will have to pay some tuition fees one after another. There are also many pitfalls. In the past eight or nine years, we have stepped on a lot of pitfalls. The biggest problem here is valuation. and the source of the project. We will have a chance to discuss in depth later.

Earlier, I shared with you the changes in the S fund market in the past year from the global to China, from the perspective of speed to trend.

Gopher Investment Practice

Gopher started S fund in 2013 and is one of the first managers to introduce the concept of S fund to China. The reason why we do S is because we see that LPs have strong liquidity needs, and then we bring this into China from overseas. In the past eight years, we have managed 5 tranches of RMB, and now we are doing the 6th tranche, as well as two tranches of USD funds, as well as two tranches of RMB secondary accounts. The total amount is 6.7 billion yuan, and there are more than 3 billion closed accounts. Up to 10.5 billion yuan in scale. The first five phases of the investment have been completed, and more than 100 transactions have been invested, including a single fund share, including the so-called defaulted share, including subsequent additions, as well as various types of votes and methods of fund and share reorganization. Through the S fund and the parent fund, it covers more than 100 GPs, about 250 sub-funds and about 7,000 active projects. At the same time, we manage them with our investment management system to empower our Secondary transactions and our cooperation. GP and LP.

I want to once again be very happy and honored to invite all the GPs and LPs here, and we will explore more cooperation in the Secondary market in the future.