S fund development in China provides exits

By Echo Liu, Grandway Law Offices
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In private equity investment, a secondary fund (S fund) is a product specifically designed to acquire partnership shares of property of private equity funds from investors. Unlike traditional private equity funds that invest directly in company equity dealing with target companies, S funds acquire equity or partnership shares of property in a fund from investors, and mainly deal with investors in other private equity funds.

With China’s early private equity funds starting to enter the mid or late stages of their investment horizon, or even nearing the end, many are nearing exits. However, when the IPOs of investment targets of private equity funds are not progressing as expected, the most important or popular exit method is hindered. Many private equity funds are now seeking a way out, and it is increasingly difficult to complete a project exit and wind up the private equity fund as scheduled.


On 15 December 2020, the Beijing Local Financial Supervision and Administration (BLFSA) stated that the China Securities Regulatory Commission had officially approved a pilot programme of share of property transfer of equity investment and venture capital in Beijing Equity Trading Centre, a custodian and trading platform for shares of unlisted joint-stock companies.

Echo Liu, Grandway Law Offices
Echo Liu
Grandway Law Offices

On 7 September 2021, preparation of the Beijing Science & Technology Innovation Relay Fund, guided by the BLFSA, managed by Guoke Jiahe Fund, invested by the Chinese Academy of Sciences and implemented in Tongzhou District, officially started. As a cornerstone fund and the first “market-making fund” of the S fund market in Beijing, the relay fund planned to acquire equity and shares of property of RMB20 billion (USD3 billion) from institutional funds around the world in its first phase.

On 8 July 2021, the Guangzhou government reviewed and approved the Implementation Opinions on Further Promoting the Integrated Development of Technology Finance and the Industry in the New Era, proposing to explore establishing a private equity transfer platform relying on the Guangdong Equity Exchange and private equity S funds, and broadening exit channels for venture capital institutions.

On 15 July 2021, the Communist Party of China Central Committee and the State Council published the Opinions on Supporting the High-level Reform and Opening-up of Pudong New Area to Build a Pioneer Area for Socialist Modernisation, of which article 15 proposes, based on the pilot experience, to explore the legal establishment of a platform for transferring private equity and venture capital equity shares of property in Pudong at an appropriate time, to promote development of the secondary trading market for private equity and venture capital equity shares of property.

Trading modes for S funds in China mainly include accepting the transfer of fund shares, increasing fund shares of property, and directly undertaking investment targets.


Serving as a new limited partner (LP), the S fund enters target funds through acquiring shares of property of one or more old LPs, while the total shares of property of the target fund remain unchanged. According to news released on chinaventure.com.cn on 19 May 2021, Legend Capital officially announced the close of a medical renewal fund deal of USD270 million. The deal was jointly led by Hamilton Lane and Coller Capital, with the participation of other internationally renowned institutions. In February 2020, Legend Capital also closed a renewal fund deal of USD200 million.

Under that trading mode, S funds should consider the following trading steps and points when investing in target funds:

  • Learn about the shares of property of the target funds to be transferred;
  • Obtain consent from the fund manager(s) and/or general partners (GPs);
  • Conduct your own due diligence on target funds and transferor(s), or engage professional intermediary agencies;
  • Confirm and deliver trading documents; and
  • Record updates to the fund contract or changes of major matters with the Asset Management Association of China.


By directly increasing investment into the target fund, the S fund joins the target fund and increases the total shares of the property. This mode is primarily suitable for funds wishing to raise additional funds to increase their investment. There may also be cases where original LPs need to exit in the meantime, and therefore new LPs are needed to provide cash flows to the target fund.

Compared with the mode of acquiring the transfer of fund shares of property, the S fund has no counterparty to the transfer of shares of property and its status is closer to that of a participant in private equity investment. Therefore, it requires the fund managers and/or GPs to voluntarily waive their pre-emption rights and procure other LPs to do likewise. Since there is no share of property transfer, there is no need to sign any share of property transfer agreement.


By directly acquiring shares of investment targets, the S fund facilitates the overall exit of the original investment portfolio, including ordinary shares, preferential shares, convertible bonds and shareholder loans. Under this mode, the S fund undertakes the investment targets of the target fund instead of the shares. This is a general S fund trading mode instead of a traditional one. According to news released by Kinzon Capital in February 2020, TR Capital led the purchase of renminbi fund assets of Kinzon Capital and helped Kinzon Capital to establish its USD fund. This renminbi to US dollar deal contained seven projects currently managed by Kinzon Capital, covering about USD100 million. According to pedaily.cn on 18 May 2021, Huagai Capital successfully raised an S fund of RMB800 million. The LPs involved were heavyweight players. Shenzhen Capital Group was the fund’s co-sponsor and largest LP. TR Capital, a US dollar S fund, invested with the qualified foreign limited partner structure as a cornerstone investor.

Other LPs included the S fund of Shangshi Shengshi, wealth management subsidiaries of active commercial banks, and other well-known institutions. This is a restructuring and continuation fund denominated in renminbi which, barring unforeseen circumstances, will be restructured to undertake outstanding high-quality medical projects in Huagai Capital’s three existing funds. Unlike the first mode, the S fund directly acquires investment targets instead of shares of property of private equity funds. Therefore, this mode is an equity transfer of investment targets. Investors should note the processes and points for attention characteristic of equity trading, instead of spending too much time on communication with the target funds’ LPs.

Echo Liu is a partner at Grandway Law Offices

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