$240 billion charity fund makes investment, reaping an IPO dream team

In 2021, an unprecedented heavy rain hit Zhengzhou on July 20, causing countless residents to be displaced. Despite the disaster, numerous charitable funds took action within just ten days, with a total of 1.346 billion yuan entering the disaster area in Zhengzhou.

Similar examples abound. Charitable funds have become an indispensable facility in every country, applied in various fields such as poverty alleviation, disaster relief, education, and healthcare.

According to data, there are currently over 9,600 registered foundations in China. By 2021, the scale of these charitable funds had reached over 240 billion yuan, with some foundations having assets as high as 2 billion yuan.

Little known is the fact that this "charitable money" is also a source of funds in private equity investment. In the past, many charitable funds have ventured into the field of equity investment.

Recently, the topic of charitable fund investment has once again attracted attention.

At the inaugural meeting of the Long-Term Capital Committee of the China Securities Investment Fund Industry Association, Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission, pointed out the important significance of long-term capital for the long-term healthy development of the capital market. He expressed the hope that long-term funds represented by social security funds, insurance funds, bank funds, and public welfare charitable funds would further increase their allocation to equity venture capital funds in accordance with market principles.

This marks the first time that public welfare charitable funds have been proposed as long-term funds for equity venture capital funds by regulatory authorities.

Although in the past, public welfare charitable funds have been a very niche source of funds in the venture capital market, with this recent statement from the regulatory authorities, the day when charitable funds enter the venture capital circle on a large scale may be approaching.

01 Charitable funds pouring into the venture capital circle

In today's context of a capital winter, individual investors have low investment desires, and apart from a small number of leading investment institutions, small and medium-sized institutions often face the dilemma of not being able to raise funds. With few resources available, suffering investors often wish for the emergence of new long-term funds.

In fact, various charitable funds are among the most suitable funds to participate in investment.

Some may question whether charitable funds, which generally do not pursue profits, can participate in equity investment. The answer is yes. According to the "Regulations on the Management of Foundations" promulgated by the State Council in 2004, foundations can use safe and reasonable means to preserve and increase the value of foundation assets. In other words, charitable funds are allowed to participate in investment.

However, domestic asset management institutions have not shown a positive attitude towards them. In contrast, charitable funds in overseas regions such as Europe and the United States, whether public or private, are very proactive in their investments. Although there are numerous cases of investment failures leading to losses, the long-term effects of their investments are still positive. It is reported that in the United States, donations and charitable funds are the third largest source of venture capital, after pension funds and financial insurance.

Looking at the situation of charitable funds in China, taking the Oriental Fund Foundation as an example, in 2010, the net assets of the Oriental Fund Foundation were 138.3 billion yuan, with investment income of 3.2 billion yuan, and an investment return rate of only 2.3%, far lower than the low-risk bank wealth management products. This is also the common situation for most charitable fund foundations in China. Many fund foundations have funds lying idle in their accounts without any operation.

The reason for this choice is simple: to avoid risks. The failure of state-owned capital investment will be held accountable, and there is even the risk of causing the loss of state-owned capital. The requirements for charitable funds in this regard are equally strict.

According to Article 29 of the "Regulations on the Management of Foundations," public welfare charitable foundations must spend no less than 70% of the total income of the previous year on public welfare activities each year. Therefore, public welfare charitable foundations must ensure that the annual charitable activity expenditures and donated properties are fully and timely allocated before they can engage in investment activities.

For public welfare charitable foundations, it is difficult to invest in high-yield, long-term assets when the remaining funds available for investment are small. At the same time, these charitable funds generally lack investment capabilities, so the responsibility for investment failures is a situation that all charitable funds do not want to face. Therefore, most charitable fund foundations prefer to invest in stable and low-yield short-term investments such as "money market funds," "bank wealth management products within one year," and "trust plans."

However, according to the "2023 China Foundation Asset Preservation and Appreciation Investment Management Report," as of the end of 2022, the number of registered foundations in China has reached 9,620, with non-public welfare foundations accounting for 71% and public welfare foundations accounting for 29%. In terms of total assets, the net asset scale of foundations reached 240.225 billion yuan in 2021. Other data shows that there are 21 foundations with assets between 1 billion and 2 billion yuan, and 12 foundations with assets exceeding 2 billion yuan, mainly university foundations and individual family foundations.

With this huge amount of funds entering the venture capital market, it will undoubtedly become a new financial lifeline, contributing to the incubation of excellent enterprises, especially in the current context of a capital winter. Moreover, with the increasing awareness of disaster relief, the scale of charitable funds in the future will rise significantly.

The Secretary of the Party Committee and President of the China Securities Investment Fund Association, He Yanchun, previously proposed that with the accelerated transformation of asset management to net value, the demand for long-term asset allocation of medium and long-term funds, including public welfare and charity funds, continues to increase, and equity venture capital funds will receive longer and more diverse sources of funding.

Similarly, at this year's National People's Congress and Chinese People's Political Consultative Conference, CPPCC member Jin Li submitted a proposal to relax the proportion restrictions on the investment of medium and long-term funds such as social security funds in the venture capital field. For some charitable and public welfare funds, such as university education foundations, the restrictions can also be relaxed under compliance, encouraging more funds to be allocated to equity investment.

With more and more professionals speaking out, insiders in the charitable fund industry may bring about new explorations and attempts.

Participating in investment is the full utilization of existing assets, which is a "finishing touch" for charitable funds. Successful investment will increase the asset size, leading to a higher proportion of expenditure on charitable causes. At the same time, through investment incubation, the invested outstanding enterprises can also achieve rapid development, ultimately benefiting the country and the people.

However, charitable funds are ultimately "compassionate funds" with warmth, and whether it is appropriate for them to enter the cold capital market on a large scale is still a question. After all, the main business of charitable funds is still to provide emergency relief. If participating in investment leads to a weakening of the main business, it may not be worth the loss.

Therefore, how to scientifically utilize these charitable funds for investment is a difficult problem that foundations need to discuss.

02 Charitable funds have participated in investments and achieved a group of IPO stars

In fact, some charitable funds have made initial attempts at investment, but the number is relatively small.

In May 2023, there was a change in the investment enterprise of Wuxi Deyao Sheng. According to QCC, the original general partner, Jin Bailin Investment Management Co., Ltd., withdrew, and three new general partners joined.

These three general partners are Wuxi Lingshan Charity Foundation, Beijing Chunmiao Charity Foundation, and Zhejiang Xianghai Charity Foundation. In simple terms, these three charitable foundations became limited partners of Wuxi Deyao Sheng.

It is worth mentioning that for Wuxi Lingshan Charity Foundation and Beijing Chunmiao Charity Foundation, this investment is not their first involvement in the field of equity investment. Prior to this, Wuxi Lingshan Charity Foundation had completed 6 external investment events, and Beijing Chunmiao Charity Foundation had also completed its first external investment activity.

In fact, many charitable foundations have "quietly" participated in equity investment.

As for why it is said to be "quietly," according to China's "Interim Measures for the Management of Value Preservation and Appreciation Investment Activities of Charitable Organizations," charitable funds cannot participate in direct investments like VC and PE funds. Therefore, we rarely see the presence of charitable funds in the venture capital market.

But it is precisely because of their low profile. When everyone's attention is drawn to VC, PE, and CVC, charitable funds have quietly developed into a huge scale.

The Southern Metropolis Public Welfare Foundation was established on May 11, 2007, and is a national non-public fundraising foundation approved by the Ministry of Civil Affairs.

According to QCC, since its establishment, it has only made 3 direct investments, including two as a limited partner in VC giants Sequoia China and one in Yu Hong Capital. However, the number of its indirect investments is as high as an astonishing 3042.

This includes star companies such as He'en Medical, Bovosi Education, as well as 13 IPO companies such as Zhongyi Testing, Beitaini, Leapmotor, and Borui Pharmaceuticals. Of course, this also includes investment institutions such as ZhenFund.

According to the investigation, it was found that most charitable funds, like the Nandu Public Welfare Foundation, have few direct investments but many indirect investments.

For example, the Shanghai Charity Foundation, which participated twice in the equity of Shanghai Shengtai Investment in 2009, currently holds 100% of the equity after two participations. Shengtai Investment has been involved in 13 external investment events and holds stakes in 187 companies indirectly.

Speaking of charitable foundation investments, one cannot ignore the existence of the Aiyou Charity Foundation.

Established in 2004, the Aiyou Charity Foundation carries out projects nationwide and is the first non-publicly funded foundation registered in China. In May 2018, Aiyou obtained public fundraising qualifications and officially became a national public fundraising foundation. Just as its name suggests, Aiyou is a charitable foundation mainly focused on the field of children.

According to the investigation, the Aiyou Charity Foundation has made as many as 13 direct investments. This includes investment institutions such as Gaorong Capital, Qiming Venture Partners, New Horizon Capital, and Wuyuan Capital. It has made over 5,000 indirect investments, making it a very active institution in the charitable fund family. Among them, through these investment institutions, the Aiyou Charity Foundation has indirectly invested in 446 companies, 19 of which have completed IPOs.

It is worth mentioning that in 2018, Aiyou Capital established China's first public welfare VC support program. According to the introduction by the chairman of the organization, the Aiyou Public Welfare VC Support Program selects outstanding organizations from the 115 institutions previously funded by Aiyou in various vertical fields, and empowers and supports those that are more outstanding and have a greater leading role, and can generate greater social impact. In simple terms, the LP behind Aiyou's board of directors provides funding, and Aiyou acts as the GP for investment. It is worth mentioning that Wang Bing, the chairman responsible for this business, has been active in the investment industry for many years and has invested in companies such as Sina, Tencent, Alibaba, Focus Media, Baidu, and Ctrip.

There are many more cases of charitable funds involved in equity investment, such as the Heren Charity Foundation, Hubei Hongyuan Charity Foundation, and the Norman Bethune Public Welfare Foundation. It is believed that in the near future, more charitable funds will participate in equity investment.

03 University Education Funds, the main force in charitable funds' investment

Among the many charitable funds, if there is one fund that excels in the investment field, it is undoubtedly the University Education Fund. In terms of the number of contributions and the scale of contributions, the University Education Fund is the most active presence.

In 1994, Tsinghua University Education Foundation was officially established, making it the earliest university education foundation formally registered in mainland China, and is also known as the "domestic version of the Yale University Foundation." Tsinghua University was the earliest imitator of the "Yale model" in China. After that, other university foundations emerged one after another, such as Peking University Education Foundation, which was established a year after the establishment of Tsinghua University Education Foundation.

It is worth mentioning that in the past two years, the foundations of Tsinghua University and Peking University have increased their emphasis on equity financing, investing more and more donated funds into VC/PE institutions. At the end of 2019, long-term equity investments accounted for 60.4% of the total assets of Tsinghua University Education Foundation, while Peking University Education Foundation accounted for 49.4% of the total assets. These two figures have exceeded the proportion of equity financing in the Yale Foundation, their predecessor.

Today, these university education funds have become super LPs behind many VC/PE institutions. For example, Tsinghua University Education Foundation has invested in many institutions, including Hillhouse Capital, Horizon Ventures, CPE Source Peak, DHVC, Joy Capital, Inno Angel Fund, Tsinghua Holdings, Xinyi Investment, and Yinhua Huqing Investment Fund. Peking University Education Foundation has invested in institutions such as Hillhouse, CICC Capital, Sequoia Capital, and Songhe Capital. Shanghai Jiao Tong University Education Development Foundation has invested in institutions such as DT Capital, Sequoia Capital China, and GSR Ventures. Wuhan University Education Foundation has invested in institutions such as Shunwei Capital, Jiahua Capital, and Yuanhe Capital. There are many more examples like these.

The reason why university foundations actively participate in equity investment is that large-scale funding is needed for projects such as school research funding, assistance for students in need, scholarships for outstanding students, and encouragement for outstanding alumni to start businesses, and these projects cannot rely solely on alumni donations and appropriations.

Therefore, it can be understood that university foundations "earn extra money" through investment and then use the extra money to help the development of schools or alumni. In fact, university foundations are a significant source of funds in the venture capital market in the United States. For example, Zhang Lei of Hillhouse Capital previously received support from the Yale University Foundation. Using the money earned from investments to support student development, isn't this also the purpose of the existence of education funds?

University education funds have become a major force in charitable funds' participation in equity investment, and other charitable funds are also striving to catch up.

With the development of the times, people are paying more attention to uncontrollable disasters and assistance to impoverished areas. As a result, the scale of charitable funds has grown significantly. According to data from 2021, China has a total of 240 billion yuan in charitable fund assets, and according to regulations, 30% of this, which is 720 billion yuan, is used for investment. In the current capital winter, this large sum of money is precious and rare.

Charitable funds, as investors, use capital to drive industrial development, which undoubtedly also constitutes a form of charity.

On September 15, 2023, the 10th China Public Welfare Charity Project Exchange and Exhibition, jointly organized by the Ministry of Civil Affairs, the State-owned Assets Supervision and Administration Commission of the State Council, the Ministry of Agriculture and Rural Affairs (National Rural Revitalization Bureau), the All-China Federation of Industry and Commerce, the Red Cross Society of China, the China Song Qingling Foundation, the Guangdong Provincial Government, the Shenzhen Municipal Government, and the China Charity Federation, opened. On the opening day, the funds for major donation projects, consumer assistance product procurement, and industrial investment exceeded 79 billion yuan.

This is a typical case of using charity to drive industry, and perhaps it is also a characteristic way of future investment for Chinese charitable funds.