FoF exits from direct project investments mainly through methods such as the listed/listed listing of the invested enterprise, agreement transfer (mergers and acquisitions, repurchases, equity transfers, etc.), and liquidation; FoF exits from sub-fund investments mainly through methods such as the maturity liquidation of sub-funds and share transfers. Currently, the term of RMB-denominated private equity investment funds is generally relatively long, ranging from at least 5 years to as long as 8-10 years or even longer. Under such circumstances, it is crucial for FoF to recover funds as early as possible and exit smoothly from sub-funds. The following discussion will focus on the exit of FoF from sub-funds.

FoF is generally divided into market-oriented FoF and government-guided funds. The main differences between the two lie in their operation objectives and capital sources, while their exit methods and paths are roughly the same. With the development of the domestic equity investment industry, FoF has gradually shifted from incremental expansion to the stage of stock optimization, and has begun to focus on the return and exit of invested funds. From the perspective of the current exit methods of domestic FoF, there are mainly the following exit paths:

The capital withdrawal and exit of FoF largely depend on the exit progress of the invested sub-funds. This is because only after the sub-funds exit from the invested projects and recover funds can they distribute to the FoF; when the term of the FoF is longer than that of the invested sub-funds, the FoF can generally exit naturally when the sub-funds are liquidated upon maturity. Therefore, whether the sub-funds can exit smoothly from the invested projects will directly affect the capital withdrawal and exit of the FoF.

The exit of sub-funds from invested projects is affected by multiple factors such as the macroeconomy, policy environment, and their own strategies. For example, when economic growth slows down or an economic recession occurs, it will affect the operation of enterprises, leading to a decline in corporate profitability. At this time, it will be more difficult for sub-funds to exit from the invested enterprises, or the probability of exiting at a loss will be higher. Another example is that affected by the current policy of phased tightening of IPOs, the uncertainty of sub-funds exiting through the listing of invested enterprises has increased significantly, or the exit time point may be delayed. In addition, the strategy of the sub-fund manager will also affect the exit of the sub-fund. If the fund invests in early-stage start-ups, it will generally consider exiting through mergers and acquisitions or old share transfers, with a relatively long exit cycle; if it invests in mature enterprises, it will be more inclined to exit after the invested enterprises are listed, and can achieve exit relatively quickly under the condition that other factors remain unchanged.

Since the exit of the FoF depends on the exit of the invested sub-funds, after fully considering the exit methods and influencing factors of the sub-funds, the FoF can improve the capital withdrawal cycle and reduce exit risks by adjusting its own strategies. On the one hand, the FoF can determine its investment based on exit needs, and achieve a balance between capital return and risk-return by allocating sub-funds at different stages. Sub-funds at different investment stages face different risks and capital return speeds: early-stage funds face higher risks, have higher expected returns, and have a relatively longer capital return cycle; PE funds invest at a later stage, with relatively lower risks and expected returns, but their capital return speed is relatively faster. When selecting sub-funds, the FoF needs to form a portfolio; at the top-level strategy level, the FoF can also achieve full risk diversification and accelerate capital circulation by configuring different types of businesses through PDSM (i.e., sub-funds, direct investment projects, secondary shares, mergers and acquisitions, etc.). On the other hand, the FoF can influence the exit progress of the sub-funds by participating in the exit work of the sub-funds, thereby accelerating its own capital withdrawal and exit speed. Although the exit management of the sub-funds is mainly the responsibility of the sub-fund managers, the FoF can understand the operation of the funds through the regular information disclosure materials of the sub-funds and daily communication with the sub-fund managers. Regarding the exit plan of the sub-funds from the invested projects, the FoF can not only provide corresponding suggestions but also coordinate its own resources to support the exit of the sub-funds, such as introducing old share buyers for the sub-funds and assisting in promoting the mergers and acquisitions of the invested projects. By actively empowering the exit of the sub-funds, the FoF can help the sub-funds shorten the operation cycle and create more opportunities for its own capital recovery and early exit.

Similar to private equity investment funds exiting from invested projects through equity transfers, FoF can also exit from sub-funds through fund share transfers.

With the development and maturity of China's private equity market, the secondary market for equity investment (referred to as "S-fund" or "S-transaction") has emerged. When the term of the FoF is shorter than that of the invested sub-funds, or the FoF needs to terminate its investment in advance due to policy influences, or the FoF's cash flow needs change due to financial conditions, it can consider realizing early exit by transferring the shares of the held sub-funds. S-funds are important tools for providing liquidity to the primary equity investment market and have evolved into various forms such as full continuation funds, restructuring funds, and selected funds.

China's private equity S-market has experienced explosive growth in the past three years. Many FoF investment institutions have begun to focus on the S-business, and new S-funds have been continuously emerging in various regions. Nevertheless, compared with the more mature overseas S-markets, the development of China's private equity S-market is still in the early stage, and there are many difficulties in practical operation: for example, information asymmetry in transactions, where the information obtained by the transferee mainly comes from the fund manager, and the first-hand information on the underlying investment portfolio available is limited; another example is the lack of unified and standardized pricing standards. S-funds themselves have strong non-standard attributes, and the price quotations of buyers and sellers may vary greatly. Since there is currently no independent and authoritative third-party valuation and pricing system, this will greatly affect price determination and transaction completion; in addition, the nature of the buyers and sellers in S-transactions can also affect the progress of the transaction. For example, trading counterparts such as state-owned capital and insurance funds are subject to different regulatory and compliance requirements, and their internal approval and decision-making processes are relatively complex, which will also increase transaction uncertainty.

Although the development of S-funds faces certain practical difficulties, S-funds can not only provide liquidity to the market and meet the needs of investors but also enrich investment methods and diversify investment strategies. Therefore, the development of the S-market is imperative. It is believed that the various difficulties faced in the S-transaction process will be gradually improved and resolved. First, at the top-level design level, the state is actively promoting the establishment of a financial regulatory system and the formulation of policies and regulations. For example, Beijing and Shanghai have successively established pilot platforms for the transfer of private equity venture capital fund shares, and Guangzhou, Sanya, and other places have also issued policies and regulations to support the development of S-funds and encourage share transfers; there are also reports that Suzhou, Qingdao, and other places will explore the establishment of pilot platforms for the transfer of the private equity secondary market. The support of professional trading platforms combined with policy support will help improve the standardization of S-transactions. Second, in terms of valuation and pricing, with the increase in S-transactions, more professional service institutions will join in, promoting S-transactions to break through the bottleneck of valuation and pricing, which will be conducive to the construction of a valuation and pricing system. At the same time, by adjusting and designing the transaction structure, the difficulty of valuation and pricing in S-transactions can also be alleviated to a certain extent. For example, the "front-end transfer at par, back-end profit sharing" transaction model we are currently exploring can not only simplify the early price negotiation but also allow buyers and sellers to share profits and risks, thus being more conducive to promoting and finalizing the transfer transaction. In addition, LPs with state-owned capital backgrounds account for more than 60% of the market share in the private equity investment industry and are important participants in S-transactions. When are important participants in S-transactions. When dealing with special trading counterparts such as state-owned capital, compliance is the top priority. Currently, there are ambiguous policy areas in the practical operation of state-owned fund share transfers, which pose certain obstacles to S-transactions of state-owned shares. In the future, with the unification and clarification of S-transaction policies, the successive launch of fund share transfer pilots in various regions, and the improvement of the fund share registration and change mechanism and tax policy guarantees, the participation of state-owned funds in S-market transactions will become more standardized, efficient, and flexible, and more state-owned funds will gradually enter a virtuous cycle of fund-raising, investment, management, and exit.

Government-guided funds are essentially FoF, but since their funds mainly come from finance or state-owned capital, they have special requirements such as supporting the growth and development of small and medium-sized enterprises, driving industrial agglomeration, and promoting the transformation and upgrading of local economies. Therefore, in addition to exiting through maturity liquidation and share transfer before maturity, government-guided funds also have some special exit regulations.

The table below summarizes the relevant regulations on concessional exit of some provincial, municipal, and national-level guided funds.

It can be seen from the above table that on the premise that the sub-funds meet the requirements of relevant special policies, government-guided funds can transfer part of their benefits to achieve early exit. The current main concessional methods include the transfer of the original investment amount and the transfer of the original investment amount plus a fixed interest rate (such as the People's Bank of China's benchmark deposit/lending rate for the same period). From the perspective of government-guided funds, on the one hand, concessional exit can realize capital return quickly, improve the turnover efficiency of financial funds, and continuously play the role of guided funds in supporting the development of local industries; on the other hand, concessional exit can mobilize the enthusiasm of sub-funds and encourage them to achieve the policy goals of the government-guided funds. From the perspective of sub-fund managers, the concessional exit of government-guided funds provides more possibilities for the fund-raising of sub-fund managers. For example, in a recent P+S combined transaction we were involved in, while raising a new phase of funds, the manager could transfer the secondary shares of its previous phase of funds. The share transferor was a provincial government-guided fund, which could transfer the shares at the original investment amount within 4 years. In this case, if the fund where the secondary shares are located has good performance and potential returns, it will be very attractive to potential buyers, and the share buyers will also have a stronger willingness to participate in the investment of the manager's new phase of funds. By using the concessional exit mechanism of government-guided funds and combining the fund-raising of new funds with the transfer of secondary shares, the manager will greatly improve the success rate of fund-raising for the new fund.

In order to protect the rights and interests of state-owned assets when certain specific situations occur, government-guided funds generally set mandatory exit clauses to ensure the exit path. For example, situations such as failing to carry out investment business in accordance with policy requirements and failing to make effective rectification, failing to complete industrial and commercial registration and AMAC filing within one year after the agreement is signed, failing to carry out investment business within one year after the first capital contribution, serious deviation of the investment direction from the target field, and illegal and irregular acts of the manager damaging the interests of the guided funds.

It can be seen that mandatory exit is generally triggered when the fund encounters adverse conditions or major risks. Government-guided funds usually specify mandatory exit clauses in the partnership agreement or supplementary agreement. When specific situations occur, the guided funds have the right to choose to exit early and require the sub-fund managers to cooperate in completing the share transfer within the agreed time or require the sub-funds to liquidate in advance to achieve early exit.

Although government-guided funds do not take profit-making as their primary goal, they still shoulder the responsibility of preserving and increasing the value of state-owned assets. Therefore, it is necessary to balance policy goals and economic benefits. In practical operation, guided funds can also explore exiting by transferring sub-funds in packages. By evaluating and scoring the policy goals and profit performance of the sub-funds respectively, the guided funds can combine and sell sub-funds with different performance, thereby grasping the initiative in capital withdrawal and exit.

The above are the various exit methods of FoF. In general, FoF managers should formulate reasonable exit strategies based on their own demands and the overall economic environment. In post-investment management, FoF should regularly review the underlying assets of the sub-funds, transfer part of the sub-fund shares in a planned manner, and realize the rolling cycle of its own funds; it should actively participate in and empower the exit work of the sub-funds to avoid missing exit opportunities due to passive waiting. In addition, with the continuous improvement of various policies and systems, the exit path of FoF will become clearer and more definite, the procedures will be more convenient and flexible, and the exit efficiency will be greatly improved. In the future, FoF will gradually realize a virtuous cycle of investment-exit-reinvestment and will continue to serve technological innovation and industrial transformation and upgrading in the long term.