Since the beginning of this year, from the central to local levels, efforts have been made to explore the establishment of incentive and restraint mechanisms, as well as fault tolerance and exemption mechanisms for state-owned venture capital institutions and state-owned funds, encouraging state-owned funds to "dare to invest" and "boldly invest", and loosening the restrictions on "patient capital". According to insiders, the State owned Assets Supervision and Administration Commission of the State Council has recently issued the "Guiding Opinions on Supporting the High quality Development of Central Enterprise Venture Capital Funds (Draft for Comments)" to the industry, which stipulates the incentive and fault tolerance mechanism. After the official release of the guidance, local authorities should refer to and implement relevant measures, "a person from a local state-owned investment institution told reporters. Establishing and improving incentive and fault tolerance mechanisms for state-owned venture capital institutions can help stimulate their enthusiasm and initiative to invest in small, early, long-term, and hard technology investments, and promote a virtuous cycle of technology, industry, and finance. Tian Xuan, Dean of the National Institute of Finance at Tsinghua University, stated in an interview with reporters that improving the fault tolerance mechanism and incentive mechanism will reduce the risk-taking of state-owned venture capital institutions and government guided funds, improve the investment environment, encourage them to pay more attention to investment effectiveness, make long-term investments, and strengthen patient capital; We will promote state-owned funds to increase support for early and high-risk technology projects, while encouraging and guiding social capital to invest in national strategic emerging industries and key areas, in order to better serve the development of new quality productivity. The construction of incentive fault-tolerant mechanism has achieved phased results. State owned assets have become the main source of investment in the venture capital market. However, in practice, due to the constraints of traditional assessment mechanisms, some state-owned venture capital institutions lack investment patience and cannot accompany "hard technology" enterprises. Since the beginning of this year, the central and local governments have accelerated the establishment and improvement of incentive and fault tolerance mechanisms. In June, the General Office of the State Council issued the "Several Policy Measures to Promote the High Quality Development of Venture Capital", proposing to "optimize the management of government funded venture capital funds, reform and improve fund assessment, fault tolerance and exemption mechanisms, and improve performance evaluation systems", "improve the management system of state-owned venture capital that conforms to the characteristics and development laws of the venture capital industry and the due diligence and compliance exemption mechanism, and explore the assessment of state-owned venture capital institutions according to the entire fund life cycle". The State Council executive meeting held on September 18th proposed to promote state-owned capital investment to become more responsible long-term capital and patient capital, and to improve policies and measures related to state-owned capital investment, assessment, fault tolerance, and exit. Guangdong, Hubei, Hunan and other places have also released documents clarifying the establishment of performance evaluation, incentive constraints and fault tolerance mechanisms for state-owned venture capital institutions. For example, in July, the Standing Committee of the 14th People's Congress of Guangdong Province passed the "Guangdong Province Science and Technology Innovation Regulations", which for the first time proposed nationwide that "the preservation and appreciation of state-owned capital should not be the main assessment indicator", and proposed that "provincial and prefecture level municipal governments should establish and improve performance evaluation, incentive constraints, and fault tolerance mechanisms for state-owned venture capital institutions, and promote state-owned venture capital institutions to increase support for early-stage technology-based enterprises". In October, the Financial Office of the Shenzhen Municipal Party Committee released the "Action Plan for Promoting High Quality Development of Entrepreneurial Investment in Shenzhen (2024-2026) (Draft for Public Solicitation of Opinions)", which for the first time proposed the development of "bold capital" nationwide, attracting widespread market attention. The adjustment and reform of the assessment, fault tolerance, and incentive mechanisms of state-owned venture capital institutions will greatly stimulate the enthusiasm of state-owned venture capital institutions and government guided funds, encourage them to be more bold and proactive in investment decisions, and be willing to invest Tian Xuan said. With policy support, some state-owned venture capital institutions have initially established incentive fault-tolerant mechanisms internally, and have achieved phased results. On November 29th, the Equity and Venture Capital Professional Committee of the China Investment Association and LP Investment Advisory jointly released the "2024 Research Report on Incentive and Due Diligence Exemption (Fault Tolerance) Mechanisms for State owned Investment Institutions" (hereinafter referred to as the "Report"), which shows that over 60% of the surveyed institutions have established due diligence exemption (fault tolerance) mechanisms, and over 50% have established incentive mechanisms. Specifically, over 60% (63.16%) of the surveyed institutions have established due diligence exemption (fault tolerance) mechanisms, with nearly half (48.87%) included in the performance evaluation system. A more relaxed and friendly risk tolerance atmosphere is being created and established. In terms of incentive mechanisms, only over half (57.14%) of the surveyed institutions have established incentive mechanisms, which are mainly reflected in the "investment" and "exit" stages. Less than 40% (39.85%) of the institutions have achieved full coverage of the "fundraising, investment management, and exit" stages in their incentive mechanisms. From the perspective of policy measures released by local governments, the fault tolerance mechanism mainly includes two directions: "fault tolerance" and "tolerance for losses", and some places have set a certain proportion of fault tolerance. For example, in September, the "Zhengzhou Angel Investment Fund Establishment Plan" proposed to follow the rules of angel investment, reasonably tolerate normal investment risks, and not use normal investment risks as a basis for accountability. If the investment loss rate during fund liquidation does not exceed 40% of the investment principal, a fault-tolerant procedure will be initiated in accordance with laws and regulations. However, the above-mentioned report shows that nearly half of the surveyed institutions do not support setting a fault tolerance ratio, partly because the probability of risk occurrence varies in different investment directions and stages; On the other hand, the 'tolerance rate' implies default accountability for exceeding the established portion. From the perspective of assessment, some places have established a fund lifecycle accounting mechanism for investment in the field of science and technology innovation. For example, the State owned Assets Supervision and Administration Commission of Hubei Province has released the "List of Fault Tolerant Exemption Matters for State owned Enterprises in Hubei Province (2024 Edition)", which clearly stipulates 10 types of fault tolerant exemption situations. According to the State owned Assets Supervision and Administration Commission of Hubei Province, provincial seed funds, venture capital funds and other state-owned funds have adopted a performance evaluation method of whole life cycle accounting and market-oriented valuation, and are not assessed and evaluated based on the profit and loss of individual investment projects. If the overall return of the fund is higher than the social average, there is no need to focus on the gains and losses of individual projects for accountability. This is also the practice of market-oriented LPs. Therefore, it is recommended to optimize the fault-tolerant mechanism by considering the overall return of the fund throughout its lifecycle A person from a state-owned enterprise venture capital institution told reporters. Local government departments are currently prioritizing the resolution of the issue of 'whether there is', and the implementation details still need to be improved LP Investment Advisor founder, Guoli Bo, stated in an interview with reporters that there is currently a lack of highly operable execution rules for the fault tolerance mechanism. Statements such as "fully revealing risks" and "properly implementing procedures" are vague, and the mechanism still has a long way to go before it can be truly implemented. Tian Xuan stated that it is necessary to further refine the standards and scope of fault tolerance and exemption, strengthen relevant legal and regulatory support, and provide investment guidance and legal basis for the market. Among them, it is particularly necessary to clarify the standards for reasonable investment behavior and operational errors in failed projects, and provide employees with moderate risk tolerance space. At the same time, it is necessary to establish a sound institutional system for the entire process of venture capital market access, fund management, and exit channels, improve relevant due diligence requirements and risk assessment mechanisms, strengthen the construction of internal control mechanisms and compliance requirements for venture capital institutions, enhance external supervision, ensure the fairness and transparency of incentive tolerance mechanisms, and maintain a healthy and stable development order in the market. Establishing a market-oriented incentive mechanism that covers the entire process of "fundraising, investment management, and withdrawal" is the key to improving the investment efficiency of state-owned venture capital institutions and stimulating the vitality of venture capital. Guo Guobo stated that some state-owned investment institutions have salary ceilings, and the implementation of incentive mechanisms is easily decoupled from performance evaluation, which cannot truly play a role. State owned investment institutions need to refer to the best practices in the market, establish incentive mechanisms that adapt to market competition, and cover the entire chain of "fundraising, investment management, and withdrawal" in each link. Tian Xuan believes that it is necessary to strengthen the combination of incentives and constraints, increase the coverage of the entire chain of assessment and incentives, establish diversified assessment indicators and differentiated incentive measures, comprehensively cover the entire life cycle of investment projects, link performance with salary incentives, such as setting different amounts and forms of reward measures according to fundraising scale, investment appreciation, etc., and using equity means reasonably. Guo Guobo stated that in the future, venture capital institutions will play an important role in China's economic transformation and upgrading. Establishing and improving incentive and due diligence exemption mechanisms for state-owned venture capital institutions can provide stronger support for early, small, and hard technology investment, and provide better growth space for forward-looking but high-risk scientific and technological innovation projects. (New Society)