On March 7, 2021, the highly anticipated 2021 China Fund-of-Funds Annual Conference was successfully held at the Grand Hyatt Shanghai Jinmao Hotel. During the event, Xu Qing, Managing Partner at Yuanhe Chencun, delivered a keynote speech titled "Fund-of-Funds Empowering Technological Innovation and Regional Economic Development," sharing her insights on the collaboration between LPs and GPs, and exploring the fund-of-funds' pivotal role within the broader capital and industry development ecosystem.

Key takeaway

Partner-as-a-Service is the most fundamental service management model for a fund-of-funds. At the heart of this partnership lies the commitment to understanding and addressing the other party's needs.

The most crucial factor when looking for a partnership is reliability. From an LP's perspective, a reliable GP means: capable of generating profits, operating in a transparent and compliant manner, and maintaining a stable team. Meanwhile, from a GP's standpoint, a reliable LP signifies: someone who can provide consistent support, offer valuable feedback rather than excessive demands, and lend their credibility when needed.

Yuanhe Chenkun's internal code of conduct includes:

Actions follow words—what you say, you deliver.

Capable of continuously creating value.

To be able to start, finish, and take responsibility for what you do.

Can skillfully identify the core interests of both parties and reach a central, shared point.

Provides frank and decisive feedback, but rarely offers advice.

First, a fund-of-funds must have a clear allocation strategy. Through this strategy, it selects suitable GPs to build an investment portfolio, ultimately forming a robust resource network system. Downstream from the fund-of-funds are VC management firms that deeply understand specific industries. Meanwhile, upstream lie government entities, major capital players, and large industry leaders. By bridging these two ends—upstream and downstream—the fund-of-funds provides resource providers with exceptional opportunities to actively participate in and drive innovation and technological advancement.

While a fund of funds may not appear to directly control the real economy, it actually has a keen ability to influence and impact the broader development of industries—and clearly understands how to facilitate their horizontal expansion. By effectively grasping the needs of both capital providers and resource stakeholders, and by serving as a vital hub for integration and collaboration, this is precisely where the core value of a fund of funds lies.

Here are the key points of the speech, compiled by the Fund-of-Funds Research Center, with some content omitted.

Yuanhe Chencun has been operating a fund-of-funds business for 15 years, witnessing the evolution of the fund-of-funds industry across China's market. Yuanhe Chencun proudly carries the slogan: "The Most Reliable Investment Management Partner." Digging deeper, this slogan highlights three key words: partner, reliable, and investment management.

Partners as a Service

First, we define ourselves as having the role of "partners."
In our private equity fund industry, we often talk about LPs and GPs—where "L" and "G" are actually both adjectives. At their core, though, they both refer to the same thing: "P" (Partner).

Chairman Wang Zhongmin (Note: Former Vice Chairman of the National Council for Social Security Fund) once introduced a concept called "Partners as a Service," or PaaS—though this is an unconventional form of PaaS, distinct from the PaaS models we typically think of. It essentially refers to "partnership as a service." I’d like to borrow and adapt this core idea he articulated. At its essence, Partners as a Service represents the most fundamental service management model within a fund-of-funds structure. By leveraging the fund-of-funds—a powerful asset management tool—we can effectively allocate assets. Importantly, in the investment management agreements governing these funds, our relationship with partners is built on equality and mutual respect.

As partners, we strive for an equal, open, and collaborative relationship—one where GPs and LPs work together to achieve mutual success. This requires us to trust each other and prioritize others’ interests alongside our own. At the heart of this partnership lies a genuine focus on understanding and addressing each other’s needs.

For direct investment funds, Yuanhe Chencun acts as an LP, but when we raise capital as a fund-of-funds, we naturally take on the role of a GP as well—shifting our identity depending on the context. We have a particularly deep understanding of what it means to foster an equitable partnership. In fact, I often find myself in the same position as a GP during fundraising—being asked countless questions—and I truly empathize with that experience.

For a simple example, imagine that in a challenging fundraising environment, a GP approached us, hoping Yuanhe Chencun would become their LP. This arrangement means we’d invest upfront, typically giving the GP 6 to 12 months to secure the remaining capital. However, given the current market conditions, some GPs are struggling to meet their fundraising targets within the agreed timeline—and as a result, they’re asking for extensions. Meanwhile, once these GPs eventually bring in newer LPs, those newcomers will likely have their own unique expectations and priorities. After all, everyone has their own perspective, and each party naturally seeks to protect its own interests. In situations like this, it becomes crucial for early-stage LPs and later entrants to engage in open and thorough communication. How can we effectively bridge these differing viewpoints among a fund’s diverse group of LPs, while collaboratively exploring a path toward shared growth? That’s precisely the question we need to address.

In any investment environment, we aim to find partners. So if a GP finds our due diligence too complex or our requirements too demanding, please understand: we’re not just looking for an investment vehicle—we’re seeking a true partnership. That’s why we need more open and collaborative communication.

What kind of partner are you looking for? Reliable! When entrusting your money to someone else, reliability is absolutely the top priority. From an LP’s perspective, a reliable GP means: 1. They can generate returns, 2. They operate with transparency and compliance, and 3. They have a stable, dedicated team. Meanwhile, from a GP’s standpoint, a reliable LP means: 1. They’re committed to long-term partnership, 2. They offer constructive feedback rather than excessive demands, and 3. They provide strong endorsements. Once this most basic criterion of reliability is met, different institutions may have their own unique additional standards.

Yuanhe Chenkun's internal code of conduct includes:

Actions follow words—what you say, you deliver.

Capable of continuously creating value.

To be able to start, finish, and take responsibility for what you do.

Can skillfully identify the core interests of both parties and reach a central, shared point.

Provides frank and decisive feedback, but rarely offers advice.

Focus on solidly managing fund investments.

First and foremost, it’s important to emphasize that a fund-of-funds should not be simply regarded as just another institutional investor. A fund-of-funds is a unique type of fund in its own right. As a fund, it naturally goes through the entire lifecycle—from fundraising and investment management to exit strategies. It’s not merely an investor; it also needs to raise capital, define its own strategic positioning, and implement sophisticated asset allocation approaches. Moreover, robust middle- and back-office management is essential, along with a favorable exit environment—only then can it successfully navigate its full lifecycle.

Specifically, in today's market, direct investment funds are facing significant fundraising challenges—and, in fact, so are their parent funds. During the fundraising process, I’m often asked: Why should investors put their money into a parent fund? What exactly is the value of a parent fund?

If we can genuinely deliver value within the investment value chain, we should be able to secure funding. But if we fail to raise capital—does that mean there’s something wrong with our product, our business structure, or perhaps our strategic positioning?

What is a master fund? A hub for resource aggregation.

First, the master fund must have a clear allocation strategy. Through this strategy, it selects suitable GPs to build an investment portfolio, ultimately forming a robust resource network system.

China's economy has achieved remarkable global success after years of development. Moving forward, it must increasingly rely on technological innovation to drive industrial growth and generate sustainable revenue. Meanwhile, fund-of-funds can foster their own industry ecosystems by strategically allocating resources across various sectors.

The downstream players of the fund-of-funds are VC management firms that truly understand the industry. These firms are uniquely positioned to navigate technological advancements, shifting market trends, and frequent changes in fund managers. The market consistently sees waves of new technologies, emerges with fresh industry tracks, and continually produces batches of managers well-suited to the prevailing conditions at any given time.

We clearly see the immense potential benefits that industrial development can bring, yet at the same time, individual startup projects may also harbor significant investment risks. Pursuing opportunity-driven investments could lead to numerous challenges, making it far more effective to generate profits by capitalizing on the growth of the entire industry. For VC management firms, what’s needed are substantial funding, access to industry resources, and supportive government policies tailored to foster industry development.

The upstream players of the master fund include the government, major capital entities, and large industries.

They can provide the space needed for industries to thrive. For instance, many local governments have put in place very clear support strategies aimed at fostering the growth of their regional industries. For large-scale capital and major industries, it’s also relatively easy to grasp the specific needs driving industry development—whether they’re looking to stay ahead of the curve or explore cross-sector opportunities that could spark transformative change.

For these entities, what they need is effective capital deployment and stable financial returns.

In connecting the upstream and downstream sectors, the role of the fund-of-funds is to provide resource providers with exceptional opportunities to participate in the development of technological innovation. It effectively identifies and addresses the needs of both capital providers and resource partners, seamlessly acting as a central hub for integration and collaboration.

In this system, the core is to build the right bridge between demand-side entities and early-stage tech companies, acting as a central hub.

Yuanhe Chencun excels in primary-market equity funds and has a deep understanding of the players in the market. Over the past few years, the industry has introduced concepts like VC 1.0, 2.0, and 3.0, and we’ve made some thoughtful adjustments to align with evolving market dynamics. Today, we’re more inclined to allocate capital to teams that combine insights into industry development with strategic shifts in market trends—what we call the "3.0 approach."

While the master fund may not seem to directly control the real economy, we actually have a keen sense of how it’s shaping entire industries—and our understanding of industries’ lateral expansion has become much clearer. Cross-industry integration is precisely where the master fund excels. Take, for instance, last year’s booming biopharmaceutical investments. We observed that traditional healthcare-focused funds and investment firms with an internet background often arrive at completely different valuations and assessments of the same projects—essentially reflecting two entirely distinct levels of insight.

To truly deliver value, the master fund must align closely with industries, collaborate with local governments, and better address regional needs—ultimately driving the integrated growth of industries. Finding the "common ground" amid "differences"—that’s precisely the core value of the master fund.

The market conditions remain challenging for the fund of funds. We need to identify our core strengths and forge our own unique path.