A bank employee counts Chinese renminbi (RMB) banknotes next to US dollar banknotes at Kasikorn Bank in Bangkok, Thailand, on January 26, 2023.
Atit Perawonmeta | Reuters
The three shifts currently underway are:
The business model of famous Chinese venture capital funds such as Sequoia and Hillhouse typically involved raising capital from university endowments, pension funds, and other U.S. sources (known in the industry as limited partners). .
That money then flowed to Chinese startups that eventually aimed for initial public offerings in the U.S., generating profits for investors.
Many of these limited partners are now pausing their investments in China. This is because the US government has tightened its oversight of US funds supporting advanced Chinese technology, making it increasingly difficult for Chinese companies to list in the US. The economic slowdown in Asian countries is further dampening investor sentiment.
This means Chinese venture capitalists will need to look to alternative sources of funding, such as the Middle East, or to funds increasingly tied to local government coffers. The move to domestic channels also means a change in currency.
According to industry research firm Xiniu Data, the total amount of venture capital funding raised in China in 2023 fell to its lowest level since 2015, with the US dollar share falling to 5.3% from 8.4% a year earlier.
This is much less than the previous year. According to the data, from 2018 to 2021, USD accounted for approximately 15% of total funds raised by VCs. The remaining share was in Chinese renminbi.
Many U.S. dollar funds are now shifting their focus to government-backed hard tech companies, typically seeking to sell A shares rather than listing in the U.S.
Liaoming
PAC
For foreign investors, high interest rates in the U.S. and the relative attractiveness of markets such as India and Japan are also factors in deciding whether to invest in China.
“Venture capital firms clearly look at Greater China differently than they did a few years ago,” Kyle Stanford, principal VC analyst at PitchBook, said in an email.
“While there is still a lot of capital available in the private market in Greater China, whether from local funds or from regions such as the Middle East, the view on China’s growth and venture capital returns in general is It’s changing,” he said.
The U.S. and Chinese governments resolved a long-standing audit dispute in 2022, reducing the risk of Chinese companies being delisted from U.S. stock exchanges.
However, following clashes over the U.S. listing of Chinese ride-hailing giant Didi Chuxing in the summer of 2021, both countries have increased scrutiny of Chinese-based companies aiming to list in New York.
The Chinese government now requires companies with large amounts of user data (essentially China’s internet-based consumer businesses) to obtain approval from cybersecurity regulators before listing in Hong Kong or the United States, among other requirements. ing.
The US government also tightened restrictions on the inflow of US funds to Chinese tech companies. Several major VCs have separated their China operations from their U.S. operations under new names. Most famously, Sequoia was rebranded as Hongshan in China last year.
“Chinese US dollar funds can still invest in non-sensitive sectors of A-share IPOs, but are challenged by local companies preferring capital from RMB.” [Chinese yuan] ” said Liao Ming, founding partner of Beijing-based Prospect Avenue Capital, which has focused on US dollar funds.
Shares listed on the mainland Chinese market are known as A shares.
“The trend is moving towards investing in overseas assets in parallel entities, indicating a strategic move from ‘Long China to Long China,'” he said.
“U.S. IPOs are no longer a valid exit strategy for Chinese assets, and investors are targeting local exits in their respective capital markets, i.e. Chinese exits for Chinese assets and US exits for foreign assets. We should,” Liao said.
Since Didi’s IPO, only a handful of Chinese companies have listed in the U.S., and few are large. The company went public on the New York Stock Exchange in summer 2021, despite reported regulatory concerns.
The Chinese government immediately ordered an investigation, and Didi Chuxing was forced to temporarily suspend new user registrations and app downloads. The company was delisted later that year.
The investigation, which has since concluded, comes in tandem with the Chinese government’s crackdown on alleged monopolistic practices by internet technology companies such as Alibaba. The crackdown also targeted after-school tutoring, minors’ access to video games, and the real estate development company’s high reliance on debt to grow.
Instead of the consumer sector, Chinese authorities are focusing on supporting the development of industries such as high-end manufacturing and renewable energy.
“Many USD funds are now shifting their focus to government-backed hard tech companies, typically aiming for A-share exits rather than U.S. listings,” Liao said, adding that this also reflects the Chinese government’s intentions. He pointed out that it was done.
These companies include developers Development of new materials for renewable energy and factory automation parts.
According to Pitchbook data, the top 20 largest VC deals by China-based companies in 2023 were mostly in the manufacturing sector and did not include e-commerce businesses. In 2019, before the pandemic, top deals included several online shopping and internet-based consumer products companies and several electric vehicle startups.
The change is even more striking than the boom that occurred when online shopping giant Alibaba went public in 2014. The 20 largest venture capital deals by companies headquartered in China in 2013 were overwhelmingly in e-commerce and software services, according to Pitchbook data.
…The venture capital scene has become more state-centric and focused on government priorities.
Camille Brunois
rhodium group
Moving from internet apps to hard technology requires more capital.
The median deal size for China’s 20 largest VC deals in 2013 was $80 million, according to CNBC calculations based on PitchBook data.
This is much smaller than the 2019 median deal size of $280 million and only a fraction of the 2023 median deal size of $804 million for investments in the same category. This was shown by the analysis.
The data shows that many of these deals were led by local government-backed funds and state-owned enterprises, as opposed to a decade ago, when venture capital firms such as GGV Capital and internet technology companies were more prominent investors. was.
“In the past 20 years, China and finance have developed very rapidly, and in the past 10 years, private enterprises have developed rapidly. [capital] Funds grew very quickly.In other words, just invest in any industry. [generate] Yang Luxia, partner and general manager of Heiyin Capital, said in Mandarin, as translated by CNBC. She has focused on renminbi funds while exploring overseas funding.
Yang said he doesn’t expect the company to continue growing at the same pace and even takes a “conservative” approach to new energy. He said that while technology changes rapidly, making it difficult to pick winners, companies need to consider buyouts and other alternatives to IPOs.
Then there is the issue of China’s growth itself, particularly as state-related funds and policies play a greater role in high-tech investment.
“In 2022, [private equity and venture capital] Investment in China fell by half and fell again in 2023. “With private companies and foreign actors being the first to leave, the venture capital scene has become more nationally focused and focused on government priorities,” said associate director Camille Brunois. , rhodium group.
The risk, she said, is that science and technology “becomes more state-driven and aligned with government priorities.” “While this may be effective in the short term, it is unlikely to foster a thriving innovation environment in the long term.”