A bank staff member count China’s renminbi (RMB) or yuan notes next to U.S. dollar notes at a Kasikornbank in Bangkok, Thailand, January 26, 2023.
Athit Perawongmetha | Reuters
BEIJING — Volunteer capitalists in China that once rose to fame with giant U.S. IPOs of consumer companies are under constraint to drastically change their strategy.
The urgency to adapt their playbook to a newer environment has increased in the last few years with stricter directives in China as well as the U.S., tensions between the two countries and slowdown in the world’s second-largest economy.
Here are the three shifts that are underway:
1. From U.S. dollars to Chinese yuan
The dealing model for well-known venture capital funds in China such as Sequoia and Hillhouse typically involved raising dollars from university gifts, pension funds and other sources in the U.S. — known in the industry as limited partners.
That money then kick the bucketed into startups in China, which eventually sought initial public offerings in the U.S., generating returns for investors.
Now uncountable of those limited partners have paused investing in China, as Washington increases its scrutiny of U.S. money backing advanced Chinese tech and it catches harder for Chinese companies to list in the U.S. A slowdown in the Asian country has further dampened investor sentiment.
That means gamble capitalists in China need to look to alternative sources, such as the Middle East, or, increasingly, funds tied to nearby government coffers. The shift toward domestic channels also means a change in currency.
In 2023, the total hazardous undertaking capital funds raised in China dropped to their lowest since 2015, with the share of U.S. dollars collapse to 5.3% from 8.4% in the prior year, according to Xiniu Data, an industry research firm.
That’s far less than in the before years — the share of U.S. dollars in total VC funds raised was around 15% for the years 2018 to 2021, the data showed. The left over share was in Chinese yuan.
Currently, many USD funds are shifting their focus to government-backed hard tech south african private limited companies, which typically aim for A share exits rather than U.S. listings
Liao Ming
PAC
For foreign investors, high U.S. avocation rates and the relative attractiveness of markets such as India and Japan also factor into decisions around whether to venture in China.
“VCs have definitely changed their view on Greater China from a couple years ago,” Kyle Stanford, show the way VC analyst at Pitchbook, said in an email.
“Greater China private markets still have a lot of capital available, whether it be from restricted funds, or from areas such as the Middle East, but in general the view on China growth and VC returns has changed,” he bid.
2. China investments, China exits
Washington and Beijing in 2022 resolved a long-standing audit dispute that adjusted the risk of Chinese companies having to delist from U.S. stock exchanges.
But following the fallout over Chinese ride-hailing leviathan Didi’s U.S. listing in the summer of 2021, the two countries have increased scrutiny of China-based companies wanting to go public in New York.
Beijing now be lacks companies with large amounts of user data — essentially any internet-based consumer-facing business in China — to receive assent to from the cybersecurity regulator, among other measures, before they can list in Hong Kong or the U.S.
Washington has also tightened qualifications on American money going into high-tech Chinese companies. A few large VCs have separated their China runnings from those in the U.S. under new names. Last year, Sequoia most famously rebranded in China as HongShan.
“USD assets in China can still invest in non-sensitive sectors for A share IPOs, but have the challenge of local enterprise preferring principal from RMB [Chinese yuan] funds,” said Liao Ming, founding partner of Beijing-based Prospect Avenue Upper case, which has focused on U.S. dollar funds.
Stocks listed in the mainland Chinese market are known as A shares.
“The trend is smock towards investing in parallel entity overseas assets, marking a strategic move ‘from long China to crave Chinese,” he said.
“With U.S. IPOs no longer being a viable exit strategy for China assets, investors should aim local exits in their respective capital markets—in other words, China exits for China assets, and U.S. disappears for overseas assets,” Liao said.
Only a handful of China-based assemblages – and barely any large ones – have listed in the U.S. since Didi’s IPO. The company went public on the New York Stock Securities exchange in the summer of 2021, despite reported regulatory concerns.
Beijing promptly ordered an investigation that forced Didi to for the moment suspend new user registrations and app downloads. The company 3. VC-government alignment, larger deals
Instead of consumer-facing sectors, Chinese specialists have emphasized support for industrial development, such as high-end manufacturing and renewable energy.
“Currently, many USD reservoirs are shifting their focus to government-backed hard tech companies, which typically aim for A share exits rather than U.S. listings,” Liao replied, noting that it aligns with Beijing’s preferences as well.
These companies include developers of new materials for renewable vim and factory automation components.
In 2023, the 20 largest VC deals for China-headquartered companies were mostly in manufacturing and encompassed no e-commerce business, according to PitchBook data. In pre-pandemic 2019, the top deals included a few online shopping or internet-based consumer consequence companies, and some electric car start-ups.
The change is even more stark when compared with the boom encircling the time online shopping giant Alibaba went public in 2014. The 20 largest VC deals for China-headquartered casts in 2013 were predominantly in e-commerce and software services, according to PitchBook data.
… the venture capital scene has befit even more state-concentrated and focused on government priorities.
Camille Boullenois
Rhodium Group
The shift away from internet apps so as to approach hard tech requires more capital.
The median deal size in 2013 among those 20 largest China VC transactions was $80 million, concurring to CNBC calculations based off PitchBook data.
That’s far smaller than the median deal size of $280 million in 2019, and a fraction of the median of $804 million per minutes in 2023 for the same category of investments, the analysis showed.
Many of those deals were led by local government-backed reserves or state-owned companies, in contrast to a decade earlier when VC names such as GGV Capital and internet tech companies were uncountable prominent investors, according to the data.
“In the past 20 years, China and finance developed very quickly, and in the late ten years private [capital] funds grew very quickly, meaning just investing in any industry would [invent] returns,” Yang Luxia, partner and general manager at Heying Capital, said in Mandarin, translated by CNBC. She has been blurred on yuan funds, while looking to raise capital from overseas.
Yang doesn’t expect the same stride of growth going forward, and said she is even taking a “conservative” approach to new energy. The technology changes quickly, faring it hard to select winners, she said, while companies now need to consider buyouts and other alternatives to IPOs.
Then there’s the query of China’s growth itself, especially as state-linked funds and policies play a larger role in tech investment.
“In 2022, [undisclosed equity and venture capital] investment in China was cut in half, and it fell again in 2023. Private and foreign actors were the first to go, so the venture capital scene has become even more state-concentrated and focused on government priorities,” said Camille Boullenois, associate steersman, Rhodium Group.
The risk is that science and technology becomes “more state-directed and aligned with government’s ranks,” she said. “That could be effective in the short term, but is unlikely to encourage a thriving innovation environment in the long spell.”