Foreign investors fuel boom in Chinese venture capital transactions

In the first half of the year, foreign venture capital firms participated in a quarter of the nearly 2,400 venture capital transactions in the Greater China region.

With deals worth $ 56 billion in mainland China, Hong Kong, Macau and Taiwan, venture capital funding reversed sharply from 2020, when the market was slowed down by the pandemic. , according to a recent PitchBook report. In the first six months of the year, 24.6% of venture capital transactions in the region had at least one investor based outside of China, up from 22.4% in 2020. If the current pace of transactions continues, PitchBook expects capital investment to exceed $ 100 billion. by the end of the year, which would only be the second year on record with CR activity exceeding this level.

Cross-border venture capital firms, especially those headquartered in the United States, are drawn to the country’s burgeoning middle class and rapid technological development, according to the report. As Chinese regulators have stepped up their scrutiny of sectors, from gambling to out-of-school tutoring in recent months, crushing the value of some public stocks, the effect of the crackdown remains to be seen in the venture capital industry. Unlike listed stocks which can be bought and sold all day long, investments in venture capital funds are committed for many years.

“VC is a very slow industry. It’s not like the stock market where things change on a daily basis, ”said Joshua Chao, senior VC analyst at PitchBook.

But, venture capital-backed companies, most of which eventually go public, are closely tied to public markets. Part of what fuels venture capital activity in the China region is the strong initial public offering market, which gives funds a way out and profit from past investments. The data suggests that “the current environment is generating enough outflows to continue fueling the Greater China venture capital industry,” according to the report.

So far in 2021, funds have left 20 companies worth more than $ 1 billion. Nineteen of them were public offerings. PitchBook expects the total number of releases, including IPOs, sales to strategic buyers and other transactions, to reach record highs in the second half of the year. “That said, recent scrutiny and new legislation from Chinese regulators could be a hindrance for companies trying to list on foreign exchanges and will likely push more high-profile offers on exchanges based in Shanghai, Shenzhen. or Hong Kong “, according to the research firm.

Foreign venture capital firms based in the United States and Europe are particularly interested in China, as the growth of high-tech industries in their own countries has plateaued, Chao said. These investors see China as the next frontier for tech start-ups in the next five to ten years.

“For many VCs, investing in Chinese startups represents both a paradigm shift from Western companies, given the operational scale and speed of the region’s innovation economy, as well as the ‘an opportunity to invest in top-notch startups in a rapidly growing market. “, says the report.

In recent months, non-domestic venture capital firms have been involved in some of Greater China’s hottest venture capital deals, including a mega-deal led by California-based Sequoia Capital. In February, the investment firm led a $ 3 billion fundraising round for Xingsheng Selected, a three-year-old grocery app.

But Chao acknowledges that in the future, foreign venture capitalists may have to rethink their investment strategies in sectors that have been inspected by the Chinese regulator.

For example, people under the age of 18 are limited to three hours of video games per week, according to a ban issued earlier this week by China’s National Press and Publishing Administration. Out-of-school tutoring centers, one of the country’s most popular investment targets, were forced to register as non-profit associations at the end of July.

“If you invest in areas that are considered nonprofit, you are not going to give your fund back,” Chao said. “I think investors are still trying to figure out what [the regulation] resources for their current portfolio and future investments.


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