The Chinese VC/PE market is set to boom despite complicated market conditions and challenges, according to panellists speaking during The Asset’s 13th Asia Bond Markets Summit held in Chengdu in June. The panel featured partners and senior executives from the Chinese VC/PE industry talking about the opportunities and challenges for VC/PE investors within China.
China will support the development of venture capital as part of efforts to boost innovation, according to Premier Li Keqiang while delivering the Government Work Report earlier this year. This means that the accelerated industry upgrade as well as policy support will boost VC/PE firms, resulting in potential investment opportunities.
But before entering this market, investors need to better understand the characteristics of the Chinese VC/PE market. “The Chinese VC/PE industry first started in the 2000s by drawing on the experience of the overseas institutions, especially from the US. After China rolled out the growth enterprise market (GEM), the RMB VC/PE funds grew rapidly,” says Yi Yu, founding partner of Chengdu Icon Investment Management, a venture capital firm.
After 15 years of development, the Chinese VC/PE sector is now quite different from that of the US. Compared to the US, the Chinese VC/PE funds are more likely to be influenced by investment trends, according to Benjamin Yuan, founding partner of R2T2 Innovation Investment, which invests in sectors including emerging manufacturing and new energy. Having previously worked in a US VC fund, Yuan says the US VC/PE funds are good at finding specific quality firms rather than chasing popular trends.
“I take care of the China, US and India market. The US VC/PE market is overheating; India‘s VC/PE market, like the Chinese VC/PE in 2005, is quickly picking up,” says Wang Ping, partner in China, Korean Investment Partner (KIP) Capital Management. With around US$3 billion of assets under management globally, KIP has five funds in China, managing around 4 billion yuan (US$580 million). He notes that regions in China also differ in terms of the development and sophistication of their respective VC/PE scenes.
“The VC/PE firms in central and western China have limited access to investment information,” says Zhang Hui, deputy general manager of Sichuan Development Industry Led Equity Investment Fund Management, a state-owned firm based in Chengdu that mainly manages government venture capital guiding funds. Having worked in Guangzhou for seven years, he shared his personal observation on regional differences.
“I have also been exchanging insights with VC/PE firms in the first-tier cities including Beijing, Shanghai, Guangzhou, and Shenzhen. A lot of the new investment vehicles that we can find in this region are already old news to investors in those first-tier cities. They are often six months ahead of us,” Zhang says.
“This is also the case with investment opportunities. Many times, we do not even know about some of the high-quality firms based in Chengdu until they receive investment from investors in the first-tier cities,” Zhang adds.
On the other hand, first-tier cities are also facing challenges. “Some of the startups in the first-tier cities including Beijing, Shanghai, Guangzhou, and Shenzhen are showing signs of high risk in investing due to their exorbitant valuation, while cities like Chengdu are showing signs of quality growth,” says Wang. “The growth is everything to us as we are doing venture capital investment,” he emphasizes.
Yet it is not always easy to find the right startups to invest in. “We favour the technology enterprises with a focus on the series A round. Angel and series B rounds take up a smaller portion,” says Yi. As a result, these firms might not have a suitable performance track record.
Besides financial performance, the quality of the startups’ management team is also crucial for VC/PE firms before making investment decisions. “It is not hard to discover a good founder or CEO of a startup, but the management teams that the CEOs hire are not always strong enough,” Yuan says, noting that a company will not go wrong if the management team is capable.
Despite all these challenges, the diversified Chinese VC/PE industry is gaining traction and has potential for further development. Investors are actively looking into sectors such as the internet, bio-pharmacy, healthcare, semiconductor and integrated circuit (IC).
In southwestern China, which Sichuan is part of, there are some investment sectors that strongly interest VC/PE firms.
“The information security sector is a uniquely competitive industry in the southwestern part of China,” says Yi, noting that there are a lot of high-quality telecommunication enterprises located in the Chengdu Hi-tech Zone. “The IC design and software development sectors in this region are also worth looking into,” Yi adds.
Wang points out that bio-pharmacy and technology, media and telecom (TMT) firms in southwestern China are also worth checking out. “Regulators have been rolling out supportive regulations to attract overseas graduates to the southwestern part of China. These overseas returnees are boosting the development of sectors such as bio-pharmacy and TMT,” Wang explains.
Another major sector in the region is military-civilian integration. “Quite a lot of research laboratories for the military industry and intelligent manufacturing are located in Sichuan. These are one of the advantages here,” says Yi.