China’s venture capital firms outperform US, European peers amid breakneck economic growth in the past two decades
- China has become the world’s second largest venture capital market, with over 3,500 firms managing total assets worth nearly 2 trillion yuan
Chinese venture capital funds have outperformed those in the US and Europe in the last 20 years, as the country’s breakneck economic growth has given impetus to the rapid expansion of the industry, according to analysts.
Nevertheless, the sector is forecast to face major upheaval in 2019, with many smaller funds expected to collapse as winter sets in for the capital market amid a deepening economic downturn.
Chinese VC funds delivered an overall return of 1.79 times in the period from 1997 to 2018 as measured by total value to paid-in capital. That compared with US funds on 1.7 times and Western European vehicles on 1.75 times, according to an analysis released on Thursday by Paris-based eFront, a global financial software provider focused on private equity and alternative investments.
“China is one of the [world’s] largest emerging markets. The country has seen the fast development of a professional VC sector over the course of the last two decades,” said the report.
With soaring economic growth and the rapid advance of internet technology, China has become the world’s second largest VC market. It now has more than 3,500 VC firms managing total assets worth nearly 2 trillion yuan, according to separate government figures from China’s National Development and Reform Commission (NDRC). The NDRC is China’s top economic planner.
China’s gross domestic product has soared from US$962 billion in 1997 to US$12.24 trillion in 2017, a 13-fold increase.
“Venture capital has changed China in the past two decades, cultivating thousands of listed companies and supporting the growth of the economy,” said Chen Gong, chief analyst at Anbound Group in a recent note.
“They will continue to support tech entrepreneurship and emerging industries in the economy, including IT, artificial intelligence, intelligent manufacturing, new energy vehicles, as well as education, health care, consumer, etc.”
Zero2IPO Group recently estimated that China’s private equity and venture capital funds have 30 trillion yuan of funds in the pipeline for the next two decades to invest in China’s new-economy sectors.
However, the VC industry is facing fundraising difficulties this year, with a huge shakeout expected to eliminate many smaller, less established funds from the market, Chen said.
There are multiple reasons. The global financial market is undergoing a deleveraging process, after the US Federal Reserve started raising interest rates and winding down its balance sheet.
Moreover, the Chinese economic downturn has deepened, and the government has tightened financial regulations to curb debt and financial risks, leading to what investors are calling a “winter in the capital market”.
“The bubble is bursting and the easy money era has ended. The recent IPO rush by Chinese companies indicates they are trying to catch the last train before the window closes,” Chen said.
“VC funds are also accompanying their investment targets to cash out through IPOs, in spite of sharp valuation cuts or broken IPOs – IPOs falling below offer prices in aftermarket.
“It’s a great escape. Those who can’t exit through IPOs may not survive the winter.”
China’s VC funds also face more challenging exit paths than their global peers, the research by eFront found.
“Chinese VC funds divest more slowly than their peers from other geographical regions,” said the eFront report.
“One reason is the difficulty of IPOs, as local authorities tightly control public listings.
“In addition, local regulations on ownership limit international acquisitions, and local companies are more difficult to assess for buyers due to higher uncertainties.”
David Brown, deals leader for Asia-Pacific at accounting giant PwC, held similar views.
In 2018, IPOs backed by private equity and venture capital in mainland China fell to the lowest level in five years, with long waiting lists and a very low approval rate, he said at a press conference earlier this week.
Many smaller and less established private equity and VC funds collapsed last year, mainly because of the government’s campaign to curb debt and new rules that have tightened shadow banking activities and limited the fundraising。capacity of the funds.
“2019 will still be challenging for yuan funds [in the industry],” said Brown.
