Private capital glut wanes after unbridled growth
The private equity and venture capital industry on the Chinese mainland is slowing down after having surged to become the world’s secondlargest in the past few years, but business insiders believe it’s just a process of adjustment that would benefit the market’s sustainable development.
In the first half of this year, the number of newly raised VC funds fell by about 38 percent year-on-year, while the total capital size dropped by 44 percent, according to Zero2IPO Research.
The PE market, meanwhile, saw a drop of more than half in terms of newly gathered capital.
The decline in percentage terms seems immense, but the accumulative fund pool of China’s VC and PE market is still the world’s second-largest after that of the United States, and has been on an upturn.
The investable capital of VC had rallied from 167 billion yuan ($24.4 billion) in 2008 to 730 billion yuan by June this year, having hit a slightly higher peak last year, while that of PE has been going up in the past decade from 575 billion yuan to 1.7 trillion yuan, according to data from Zero2IPO Research.
In fact, the growth has been so rapid it has unnerved many investors, and that a correction is said to be necessary. As of late June this year, the Chinese mainland had about 14,000 registered VC and PE fund management firms, with some 3,000 counterparts in the US.
“More than 10,000 new investing institutions were founded in the last couple of years, but many of them lack stable internal management and risk control,” said Fu Xinghua, general manager of Zero2IPO Research.
“If the invested targets fail to make the grade, some of the institutions may run the risk of being eliminated, especially when the capital market is tightening up,” he noted.
Earlier this month, the Asset Management Association of China (AMAC) said it had “lost contact” with the executives of more than 160 private funding institutions, about 73 percent of which were in the PE and VC business. Under the country’s regulations governing private funding establishments, they’re required to report to the AMAC every three months.
Fu believes the development would lead to the demise of poorly-managed funding companies and only the fittest would survive.
Shannon Cheung, chief executive and chairman of investment firm Averest Capital, agreed that the amount of capital raised in the primary market in the past few years has been too high, and this would hurt innovation and the mass entrepreneurship economy.
With more than two decades’ experience in the mainland’s financial market, Cheung observed that the capital glut has led to an over-evaluation of some “star projects”, with some startups seeing a cutback in value when they emerged in the secondary market.
“This is not sustainable development,” he said. “However, the investment slowdown may also be seen as a good thing as startups now realize they could not rely on fundraising alone to survive.”
With a focus on early-stage investment, Cheung admitted he used to invest in seven to eight projects each year but, this year, he plans to have only four to five.
Zhang Kaixing, chief executive of Shenzhen Jin Fuzi Network Technology — an internet-based wealth-management platform — pointed out that the stagnation is the result of a regular economic cycle.
“The impact from the stock market’s big fall in 2015 has spilled onto the PE market. Many listed companies are struggling through the bear market now, so few would have sufficient capital to invest in budding ones,” he said.
“It’s the same in other economies, such as the US,” Zhang said, predicting that the US economy would begin to decline in two to three years after having expanded for nearly nine years.
Besides, he pointed out that the mainland authorities’ crackdown on leverage has also exerted extra pressure on capital flow, but he’s confident that such regulation would safeguard the industry’s sustainable development.
In April this year, top financial regulators issued guidelines to rein in high-leverage and risky investment products. The measures are expected to take effect by the end of 2020.
The tightened regulations are aimed at reshaping the inflated financial sector by reforming the entire asset management sphere. According to the guidelines, VC or PE funding would find it hard to gain capital from banks’ wealth management products, while the threshold for individual investors has also been raised.
Despite the obstacles in raising funds, investment activities remain active. In fact, Zhang believes, it’s now one of the best opportunities to make an investment.
As to which industries would have more potential, he’s adamant that real estate had passed its heyday, while artificial intelligence, the medical and healthcare, education and other industries that are related to consumption upgrade are among the most popular picks.
According to the investor, funding for Jinfuzi — an online financial investment platform based in Shenzhen, Guangdong province — has risen more than 100 percent so far this year, based on investment in these sectors.
Looking at the overall picture, Zero2IPO Research said in a report the mainland’s VC market had witnessed 2,154
The investment slowdown may also be seen as a good thing as startups now realize they could not rely on fundraising alone to survive.” Shannon Cheung,
investment deals. The total amount of funds raised in 1,679 of them reached 117 billion yuan in the first half of this year — up 14.7 percent compared with the same period last year.
The average invested capital size set a new historical high of 69.9 million yuan — 1.5 times the average in 2017.
Startups related to AI technology drew the most attention. UBTech Robotics — a budding enterprise that empowers robotics with AI — secured an investment of $820 million, making it the world’s highest evaluated AI startup.
Moreover, there had been nearly 180 fundraising activities concerning education and training by Aug 8 this year, surpassing the total of 150 for 2017, according to New Seed — a news platform for startups and investors.
In the medical and healthcare sector, the gap is even wider. New Seed has recorded 260 fundraising events so far this year, compared with just 175 in 2017.