China’s economic new normal disrupted many industries, and the private equity and venture capital (PE/VC) sector is no exception.
Driven by strong prospects in the technology industry, buoyant mergers and acquisitions (M&A) activities, and the government’s encouragement of mass entrepreneurship and innovation, RMB funds are exploring new opportunities in disruptive sectors with a focus on precision management and investment, according to PwC report, Innovation and Upgrading, Quality is Essence.
According to third-party statistics, as the domestic stock market reopened in 2014, China’s PE/VC market gradually recovered from fundraising, investing, to exiting, with fast-growing RMB funds becoming a dominant force in 2015 and 2016.
In 2016, RMB funds accounted for over three quarters of newly raised Chinese PE/VCs. Driven by expectations from a fast growing technology sector, rising demand for fundraising was generated by heightened consolidation and accelerated expansion in Fintech and payment sectors.
PE/VCs have shown interests in opportunities from internet, finance, information technology, telecommunications, biotechnology and healthcare industries.
While M&As and share transfers remain major channels to exit, RMB funds are increasingly seeking exits in state-owned enterprises’ (SOE) mixed ownership reform and China’s overseas listed companies’ returning to A-share market.
In addition, the National Equities Exchange and Quotation (NEEQ) market provided another alternative for exiting. RMB funds participated in the additional share issuance of NEEQ-listed companies, and benefited from increasing trading activities across the platform.
“RMB funds are being increasingly used to finance innovative high-technology sectors to identify foreseeable opportunities amid a slowing economy,” says Amanda Zhang, PwC China Private Equity Group North China Leader.
“In the past two years, large-scale investments occurred in mobile internet and high-technology sectors, involving both early-stage start-ups and established companies that have benefited from industry consolidation. The developed capital markets and strong M&A performance provide a diverse channel to exit.”
More proficient investment
The report indicated that the popularity of RMB funds are gradually moving from traditional financial investors to strategic investors, with focus on professional fields and value-added services.
Fund managers are placing greater emphasis on the concentration and consolidation of sectors of target companies, aiming to secure stable returns in both primary and secondary markets.
Investors have shown interests in early-staged funding, with longer shareholding periods. Beyond holding a position in the Board of Directors and being responsible for financial management, fund managers today demand greater engagement in corporate management. They even explore opportunities to participate in controlling shareholding projects and directly navigate companies’ management and development.
“Under the new normal conditions of the past two years, Chinese regulators released several policies, which includes embracing a new era of asset management, advancing SOEs mixed ownership reform, and developing multi-level capital markets,” explains Jianbin Gao, PwC China Private Equity Group Central China Leader.
“All of which pushes forward the development of RMB funds. Fund managers are underpinning value creation – they are not satisfied with being only fund providers, but also willing to become active strategic investors. As a result helping companies gain access to industry-wide resources and achieve growth.
“RMB funds are also designed to be more professional, diversified, united, and substantially support real economic growth. Under such circumstances, RMB funds have had to change their original management mode to survive severe competition.”
Industrial capital partner with private equities in cross-border M&As
As China’s Belt and Road initiative came into full swing since inception in 2015, the market has witnessed massive cross-border investments, in which private equities are playing an active role.
A cooperation model between industrial capital and private equities has emerged in outbound investments. In some cases, industrial capital cooperate with PE investors to set up funds for assets acquisition, and after wards, buy assets from PE investors once transactions have completed.
“Industrial capital companies need to consolidate industry resources and improve service offerings,” adds Qing Ni, PwC China Private Equity Group Partner. “Due to insufficient quality and lower-priced targets in domestic market, they hope to seek opportunities overseas.”
Usually, industrial capital companies have less adequate resources to explore and examine investment targets overseas, nor are familiar with the M&A negotiation and transaction process. Therefore, they hope to partner with private equity firms in cross-border M&A transactions by leveraging their expertise in financial counseling and experience in target selection.
Government-led funds open new gate
With the Chinese central government encouraging entrepreneurship and innovation, and placing an emphasis on upgrading industries, local governments are setting up venture capital guiding funds and operating in a commercialized manner, which are exerting modeling effect on the market.
Third-party statistics indicated that China had over 1,000 venture capital guiding funds by the end of December 2016.
“The government-led venture capital guiding funds will attract capital to entrepreneur investment and prioritized sectors,” says Alexander Zhang, PwC China Private Equity Group Partner.
“In future, fund managers should leverage their abundant experience and excellent decision-making capacity, and take a broader perspective when allocating portfolios and planning consolidation actions. To build a better regulated market, government-led funds should establish a standard of selecting fund managers, and set up a comprehensive appraisal mechanism taking both financial returns and local economic growth targets into consideration.”