Four major trends in China’s PEVC sector
Today, the Chinese capital market remains a force to be reckoned with as it continues to attract a huge amount of foreign capital. Meanwhile, the private equity and venture capital (PEVC) sector is recovering from the impact of the Covid-19 pandemic at a rate faster than expected. In the PEVC fundraising market, competition is intensifying, with more and more weak players being eliminated by competent ones.
Recently four trends have emerged in China’s PEVC sector. Understanding them will help you better grasp new opportunities:
1. Funds and institutions specializing in a specific area can expect smooth sailing in financing
In 2020, the pandemic and Huawei’s chip shortage spurred growth of the healthcare, chip and consumer sectors. Age-old and “dark horse” institutions that focus on sub-sectors and with unique characteristics tended to be favored by limited partners (LP) of mainstream players. Meanwhile, the boundary between general partners (GP) and LPs is blurrier than ever. More and more LPs have launched direct investment business, and some PEVC firms have become angel LPs.
2. Government guidance funds - an emerging powerful force
To date, 1,349 government guidance funds have been established, with a total value of more than RMB 2.1 trillion. There are 688 municipal-level government guidance funds, accounting for 51% of the total and amounting to RMB 933.18 billion.
3. Emission peak and carbon neutrality
At the China’s “two congresses” in 2021, “emission peak” and “carbon neutrality” were written into the government work report for the first time. In the process of achieving carbon neutrality, one should pay attention to investment opportunities from a number of sectors: power, transportation, manufacturing, new materials, construction, agriculture, negative carbon emissions, information and communication, and digitalization.
PEVC should not overlook the importance of environmental, social and corporate governance (ESG) assessment. China's domestic regulatory authorities will roll out increasingly strict ESG policies, in
particular those related to climate change. Indeed, the requirements regarding ESG investment are getting more rigorous. Currently, the majority of private equity investment fund managers do not have strong long-term green investment strategies nor clear goals. Green polices and regulations, standards and incentive mechanisms in the field of private equity investment industry badly need to be improved.
4. Chinese market’s great appeal to foreign investors
As the Chinese economy is gradually recovering from the pandemic, and as Chinese stocks and bonds have been included in financial indexes with global influence, the Chinese market’s appeal to foreign investors is greater than ever. In the next few years, international investors may invest more in Chinese assets. Meanwhile, differences between PEVC institutions in China have been widening in recent years. Many small and medium-sized private equities and newcomers have established foreign currency
funds. If Hong Kong can take advantage of risk control channels to achieve basic convertibility of RMB capital, the city’s role in promoting the internationalization of the RMB will be strengthened, and more and more financial products denominated in RMB will be traded and circulated globally.
In the near future, RMB LP direct investment will be a major trend. Some small and medium-sized GPs will face difficulties in financing and may even quit the market. That will prompt some GPs to become LPs, resulting in structural change to the LP talent pool while encouraging LP direct investment. GPs need to differentiate themselves and create new business models. Foreign LPs are expected to flood into China. As long as GPs can gain the trust of foreign LPs, financing will not be that challenging.