China-focused private equity (PE) funds raised the lowest amount of capital in eight years during the second half of 2021, as policy uncertainties in the consumer technology sector and obstacles to cashing out from investments through initial public offerings (IPOs) gave them cold feet. PE funds raised in both US dollar and the yuan totalled just US$28 billion in the second half of 2021, down 54 per cent from the first half and 41.7 per cent from a year earlier. This was the lowest six-month tally since 2014’s first half, data from consultancy Bain and Company and data provider Preqin shows. And this trend is likely to continue, as managers and investors are deterred from making further funding commitments until there is more clarity on how policies will impact Chinese private technology companies’ growth, industry observers said. “The uncertainly around future exit routes for companies and the ongoing regulatory clampdown have been a killer in the current China fundraising environment,” said Niklas Amundsson, a partner at fundraising adviser Monument Group based in Hong Kong. One thing that both managers and investors unanimously agree upon is that easy money from China has already been made, he said. “Gone are the days whereby being part of a large consortium putting capital into the next hot technology pre-IPO would generate outsize returns,” Amundsson said. The decline in PE funds raised comes amid a 50 per cent drop in exit values in China during the second half of 2021 due to policy uncertainty and poorly performing public markets. These curtailed returns from portfolio companies selling shares to public investors through IPOs, which used to be a popular avenue for funds’ investors to cash out from their China investments, Bain said. A series of regulatory crackdowns on cybersecurity and data management by technology companies – imposed after the controversial US$4.4 billion IPO by ride-hailing giant Didi Chuxing in New York in June last year – has dried up IPOs by Chinese firms in both the United States and Hong Kong stock markets. While 38 Chinese companies completed a flotation on US stock exchanges between January and July 2021, this number plunged to just one for the rest of last year, Bain said. Meanwhile, PE sponsors and venture capitalists have been a key driver for some of China’s largest technology giants. During the heydays of 2018, Ant Group, the biggest fintech firm on the planet, was able to raise a whopping US$14 billion from a consortium of investors that included Temasek, CPP Investment Board, The Carlyle Group and GIC. Ant is an affiliate of Alibaba Group Holding, which owns the South China Morning Post . Others, such as China’s superapp operator Meituan, were able to raise US$4.2 billion in a Hong Kong IPO in 2018, in one of the biggest technology listings that year. Its meteoric rise in valuation was supported by PE sponsors such as Temasek, and venture capital firm Sequoia Capital. In the third quarter last year, Chinese regulators unveiled a series of regulations aimed at curbing market excesses and achieving sustainable growth. PE firms focused on a number of sectors such as education and technology platforms were hurt by these new regulations, said Kung Kuo-chuan, founder and managing partner at Hong Kong-based PE firm Nexus Point, which focuses on companies in the domestic consumption sectors in China and Asia. The coronavirus pandemic has also compounded the current fundraising dry spell. “Overseas investors, especially those who do not have a presence in Asia, are cautious about investing in China because they find it more difficult to assess the situation on the ground, given the travel restrictions and the lack of in-person interactions,” said Kung. China, however, is too big a market for investors to ignore, as it accounts for more than 40 per cent of the region’s US$296 billion PE investment value, said Elsa Sit, vice-president at Bain’s PE practice. “In the near term, investors’ capital will gear towards funds raised by more reputable private equity and venture capital managers with sizeable assets and strong track record,” Sit said, adding that smaller managers without a long history would struggle. For the first quarter of this year, the biggest China-focused fund was C-Bridge Healthcare Fund V, a US$1.6 billion buyout fund backed by Singapore-headquartered manager CBC Group, data from Refinitiv shows. This was followed by venture capital firm IDG Capital, which raised US$789.8 million for its Carbon Zero Tech Investment Fund.